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.
In 2003, when I wrote Pigs at the Trough, America's corporate crooks were largely playing with shareholders' money. The new batch of Pigs I cover in the just-released updated version is playing with taxpayer money -- trillions of it.
Joseph A. Palermo: To "Americans for Prosperity" Capitalism Is a Love Story
The only distinguishing feature of the Americans for Prosperity Foundation's "National Defending the American Dream Summit" was its astonishing homogeneity both in thought and in demography.
I think this is indeed the core of the problem: the blind trust that scholars and teachers (and thereby students) have had (and continue to have) in their own academic or "scientific" beliefs and theories.
As root causes of the current financial crisis, there are at least the following academic/"scientific" theories of economics/finance (in which scholars and people have trusted beyond any reasonable doubt):
- "Markets are always right and are also able to rightly price the risks related to securities."
- "Firms should disgorge all of their free cash flows, preferably by buying back their own shares from the stock market"
- "Mortgage-based securities are de facto risk-free" (Indeed, even this has been claimed by some US academic textbooks).
Read more about the role of such academic/"scientific" theories in the current crisis from here:
http://www.glostra.fi/blog/The-Role-of-Scientific-Theories-in-the-Emergence-of-the-Financial-Crisis.html
Cults cannot be reformed.
the bad news: it is sad beyond imagination how strong her influence was, given the shallowness of her worldview - pseudo-education for dupes, comes to mind. Sorry, but that's what it is.
the good news: there's a lot of room for maneuvering, because the logical alternatives to Rand or modern updates of her ideology are numerous. It's simply that there has been a form of thought-police that has kept folks from having a closer look.
But the problem that business schools face, having grown out of engineering schools, is that they have the wrong mental model for what they are doing. They can't - and shouldn't try - to build machines that endlessly repeat, or support, the same task. The variables are too great, the goal entirely illusory. They'd do better to think of companies as living organisms, not machines - organisms that change, adapt and whose ultimate test is sustainability.
While it is certainly true that neither markets nor business can function on the analogy of machines, because they involve human action and interaction in essential ways, it is precisely because of this that the engineering model needs closer examination and interpretation: the point is that the way quants applied 'engineering' was absolutely not up to engineering standards. (much as haditupto2here says).
It is a scandal that minor engineering applications are subject to several orders of magnitude of more substantial oversight than shoveling around hundreds of billions.
Good engineering precisely REQUIRES to understand the uncertainty in the process modeled. Only after such analysis is it possible to separate the wheat from the chaff. Engineering is the key to proper risk management, with a view towards sustainability. Your comdemnation is throwing the baby out with the bathwater.
You can get rid of the phony engineering only by replacing it with the right stuff. Not by ignoring the difficulties. And the right stuff will automatically lead to much smaller scales of business in phony trades, because you will be able to tell in advance that there is a lack of substance and predictability. Hence a lack of sustainability. But to demonstrate that, you need (more) engineering, not morals.
Or rather: the morals and the prudence are being demonstrated by: engineering.
Also, no well-respected CONTEMPORANEOUS economist thought the Smoot-Hawley Tariff caused the Great Depression. That was neo-con revisionist history.
As a graduate of the Simmons School of Management (at which Margaret teaches), I can assure you that there are business schools out there interested in more than simply making money or proving how smart one is. In fact, at the information session before I attended Simmons, the thing I heard which most attracted me to the school was the Dean say "If you want to affect the lives of a huge number of people on a daily basis, become a business leader." Simmons, and other schools like it, work to make-explicit the ethical dillemas of business, and the principles which underlie a given approach to a solution.
The tools of business are powerful. The best schools teach students how to use these tools responsibly; challenging their students to articulate and live by their principles as human beings, as employees and as business owners.
Economics should be viewed as what it is: a laboratory for views on how preferences, prudence, and risk management capacities of free individuals interact via publicly disclosed information and pricing signals.
That there is nothing even remotely close to a full account of that in the classics on the subject is a statement which a majority of practitioners would probably admit - maybe not voluntarily, but when challenged.
It's not surprising that there is no such full account. It's because it would probably be more complex than the Standard model in particle physics. Or a single human cell.
Humble pie has been the favorite of scientists seeking discovery at all times. Know it alls don't do research.