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Much commentary about the American economy nowadays leaves the impression that economists should fix its problems. But Washington is teeming with smart economists, and the problems remain.

An economy is like a cloud: only when inside does one realize how diffuse it is - and that what matters are the particles of vapor that it comprises.

Likewise, an economy is an accumulation of transactions involving goods and services, mostly carried out by business enterprises. Their behaviors are what matters, and they cannot be adequately perceived from the distant perspective of economic models and statistics, but only on the ground - where an economy is built, where it breaks, and where it must be fixed.

On the ground, there are two kinds of enterprises: those that rely on exploration, and those that rely on exploitation. Every economy has both, but a healthy one favors the explorers. This fosters the sense of enterprise that made the United States such an economic powerhouse. Unfortunately, the American economy now favors the exploiters.

Economic development proceeds through a cycle that begins with young, exploring enterprises introducing new products, services, and processes. Over time, however, as they succeed, many explorers become exploiters. They saturate their markets, run out of new ideas, and get lazy. They then extend their product lines instead of developing new products; cut costs by putting pressure on their workers; lobby governments for favorable treatment; merge with competitors to reduce competition; and manipulate customers to squeeze out every last penny.

This, of course, makes these enterprises vulnerable to the creative challenges of the next wave of explorers - the fast new firms that confront the fat old corporations - and the cycle of destruction and reconstruction begins anew.

Contrast this with the America of bailouts, where the fat are considered "too big to fail." In fact, many are too big - or at least too mismanaged - to succeed. How else to explain why major banks and insurance companies bet their futures on mortgages that a little investigation would have shown to be junk? Their senior managers either didn't know, or cynically thought that they could get away with it, while the rest of their managers either didn't care, or couldn't get through to their bosses...

-Article by Henry Mintzberg

Read full article: , December 22, 2011