economics

Economics is ""The social science that deals with the production, distribution, and consumption of goods and services and with the theory and management of economies or economic systems.""
-- Source: economics. Dictionary.com. The American Heritage® Dictionary of the English Language, Fourth Edition. Houghton Mifflin Company, 2004. http://dictionary.reference.com/browse/economics (accessed: March 26, 2007).

Stowell on economics -- Without scarcity, there is no need to economize -- and therefore no economics. ""Economics is the study of the use of scarce resources which have alternative uses."" -- Lionel Robbins, British economist. In other words, economics studies the consequences of the decisions that are made about the use of land, labor, capital, and other resources that go into producing the volume of output which determines a country's standard of living. Those decisions and their consequences can be more important than the resources themselves, for there are poor countries with rich natural resources and countries like Japan and Switzerland with relatively few natural resources but high standards of living. (Stowell, 2007, p 2).

Economics schools of thought --
There are many economics schools of thought beyond the ones profiled here. These four schools of thought parallel the developments in management and organizational theory and are representative of the developing natural sciences and the analogous socials sciences --

• classical economics
• neoclassical economics
• evolutionary economics
• complexity economics

Classical/neoclassical vs. new economics --
The fundamental differences between the classical economics and evolutionary or complexity economics is related to their assumptions about equilibrium and decision making.

Classical assumptions include (Faulkner, 2006, pp 2-3) --

• markets tend inexorably to move towards equilibrium
• decision makers are always rational and try to profit maximize at all times
• decision-making is always based on available information and is always rational
• long run supernormal profits are not sustainable, except where there are unscalable barriers to entry
• differences between products in a given market, and between companies, tend to become minimal over time
• economic decisions are taken deterministically in response to economic forces, and not as a result of discretionary management judgment
• one management decision begins to look much like another, and the concepts of entrepreneurship or even idiosyncratic management style do not sit easily even in modern economic theory

Given these assumptions, it is clear why economics has been of little help in assisting managers in building profitable companies. The ideological inclinations have been at odds with the business strategist who is continually seeking imperfect markets and imperfect competition.

Evolutionary and/or complexity economics recognizes markets as being in continual disequilibrium and as firms continually evolving, driving this disequilibrium.

Economics and strategy (Some material sourced from Kay, 1990) --
To begin with, there are two broad branches of economics --

Macroeconomics --
Macroeconomics is the part of economic theory that deals with aggregates, such as national income, total employment, and total consumption. Such factors as output, growth, and inflation are the lifeblood of macroeconomics. With macroeconomics dealing with aggregates, it contributes little, if at all, to strategy, which seeks and understanding of specific elements and situations.

Microeconomics --
Microeconomics is the part of economic theory that deals with particular elements of the economy, such as industries, products, households, organizations, and individuals. Costs, prices, industries, markets, and individual preferences are the lifeblood of microeconomics. Technically strategy is in the domain of microeconomics, but economics has failed to address the types of questions business people need answered -- there are two groups of questions - (1) the internal organization of the firm and its relationship between its suppliers and customers, and (2) the nature of strategic interaction between small groups of firms.

Strategy and economics --
Economics has almost no influence on business policy. The evolution of microeconomics over the 1900s was based on such tools as a 'representative firm.' The role of individual agents was played down. This did little to build a body of knowledge concerning the environmental setting with which enterprises operate and in how they behave in these settings as producers, sellers, and buyers. There is nothing to explain why one firm varies from another.

Strategy origination -- (see strategy)
Economics failure to penetrate the boundary of the firm left a vacuum due to the need for business leaders to have knowledge of how to lead, manage, grow, develop, and compete with their firms. Igor Ansoff is generally credited with founding the subject of corporate strategy (Ansoff, Corporate Strategy, 1965). He was critical of economists who had shed little light on decision-making processes in a real world firm. Corporate Strategy focused on the process of executive decision making, as indicated in the subtitle, An Analytical Approach to Business Policy for Growth and Expansion.

Ansoff's work was certainly complemented by many precursors which contributed to the strategy body of knowledge up to that time, such as --

• Ronald H. Coase's The Nature of the Firm (1937)
• Joseph A. Schumpeter's Capitalism, Socialism, and Democracy (1942), with its insights into entrepreneurial behavior and innovation
• Peter F. Drucker's Concept of the Corporation (1945), identifying management as a discipline; The Practice of Management (1954), defining the discipline of management and knowledge work & workers; Managing for Results (1964), identifying opportunity pursuit, vs. problem fixing, as essential to competitive success and growth.
• Edith Penrose's The Theory of the Growth of the Firm (1959), a, if not the, the seminal work in the 'resource-based' school of strategy and competitive advantage. Knowledge creation within the company is identified as critical to the ability of a firm to grow.
• Alfred D. Chandler, Jr.'s Strategy and Structure (1962), examining the growth of major American corporations.