01/17/2009 05:12 am ET | Updated May 25, 2011

What Do Business Schools Teach Now?

The business landscape looks like nuclear winter: Merrill Lynch, Lehmann Brothers, Bear Stearns gone. Fannie Mae, AIG, GM, Chrysler teetering. In the UK, the City has lost 40,000 jobs and Woolworth's has just cleared out its merchandise and its employees. Any prospective business student would be forgiven for a crisis of faith; indeed, not having one would signal psychopathy.

After the collapse of Enron, WorldCom and Tyco, some tried to argue that these were failures caused by a few bad apples. No such pathetic fantasy will work this time. Regulators have failed, executives have failed, banks have failed, markets have failed. The only reason CEOs aren't being strung up from the nearest lampposts is because even investors appreciate that -- bad as many of these undoubtedly are -- the meltdown can't be attributed only to individuals.

But where did these people come from? Well the vast majority came out of business schools. Many of those institutions deliberately styled themselves Bootcamps for Quants: come here before making your millions on Wall Street; it'll be a good investment of the $100K+ the two years it will cost you. Historically, business schools grew out of engineering schools, derived from the Taylorian idea that a business was essentially a machine whose controls you could design and manage to generate maximum returns.

For decades, b-schools prided themselves on demanding total commitment: excellence demanded the exclusion of other interests, people, values. Total dedication was crucial to the training, designed to make initiates dependent on one another, loyal to a single, exclusive set of beliefs. And, for the most part, it worked, generating legions of bright young things eager to sacrifice anything to serve the masters of Wall Street.

(This intentional withdrawal from the world was one reason business schools found it so hard to increase their number of women students. Whereas law, medical and dentist schools reached 50%, business schools stayed stuck at around 30% female intake. The bootcamp culture didn't appeal and women have never warmed to a violent bifurcation of work and life.)

But the intentional exclusion of the rest of the world was what made it possible to work insane hours, to generate mania for deals regardless of cost, and to structure finance in ways that bore no relation to reality. Because reality had always been deliberately excluded. It was the exclusion of reality that let bankers imagine securitized mortgages had nothing to do with homes. It was the exclusion of reality that allowed GM to think it could make expensive, unattractive cars forever. It was the exclusion of reality that lay behind John Thain's delusion that, having sold his shareholders and employees short, he was entitled to a bonus.

After Enron, many business schools did a lot of soul-searching. They all questioned what they were teaching and to whom. They were shocked to discover how many of their students cheated -- and always had. Many, like Yale, added ethics courses and endeavored to integrate moral concepts into their core curriculum. Some, like Presidio, set out to teach a new business model in which profit was but one benchmark of success. But overall, not much changed.

If business schools don't change -- fast -- they'll become like military academies after the first world war: discredited and obsolete. It's time to ditch the engineering legacy: companies aren't machines, they are people. And business is not a discipline to be practiced like some religious cult, cut off from the society of lesser-minded mortals. If our economy is to survive, it needs to reposition business inside the world, inside human beings, connected to people, to consequences, to social ethics, values and responsibilities. This doesn't mean we need just to nurture so-called 'social entrepreneurs'. It means that all businesses must see themselves as social businesses, operating in society, for society and because of society.

It was Ayn Rand who, in 1961, announced that there was no such thing as society "since society is only a number of individual men[sic]." Well she was wrong. And nothing demonstrates that more vividly than the meltdown we're witnessing now. The inter-connectedness of people through business is so dense that no business -- and no business school -- can afford to ignore it. Redefining the role of business in the world is a huge opportunity for business schools if they have the wit to notice and the courage to change.

Margaret Heffernan teaches entrepreneurship at Simmons School of Management and is Executive in Residence at Babson College, both in Massachusetts.