The Economy is not a Business

As hard as it may be to believe, people have not always believed that the main goal of a business is to maximize its own profits. In fact, the idea wasn’t really introduced in this country until the 1970s; and wasn’t widely adopted until the early 1980s.

Since then, corporations have been extraordinarily successful. Corporate profits as a % of GDP went from around 6% in 1980 to around 11% today. The number of corporations filing for bankruptcy each year went from an all-time high in 1987 to near an all-time low today. The Dow Jones stock average went from about 2,000 in the early 1980s to around 17,000 today.

Despite all of this corporate success however, our economy in general has not fared nearly as well. Real GDP growth rates in the 1980s averaged around 3.1%, while they have only averaged around 2.0% since 2000.  And while corporate bankruptcies are way down, personal bankruptcies have skyrocketed. In addition, the share of our national income that goes to the middle and lower classes actually shrank from 72% in 1971 to around 52% today. And the percentage of adults in this country who own stocks is at an all-time low.

So why the disconnect? Why has the overall economy struggled so much while our corporations have been so successful? The problem is that our educational system does not do an adequate job of teaching people the fundamental difference between a business perspective and an economic perspective. Because of this, most Americans have been fooled into thinking that since the economy is full of businesses, if we just do what is best for each business, then it will automatically be good for the economy. This is simply not true.

From the perspective of a business or individual, income and expenses are COMPLETE OPPOSITES. Income is money coming in, while expenses are money that is going out.

From the perspective of the economy, income and expenses ARE THE SAME THING. One person’s income is ALWAYS another person’s expense (If I buy a cupcake from you, your income is my expense).

So we have trained all of our business leaders to focus on maximizing their own profits, and they have been very successful at doing so. The problem is that while the idea of maximizing profits makes sense from a business perspective, it makes ZERO ECONOMIC SENSE.

In business terms, maximizing profits is the same as maximizing your income while minimizing your expenses. However, in economic terms, maximizing income while minimizing expenses is the same thing as maximizing other people’s expenses while minimizing other people’s income! Gee, I can’t imagine why that might not be so good for the economy (or the middle class for that matter).

In order to truly turn our economy around, we need to start making decisions and implementing policies that actually make economic sense. And in order to do so, we must first educate everyone on the fundamental differences between running a business and running an economy.