Is falling profitability necessarily evidence of falling managerial effectiveness?

Starts out strong but then weakens. From How to Tackle the Unfolding Research Crisis by Les Coleman. I liked the attempt to structure causal categories.

Scholarly research is in crisis, and four issues highlight its dimensions. The first is that important disciplines such as physics, economics, psychology, medicine, and geology are unable to explain over 90 percent of what we see: dark matter dominates their theoretical understanding. In cosmology, 95 percent of the night sky is made up of dark matter and dark energy which are undetectable and inexplicable. Some 90 percent of human decisions are made autonomously by our sub-conscious, and even conscious decisions often emerge from a black box and have little support. The causes and natural history of important illnesses—including heart disease, cancer, obesity, and mental illness—are largely unknown for individuals.

The second dimension of the research crisis is that systems which are critical to humankind—especially climate, demography, asset prices, and natural disasters—are minimally predictable. The best example of misguided theory can be seen in the conduct of organisations. Although a high proportion of their executives have formal training in management, its inadequacy is continuously evidenced by failures as serious as bankruptcies of globally significant firms (such as Enron, Lehman Brothers, Merrill Lynch, and Parmalat) and global recessions (including as recently as 2000 and 2008). Perhaps the best evidence of management theories’ poor value is an analysis rhetorically entitled “Is the US Public Corporation in Trouble?” which showed that profitability of firms fell significantly in the 40 years to 2015. This brings the important corollary that modern management and finance theory have been associated with declining economic performance.

The third dimension is a chronic inability to reproduce research findings. This replication crisis was highlighted by an online survey by Nature in 2016, in which over 70 percent of researchers reported that they had tried and failed to reproduce other researchers’ published findings. More specifically, scientists at biotechnology firm Amgen reported in 2012 that they could only confirm the results of six of 53 (11 percent) landmark cancer studies published in high impact journals. Another indication of the dubious benefits of research is its inability to ensure the integrity of findings. Doubts over quality are serious enough to be expressed in papers along the lines of that by medical researcher John Ioannidis entitled “Why Most Published Research Findings Are False.” The variety of deceit is made clear at retractionwatch.com, and its extent is consistent with reports of endemic misconduct amongst researchers.

The final indicator of crisis in research is that progress in developing better theory and forecasting capability has stagnated since the 1960s. A paper by Stanford and MIT economists asked “Are Ideas Getting Harder to Find?” and concluded that—although the number of researchers is growing exponentially—they are becoming less productive in terms of ideas generated, and sustaining research productivity requires ever greater expenditure. For example, yields of agricultural crops have roughly doubled since the 1960s, but this required research expenditure to increase by a factor of up to six.

Symptoms of incomplete theory were made clear by the 2017 BBC radio program: “Is the Knowledge Factory Broken?” which raised awkward questions about the poor return on vast sums being given to universities and other research institutions. It argued that something has gone fundamentally wrong because most published research cannot be repeated and thus is questionable, which means that science is not being done properly.

An example of how easy it is to go astray is the claim that it is a symptom of a problem when "profitability of firms fell significantly in the 40 years to 2015." Well, maybe. But that is a fraction of the possible story. In a world of declining trade barriers and declining costs of transportation and communication, economic theory predicts that there should be a rise in competition. A rise in competition should drive down profitability.

And that is exactly what has happened. The global economy has become more efficient and leaner. Easy and protected margins are gone. Executives work hard to squeeze out profit from such a low cost, seamless, integrated, competitive environment.

Falling profitability could be a symptom of decline. But it can also be an indicator of system improvement.