September 4th, 2016
(written by lawrence krubner, however indented passages are often quotes). You can contact lawrence at: firstname.lastname@example.org
Which brings me to a paradox. Whereas our own eyes tell us that incompetence is ubiquitous, standard economic theory regards it as merely a temporary deviation. It thinks that agents are incentivized to optimize; that badly managed assets will be bought cheaply by people better equipped to run them; and that competition will drive incompetent firms out of business.
But this doesn’t happen – at least not fully. Even the best incentives can’t put in what God left out: I have an incentive to become a Premier League footballer or Nobel laureate, but you’d be ill-advised to bet on me becoming either. Credit constraints, among other things, prevent assets flowing to their best managers. And Bloom and Van Reneen have shown (pdf) that, in all countries, there is a “long tail of badly managed firms”, which tells us that competition doesn’t fully weed out idiots.
The failure here, though, isn’t merely one of Econ 101. Real people make the same mistake.
We know that stock-pickers pay too much for growth (pdf) stocks and ones on the verge (pdf) of collapse. One reason for this might be that they underestimate the ubiquity of incompetence – the fact that managers can’t grow firms or turn them around as easily as thought.
And in politics neoliberals overstate the extent to which incompetence can be removed by competition and/or well-paid management whilst the left exaggerates the benefits of nationalization. Not only do we over-estimate state capacity, but we also over-estimate management capacity*. Perhaps we underestimate the extent to which success is a matter of luck and then habit plus marginal gains.
Even the English language misleads us here. Think of the synonyms and near-synonyms for incompetence: mistakes, errors, ineptness, ineffectual, bungling, incapability and so on. All of these suggest a shortfall from a norm of competence. But perhaps the opposite is the case – that it is incompetence that is the norm. As Paul Ormerod said (pdf):
Failure is all around us. Failure is pervasive. Failure is everywhere, across time, across place, and across different aspects of life…Yet the existence of failure is one of the great unmentionables.