The Ideology of Doing Business

What is the role of ideology in shaping how businesses go about their everyday operations?

Generally, economic theories of the firm – particularly at undergraduate level –  imply that businesses have clear aims and a clear way to go about those aims. This might be the basic profit maximisation; it could be growth; it could be market share. In some models it’s not quite as clear for the firm as a whole – the objectives of managers and shareholders can conflict, for example – but it is at least the case that each agent has clear objectives, subject to some constraints.

However, the real world is rarely so certain. While it is obvious that capitalist firms throughout history have the overarching aim of making money, the way to achieve this is not always clear, particularly if we are talking about long term strategies. For example, could it be that being a “socially responsible” firm will increase business from sympathetic customers? Or that higher wages, better working conditions and so forth, which seem costly, will actually increase employee productivity? The history of how firms have worked seems to suggest that firms as a whole – or capitalism, if you like – is susceptible to waves of ideology about the ‘right’ way to do business.

Consider the American School of Economics, which was the chief ideology and policy of the USA during its industrialisation period. This was a highly protectionist school, which focused around maintaining domestic competitiveness and employment. High wages, good education and healthcare for the workers were encouraged, both for humanitarian reasons and as a way to increase productivity and make business more profitable. It was not only required that government policies were set up in a certain way – tariffs, public services, employment rights – but also that these policies had popular support. Business generally shared in the idea that well paid employees would be more productive, something epitomised by Henry Ford’s famous doubling of his worker’s wages.

The result of this policy was a large, profitable domestic sector and consistent increases in real wages, allowing the USA to outperform the UK. This isn’t to romanticise the period: I’d have plenty to say about anti-labour violence and US foreign policy at the time (that is, if anyone were interested). However, the American School of Thought demonstrates how a certain way of thinking can permeate society and business as a whole, and massively affect how the economy functions. Can you imagine such policies working these days, when the popular mentality is so against them? Surely, firms would lobby against – or find ways around – attempts to reestablish such a system.

Another example is in Japan, where they had different ideas. The Japanese firm is a highly collective organisation, one which is loyal to its employees, and in turn has this loyalty reciprocated. Firms generally offer workers ‘lifetime employment’, coupled with numerous benefits such as insurance, pensions and promises of progression, based mostly on seniority. Achievements are shared collectively, and many companies even require employees to sing a ‘company song’. Getting a job at a major firm requires that one goes through a rigorous army-esque training program, and is a major lifetime achievement, to the extent that it is not uncommon for those who accomplish the feat (or don’t) to be reduced to tears. From a certain perspective, this approach might seem quite rigid and inflexible for both workers and firms, but it has certainly produced results: successful firms like Sony and Nintendo; low unemployment despite macroeconomic weakness, security for a large amount of the population, even with relatively low government spending.

There are numerous – indeed, surely countless – other ways to organise a firm based on a people’s worldview, national identity and so forth. Germany has its stakeholder model, where union leaders sit on board meetings and have a say in how the company is run; in turn, however, they are willing to go against their immediate interests by holding wages down to maintain national competitiveness. In countries such as India, the nature of the workplace is intertwined with religious ritual, something firms must consider in how they run their businesses. The rise in worker owned coops in Argentina and across the western world, with 48,000 in the US alone, indicates a growing number of people who share their own, democracy based ideas about the best way to organise business and treat employees.

One implication of the ideology theory is that, contrary to the Reaganite idea that 1980s ‘neoliberal’ reforms simply unleashed business to its true calling, it could be that the decade just instilled them with a certain mentality, one no more special than any other. This ideology was a more ruthless, ‘profit (shareholders) first’ mantra: firms merged, outsourced and became less tolerant of unions. While it is true that these things were accompanied and enabled by changes in the law and technology, the decade as a whole it also seemed put a lot of things, particularly mergers, in vogue: evidence is quite consistent with the idea that mergers were mostly driven by hubris. Similarly, outsourcing has come under fire after it has emerged that there are many hidden communication, management and transaction costs that were not first realised, and hence it may not be as profitable as first thought. Is this uncertainty the mark of firms which have a clear aim and know how to go about it, or which seem largely motivated by fads and unaware of the exact results of the actions?

One last example of how people’s perceptions can have a large influence on the economy may come from the UK. Here, the government’s recent policy of austerity has meant that public sector workers have faced massive cuts. Naturally, the government and press have justified this by appealing to the idea that there is a lot of excess waste in the public sector: pointless, lazy bureaucrats and so forth. Meanwhile, the private sector has failed to step up and fill the gap in employment. Interestingly, a survey provided some insight into why – aside from general macroeconomic weakness – this may be the case: 57% of private sector employers said they were not interested in former public sector employees because they were “not equipped” for the job, based simply on the fact that they were employed by the public sector. In other words, the general impression, fostered by the political class, that public sector workers are useless – false though it may be – has backfired by changing business’ impression of them, reducing hires.

In sum,  it seems how businesses are run is substantially dependent on ideas, and hence can be a political choice. Cries that businesses should be more “socially responsible” may sometimes seem repetitive and empty, but history shows us that it is possible to manoeuvre the way businesses operate as a whole. Business’ ideology is also an interesting area of exploration for economic theory: instead of having businesses driven by maximising some goal, they could be driven by a certain set of principles (I expect there are some papers that deal with this, though perhaps not in the way I’d like). In any case, anyone trying to legitimise whatever way business happens to be behaving right now as ‘natural’ should take another look at the history of the firm.

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  1. #1 by Roman P. on August 15, 2013 - 12:59 pm

    Well, Gramsci proposed an idea that intellectuals first propagandize some social change and then it becomes a new orthodoxy in a society. First ideologists of the left changed the western society in the 1930-1940’s to extend the rights of workers and then the right ideologists created a new ideological climate that allowed for the greater concentration of wealth. Ideas are fickle and their propagation is uncertain, so there is no guarantee that our children won’t experience slavery as the new work ethic, for example.

    As an aside, in my culture the term ‘effective manager’ came to be an euphemism for ‘thief and scoundrel’.

    • #2 by Olle J. on August 15, 2013 - 3:41 pm

      As in for example, and more closely associated with the posts issues of business strategies, “The Second Industrial Divide”, Piore & Sabel (1984).

    • #3 by Unlearningecon on August 16, 2013 - 2:13 pm

      I agree, though admittedly this post has a degree of liberal idealism: I’d say that capitalism tends to steer ideas toward something like neoliberalism, and post-WW2 was an abomination. I tend to agree with Peter Dorman that Keynes was largely wrong about ideas.

      Ideas are fickle and their propagation is uncertain, so there is no guarantee that our children won’t experience slavery as the new work ethic, for example.

      That is depressingly hard to argue with.

      As an aside, in my culture the term ‘effective manager’ came to be an euphemism for ‘thief and scoundrel’.

      Too right! Actually, I’d say this is true to a limited extent in a lot of countries – managers are always ripe for mocking.

      • #4 by Jan on August 17, 2013 - 11:22 am

        Interesting Unlearning.I found an interesting paper from Erik Reinert -A a heteredox institituonalist development economist view on the history of economic thought.What ever one think of it i found real though provokin and interesting he saw the economic development from unortodox
        very uncommon view i think.Took up much of what you did on American school an etc.
        http://www.othercanon.com/uploads/state-paper-pdf.pdf

    • #5 by Jan C on August 16, 2013 - 6:05 pm

      “I agree, though admittedly this post has a degree of liberal idealism: I’d say that capitalism tends to steer ideas toward something like neoliberalism, and post-WW2 was an abomination.”

      Do you have any suggestions about what caused that abomination?

      • #6 by Unlearningecon on August 16, 2013 - 7:59 pm

        I’d say almost a decade of depression, followed by a war, and with experience of what happens when a post-war period is mismanaged still fresh in people’s heads, created enough collective desire for social change to make it happen.

        I should add: the existence of an ideological counterpart in the USSR and elsewhere.

  2. #7 by Sumgai on August 15, 2013 - 10:16 pm

    You should check out Seymour Melman’s work. He was a professor of industrial engineering
    and operations research who is mostly known for his anti-war work though his work on economics is great as he was a big critic of neoliberalism . He researched alternative methods of production and management, and by researched I don’t mean he sat in his office crafting theories but actually went out and saw how things functioned for himself which led to works like Decision Making and Productivity.

    Though its a old book it is still very relevant today because the same management techniques are still used today. Given that it is extremely hard to find (there is only maybe one used copy on Amazon as I write this) you may have to turn to other ways of obtaining it. Now you didn’t get this from me (though I seriously doubt anybody would care at this point given how unknown he is) but you can find it here http://www.mediafire.com/download/zh60a61za18hzte/Decision_Making_and_Productivity.rar

  3. #8 by Magpie on August 16, 2013 - 11:20 am

    One thing to keep in mind is what stage of development an economy is.

    Germany was relatively late to industrialize (like the US). In Germany, like in the US, the dominant school of economic thought (the German Historical School) emphasized the benefits of protectionism for their nascent manufacturing firms.

    Britain, at the other hand, had already achieved a notable level of industrial development: it’s no coincidence that local economists advocated for free trade.

    Incidentally, Germany was basically the first nation to establish a form of welfare state. It was an attempt to stunt the growth of the Social Democrat Party (which originally was largely Marxist).

    The equivalent response, in the US, was initially a private initiative and Ford only replicated, on a larger scale, what other firms had done before.

    • #9 by Unlearningecon on August 16, 2013 - 3:22 pm

      Yeah, that is true. I recall that Britain’s calls for the US to engage in free trade in the 19th Century were met by one official saying “we’ll use free trade when we’ve used protectionism for two centuries like you”. Of course once your businesses are established, it is profitable to you to call for ‘free trade’, and buy up pieces of less powerful businesses, like in the Asian Financial Crisis.

  4. #10 by Jamie on August 16, 2013 - 2:24 pm

    I spent many years helping businesses and public sector organisations solve a variety of operational problems. In all that time I never considered ideology to be an important influence in business, and rarely heard anyone else express that view either. Businesses are pragmatic rather than ideological. In a competitive market, businesses need to experiment and evolve continuously. Flexible pragmatism drives evolution while rigid ideology constrains it.

    A business must have at least one idea on why it is different from its competitors. That idea might be about a novel product, or a better product, or a cheaper product, or a niche product customised for certain customers, but it must be something. Equally, competitors have other ideas. Businesses need to exploit their own ideas and also neutralise their competitors’ ideas. If one business adopts a good idea then others will follow for practical competitive reasons rather than ideological ones.

    Nations do have cultures which impact on businesses. For examples, unions are more effective in co-operative cultures rather than adversarial cultures. However, individual businesses in a single country also have their own unique cultures, and these are often as distinctive as national cultures. A shared culture helps flexibility and teamwork, but that’s very different from an imposed ideology.

    I could quote many examples but I’ll stick to one. You put a negative slant on outsourcing. However, there is a different way of looking at it. All businesses are specialists at something. That means that they tend to source what they are good at internally and outsource everything else. For example, supermarkets specialise in retail and outsource almost all of the production and packaging of goods. Outsourcing is a natural part of any business. Nevertheless, some sourcing models are better than others, and some models are not viable. As a result, some sourcing experiments will succeed while others will fail. Experimentation allows businesses to evolve towards effective sourcing models and away from ineffective models. Evolution requires experiments and some experiments fail. So what? The alternative to experiment is ideological rigidity where one sourcing model is defended as an ideal against all alternatives irrespective of the facts.

    There are some exceptions to my main point. For example, I do agree that businesses which reject former public sector workers on principle are wrong. That IS ideological and makes no sense. I have worked extensively in both private and public sectors and I think I have as good a view of their relative strengths and weaknesses as anyone. There are significant differences but they are not, in general, related to the quality of the people. However, a rational debate on these strengths and weaknesses would require a more mature political environment where both left and right can see beyond the ideological rigidity of one sector being all good and the other being all bad.

    • #11 by Roman P. on August 16, 2013 - 2:49 pm

      Jamie,

      But could we really separate ideology from culture? I think that while fundamentalist Randian or pro-Marx managers/owners are a rarity and no person is (obviously) the same, the sum of their views and opinions could add up to a certain ideological climate prevailing in some society at a point of time. This in turns leads to some widespread fads, beliefs, customs, etc.

    • #12 by Unlearningecon on August 16, 2013 - 3:28 pm

      Thanks for an interesting comment. Note that the term ‘ideology’ is often used pejoratively, but I did not mean it as such: rather, I was merely referring to set of shared ideas.

      I agree that it would be silly to lump all businesses in a country or at one time together as driven by a shared ideology. What I was implying is that society may experience waves of ideology which filter through to businesses, workers and consumers to varying degrees. Some might retain their own culture or ideology; some might be marginally affected; some might embrace the new ideology entirely.

      Re: outsourcing, there’s no doubt that it can be a good business model. However, I think what happened with outsourcing – and mergers, incidentally – was that it was sometimes embraced because of the obvious benefits: growth, lower costs etc, without businesses fully taking into account the potential transaction costs due to distance, language barriers or what have you. We live in an uncertain world, and sometimes things emerge that businesses weren’t expecting – they will surely adapt, as you say, but this takes time, and it’s probable that so many new ideas come along in the mean time that we never reach anything like a competitive equilibrium where each firm has it all figured out.

    • #13 by Jamie on August 17, 2013 - 11:17 am

      Thanks for the replies. I don’t agree though. Culture and ideology are very different, and ideology isn’t just a set of shared ideas.

      Most businesses would say that they have a culture. Many are proud of their culture. I don’t know of any business which would say it has an ideology. Culture is an organic thing. No-one imposes a culture. On the other hand, ideology is almost always imposed.

      Ideas are almost always a good thing as long as they are evaluated on their merits. Yes, some ideas are little more than fashion accessories but how do you tell the difference between the good ideas and the duds other than by trying them out. If a business makes a mistake by implementing a bad idea then it hurts only itself. If the idea is bad enough then the business will go bankrupt and disappear. On the other hand, if the business doesn’t implement any new ideas then it will also go bankrupt and disappear. Some businesses might make a merger work while others don’t. It isn’t black and white. It’s all about risk and reward. There is no such thing as ‘a competitive equilibrium where each firm has it all figured out’. Businesses aren’t all-knowing deities. Of course they make mistakes. Do you know of any human institutions which don’t make mistakes? What is your alternative proposal to avoid business mistakes in the future?

      Ideologies, on the other hand, are almost always bad. Ideologies tend to involve a very fixed set of ideas which divide society into goodies and baddies. The ideology insists that any idea from a goody must be a good idea even when it is patently stupid. Meanwhile, any idea from a baddy must be a bad idea even if it is well founded. Also, the motives of the baddies must be questioned at all times. 20th century politics was riddled with this and mostly it was a disaster. If we succeeded, it was despite these ideologies, not because of them.

      It is possible to have ideas without ideologies. That’s what successful businesses do. That’s why they are smarter than governments, and that’s why they can cause problems for society by, say, avoiding clumsy tax regimes.

      Politicians have realised that they can’t get elected any more on vague ideological platitudes. However, they haven’t yet evolved to understand that they do need good ideas instead. Mostly, therefore, politics has descended into vacuous nonsense. The UK Prime Minister, David Cameron, had an idea once. It was about a Big Society. No-one understood what he meant and it never went anywhere. Meanwhile, I don’t recall even one good idea from Leader of the Opposition, Ed Miliband.

      Pragmatic politics would involve, for example, developing specific ideas for agile tax regimes which would force large businesses to pay their fair share. Instead, we get useless platitudes about tax being a moral issue rather than a legal issue from the people who set the laws.

      Governments should aspire to being more like successful businesses. When governments try to blame successful businesses for their own failure, they are useless.

      Ideas matter. Ideologies don’t. Think of it like the iTunes era versus the CD era. We can pick and choose the best ideas without buying Marx’s greatest hits or any other compilation.

    • #14 by Jamie on August 17, 2013 - 12:05 pm

      Here’s another way to think about it.

      Suppose that Mainstream Economics Inc and Post Keynesian Inc are two businesses competing in a market for selling ideas to the public. Mainstream Economics has a huge market share but Post Keynesian thinks that it has a much better product.

      You are appointed CEO of Post Keynesian and given the task of turning round this failing business. You need to set clear objectives and priorities; set clear measures for assessing progress and success; and define a business strategy and implementation plan complete with specific actions and responsibilities.

      What is your strategy? Note that there is no correct answer; no-one else has ever done this before; and there is no guarantee of success whatever you decide to do. Any choice will have pros and cons. For example, you could decide to propose a merger with Paul Krugman. You have good ideas. He has the best access to the market. The merger might succeed beyond your wildest dreams or it might founder on personal and ideological differences. Is MMT a distinct brand of Post Keynesian? Should you close down this brand; or should you re-brand Post Keynesian as MMT; or should you run the two brands in parallel? When you consider these choices I think that you’ll see that almost every practical choice involves ideological compromise, and almost every choice will upset someone. How will you manage the upset people? How do you think they will react to your strategy? Will they buckle down reluctantly or will they leave and set up their own business? What will happen to your strategy if they muddy the waters by presenting the public with two similar but indistinct alternatives to Mainstream Economics?

      This is a serious question by the way. I’d be interested in your answer.

      • #15 by Unlearningecon on August 19, 2013 - 9:24 pm

        Your comments are interesting but it feels like you are framing this as a disagreement when the disagreement seems to me to be mild, if any.

        What I am saying is that a shared societal perspective might influence businesses. This might not be ‘wrong’ or ‘right’; as your example shows, the best way to do things isn’t always clear. Neither must we call it ‘ideology’. However, different perspectives – like the American School versus the German stakeholder ‘school’ – may have different political implications, and we can judge them accordingly. I’m really attacking the idea that there is a baseline ‘free market’ upon which businesses build themselves up independently of wider culture, policy and so forth, not that businesses have no autonomy, or that bad ideas will not survive. Surely, you can imagine different economic outcomes if capitalists believed in maintaining full employment versus if they wanted to maintain a certain rate of unemployment?

        Re: my post-Keynesian business, since you’re interested: I’d probably try to integrate the Sraffian idea that society has to reproduce itself, and adopts aggregate agents (bankers, capitalists, workers, government) with a Steve Keen-style banking sector. I’d be looking for building a comprehensive alternative to neoclassical economics, and moving away from purely attacking it.

      • #16 by Jamie on August 22, 2013 - 3:35 pm

        Apologies if you think I’m trying to pick a fight. That’s not my intention. I agree with a lot of your posts and find them educational. For example, the recent posts on monetary theory.

        With this post, it’s not about being right or wrong. It’s about perspective and proportion. At a guess, I’d say that the influences on a business are of the magnitude of 80% related to the nature of the business and its customers and suppliers, 15% related to culture and 5% related to political ideology. Your post is titled by the 5% and ignores the 80%. Also, it is biased in the 5%. For example, there are over 2 million businesses in the UK. Assuming a working population of 30 million, that gives an average size of 15 employees per business. It is entirely natural for them to merge (and de-merge) to make themselves more focused and effective. However, you seem to suggest that business mergers are a sign of a neo-liberal conspiracy. If that’s not what you intend then you should avoid words like ‘ideology’ and ‘neo-liberal’ when writing about this type of thing.

        I read a great post yesterday about business by Frances Coppola. It taught me some history about the banking industry in the UK and challenged my views on how I should think about managing my savings. That’s how to write about business as an economist. Focused and specific. John Kay is often very good too.
        .

      • #17 by Unlearningecon on August 22, 2013 - 6:36 pm

        No, it’s fine: criticism is welcome, especially constructive criticism like yours. I agree that businesses have their own culture and aims, and that they aren’t just driven by whims.

        However, I am curious as to how you would explain the seemingly shared approach to business organisation in Japan or the industrialising USA? Seems to me a set of shared national ideas is the obvious explanation. But maybe I’m wrong.

      • #18 by Jamie on August 23, 2013 - 3:57 pm

        One of the things I like about your blog is that you see the economy as dynamic and chaotic rather than in an ‘equilibrium’ (whatever that means). However, I think you are looking at business organisation in a static point-in-time way.

        It may be that a business idea originates in, say, Japanese car manufacturing and that it starts there because of Japanese culture. However, if it results in competitive advantage then car manufacturers in other cultures will adopt the idea too. Also, if the Japanese car manufacturer opens a factory in the UK, it will bring its management ideas as well and expose its UK employees to those ideas. Maybe some of those employees then leave the Japanese manufacturer and join a UK manufacturer where they share the Japanese ideas, or maybe they set up a consultancy focused on helping businesses in the EU learn from Japanese manufacturing techniques.

        Other ideas turn out not to be sustainable in a competitive world. For example,.Henry Ford’s generous approach to wages is only sustainable as long as every other car manufacturer adopts the same approach. As soon as one breaks rank, it will out-compete the others due to lower costs. This then leads to everyone else following. I’m not an expert in this area but I seem to remember that part of the need for a US auto industry bailout came from unaffordable pensions contributions.

      • #19 by Unlearningecon on August 28, 2013 - 2:20 pm

        I see what you mean but I am forced to ask: why did, say, the Japanese approach not spread? It was acknowledged (and indeed is even in popular culture) that the Japanese firms were out competing their US counterparts and efforts were made to change, but either for cultural reasons or because existing institutions were too rigid, the firms ultimately didn’t adopt a similar approach.

        It seems historical starting point matters for how firms function, both in the long and short term. Japanese lifetime employment is becoming less common (though it’s still the norm), seemingly due to economic weakness, but overall the rigidity of institutions (public and private) seems to me to be a bigger factor than competitive adaption. Perhaps my impression is faulty, though.

  5. #20 by Mick Brown on August 17, 2013 - 8:11 pm

    Having dropped out in the mid 1960s it wasn’t long before I came up against the world of small business. Since 1970 I’ve been fascinated about how firms work. Your brief summary of different business and social systems in parts of the world puts the UK as the most regressive and that includes those with religious influences.

  6. #21 by metatone on August 19, 2013 - 6:39 pm

    There’s a literature from the org side, “mimetic isomorphism” is a good keyword.
    Basically, it agrees with you overall.

  7. #22 by Unlearningecon on August 19, 2013 - 7:58 pm

    @jan, sumgai & metatone,

    Thanks for the recommendations and links.