Performance Management Solutions

Alasdair White is a business school professor based in Brussels, Belgium where, for 20 years, he has taught management from a behavioural perspective with, he has to admit, a bit more than a passing nod towards free-market economic theory.

A little over 100 years ago, the world of science was faced with a radical challenge to its most basic and fundamental belief: that the laws of physics were Newtonian and immutable. For nearly 250 years, the law of gravity and all that Newton and others drew from it had ruled the scientific world and to seriously question those laws was to invite ridicule, disbelief, and charges of scientific heresy. But that’s exactly what a number of scientists were doing at the begining of the 20^th century.

Through careful thought and analysis they concluded that while the rules of Newtonian physics were true and immutable, they were ONLY true and immutable in certain circumstances, and that they did not apply – indeed, could not apply – at the sub-atomic level. As a result, quantum mechanics (or quantum physics) was born. It is interesting to note that they were not claiming that the laws of Newtonian physics were wrong but that a different, parallel set of laws applied as the mass of any body became smaller and more fundamental.

This idea that the two sets of laws of physics were so radically different but equally true was almost unthinkable, and many initially argued that somehow the laws of microphysics, such as quantum mechanics, could be aligned with and explained by the ‘more robust’ laws of Newtonian physics. But this was soon shown to be wrong: microphysics was engaged with matter at a very different and more fundamental level; a level at which Newtonian laws were an over-simplification. Now, a hundred years later, the education system is still teaches Newtonian physics as though it were the only truth, rather than one of a number.

I believe that something similar is about to happen in the world of economic theory.

What was first called political economy by Adam Smith way back in 1776 when it was the study of how economic agents interacted to create the ‘wealth of nations’, economics has become one of the most powerful areas of study, one that its practitioners claim affects every aspect of our lives, but one that is profoundly flawed.

In the 250 years since Newton, scientists have unravelled the secrets of the universe with surprising accuracy and with profound impact on everything we do and use in our lives. They have examined the universe all the way back to its origins, they have examined matter down to the fundamental particles that make up everything around us, they have used that knowledge to create things for both good and evil, and few, if any, now question the ideas that once appeared so radical. (Einstein showed that space and time curve and are relative to each other and to the speed and position of the observer, Heisenberg showed in his uncertainty principle that one cannot at the same time define exactly where something is now and where it will be in the future, while particle physicists at the Large Hadron Collider at the CERN Laboratories in Switzerland have shown that some fundamental particles can be in two places at the same time.)

In the 250 years since Adam Smith, on the other hand, economists have done little to explain how the economic activity of the world is organised. They have invented, proposed and imposed a huge number of theories that have rapidly been shown to be incomplete, inaccurate or plain wrong; and they have based it all on the fundamentally flawed idea that the macro and microeconomic world operates with the same rules: that there is only one economic truth. Economic discourse, certainly at a political, financial and commercial level, is littered with statements that start with “Of course …” followed by some wild idea presented as an absolute truth.

In the last 50 years, we have had Marxism, Keynesian economics, monetarism, and free-market economics, and while they may all shed some light on how the economy works at a macro level, they are none of them wholly correct, but neither are they wholly wrong – although the adherents of each school will vehemently promote their own theory and decry those of others. However, what bothers me is this: none of the theories makes any rational sense when the economy of the world is considered at a micro level – the level of the individual man, woman or child.

In the next few blogs we’ll explore these ideas further and look at the underlying fallacy of most economic theory – the subject of full knowledge and rationality – the behavioural aspects of microeconomics and whether business schools are partially to blame for the current economic problems by teaching, without critical analysis, theories based on fundamentally flawed ideas.