Untelling the Dominant Economic Story

David Sloan Wilson thinks there must be another story based on better assumptions

In How Putting Shareholders First Harms Investors, Corporations, and the Public, David Sloan Wilson (interviewing Lynn Stout) debunks several central aspects of conventional business thinking:

A bedrock assumption of economics is that firms become well adapted by competing against each other. If so, then consider a study that I reported upon earlier, which monitored the survival of 136 firms starting from the time they initiated their public offering on the US Stock Market. Five years later, the survivors—by a wide margin—were the firms that did best by their employees.

If only the fittest firms survive, then doing well by employees would have become the prevailing business practice a long time ago. That hasn’t happened, so something is wrong with the simple idea that best business practices evolve by between-firm selection.

So, if companies supposedly learn from the successful practices of 'high-performing' companies, why aren't more -- if not all -- businesses dedicating themselves to doing well for employees, instead of pushing for short-term returns? The reality is the opposite, he tells us:

The dominant economic story rests upon a theoretical foundation that is extraordinarily weak.

Wilson wrote earlier (the 'earlier' in the quote above), in Business Schools Have It Backwards. Companies Survive Longer When They Put Employees First., where he makes three strong recommendations, based on the '90s work The Human Equation: Building Profits By Putting People First by Jeffrey Pfeffer.

1) Insist on a strong theoretical framework. The dominant economic story rests upon a theoretical foundation that is extraordinarily weak. This is sometimes difficult to detect, because absurd assumptions about human nature and economic systems are hidden behind a thick wall of mathematical formalism that most people can’t penetrate and therefore accept on faith. [...]

2) Insist on empirical evidence. A single business is a complex system, not to speak of a multi-business economy. A business strategy that seems to make sense based on an underlying rationale, such as cutting costs by paying the lowest possible wage or claiming the right to dismiss employees at will, can easily backfire based on unforeseen consequences. Rigorously designed studies are required to track all of the consequences of any given business practice. [...] Most businesses have not adopted a culture of basing their management practices on evidence-based research. The second step toward changing the story is to demand evidence to justify any given business strategy, even one that is informed by the best theory.

3) Beware of practices that lead to short-term benefits and primarily benefit the elite. These practices might benefit the common good over the long term but they are more likely to be part of the problem. The third step toward changing the story is to demand an especially solid theoretical justification and empirical evidence for these practices—even when they appear well-intentioned.

These insights lead us to the conclusion that companies are not in fact operating empirically, searching for the best long-term way to operate, in general. There are operating on either a/ folklore or b/ the aim to strip-mine the company in the short term for the benefit of shareholders and the management elite. As Wilson puts it,

Putting people first has not become the norm in the business world and treating employees as chattel is perversely spreading worldwide like a cancer.