Well, good morning. It's a pleasure to see all of you here. It's a great pleasure to be back in California.
I have spent many enjoyable years here on the West Coast, as Doug mentioned, as a graduate student,
at that notorious hotbed of libertarian sentiment and Austrian economic thinking.
University of California, Berkeley, somehow they managed to let me through.
Indeed, some of, as you know, there's sort of a revolving door in Washington
across many levels. One is the top economic advisory posts at most of the executive branch agencies. They sort of rotate in with the, depending on the party and power. So when I was a graduate student, as I was finishing my career, most of my professors or many of my professors became top Clinton appointees to be the economic, chief economic advisor to the FTC or the Federal Communications Commission or the Justice Department and I trust division. They went
Back to the University with the Change Administration, and now many of them are back serving with
Obama as well. In fact, Obama's chief economic advisor, Christina Romer, was one of my professors
and a former employer. They're nice people, but they're misguided in one or two areas,
which we'll be talking about this weekend.
I want to talk about business schools, about the role that management education plays in society, and the relationship that it may have to the financial crisis and the recession. Now, when the crisis hit, naturally people began searching for explanations. Well, the problem started in the housing market, right? It was zero down, adjustable rate mortgages, and so people thought that maybe these had something to do with it. These were possible
in explaining the economic collapse. Maybe it had something to do with complex mortgage-backed securities and other financial instruments that are difficult to value.
Some thoughtful commentators began thinking about federal housing policy, policies designed to encourage, as Doug mentioned just now, home ownership among people who traditionally would not have owned homes.
A few people, mostly crazy Austrian economists, thought that monetary policy might just have
something to do with it. Now, as the crisis continued and developed into a full-blown
global recession, a new script emerged, however. Yes, it is said there may have been particular
problems in particular markets like housing. Yes, government policy may bear some responsibility,
and notably because regulators were, you know, quote, asleep at the wheel during the wild capitalist dog-eat-dog laissez-faire bush years.
But the real underlying problem many people are now telling us is very simple, greed.
Selfish, naked greed. Homeowners were greedy for more house than they could afford.
Greedy for new cars and vacations financed out of their ever-increasing home equity values.
Banks were greedy to make money by taking advantage of poor hapless consumers,
offering them tempting adjustable rate mortgages and credit cards with irresistible teaser rates.
Financial intermediaries were greedy to stuff their pockets with profits
by securitizing and bundling mortgages and other financial instruments
Capitalism, we are told, is a system that is based on greed, a system that fosters greed,
that encourages greed, that exploits greed, that enhances greed, all for the benefit of
a few fat cats and at the expense of the common man. It was greed which was allowed to flourish
in these wild, unregulated, free market days in the unbridled capitalist system that, of course, we have, as you all know.
That's what caused the housing bubble. That's what caused the financial crisis. That's what caused the recession.
Now, if you think about it just a little bit, appeals to greed cannot possibly explain the timing of the financial crisis.
This cannot be any sort of scientific explanation for what happened.
It doesn't explain the cause of the crisis or any economic phenomenon.
If by greed we simply mean self-interest, well, I mean, sure, there was greed during the boom years.
You know, there's greed now.
There was greed in our parents' day and in our grandparents' day.
As my former colleague Larry White puts it, blaming the financial crisis on greed
is like blaming a plane crash on gravity. Greed is ubiquitous, right? Greed is all around us.
People were just as greedy 10, 20, 50, 100 years ago as they are today.
It isn't the case that before, let's say, 2005, homeowners didn't care how big their houses were.
They didn't care what car they drove or how many vacations they took.
The developers and home builders didn't care how many projects they had.
Banks and brokerage houses didn't care about their bottom line.
And then all of a sudden people decided to get more greedy.
That doesn't make any sense at all. Right? To explain the behavior
of homeowners, of financial institutions, of people in housing and securities and
other markets.
Right? We have to ask why their ever-present greed
was, you know, sort of channeled into one particular market,
into particular activities like housing and mortgages and so on.
To explain the crisis, we have to look beyond sort of silly, facile explanations like, well, people are just greedy.
Now, of course, it's true that people's values, beliefs, and preferences are critically important in determining what goods and services get produced,
what entrepreneurs succeed and fail, unless you're the entrepreneur running Citibank or AIG or General Motors, it's a different case.
You know, what cities will or neighborhoods and towns and cities will thrive, which ones will shrink, etc.
Right? This is what Mises emphasized in his analysis of consumer sovereignty.
Ultimately, it is consumer decisions that determine the allocation of resources in a market economy.
But when we look to explain macroeconomic fluctuations, what Rothbard called the cluster of errors that constitutes the business cycle,
We cannot just simply assert random, unexplained, exogenous changes in greed or something like that.
To explain stock market bubbles or crashes in terms of waves of irrational exuberance
or sudden increases in pessimism is not to explain them at all.
Those are just-so stories, explanations invented after the fact that it could explain anything
and therefore explain absolutely nothing.
Doug talked about this in his talk just now. We want to understand why people started behaving in certain ways, why they started thinking that debt didn't matter, that house prices will always rise, that only fools save their money, and so on.
To that, of course, we need to look toward monetary policy, as Doug already explained and as other speakers will describe throughout the day.
But back to these critics for just a moment, back to the critics of capitalism, the critics, those who blame the crisis on greed.
Now, to explain the events of the last 18 months on greed, right, they have to somehow posit an increase in greed, right, to explain the timing.
They have to say that, well, there was extra greed during the boom years or maybe there was extra greed over the last two or three years and now it's sort of come to a head.
What could have made people so greedy?
What could explain an increase in greed over years or decades?
Well, I mean, the natural explanation is right-wing pro-capitalist propaganda, right?
It's the talk show hosts and the think tanks, the laissez-faire ideologues that dominate the Republican Party.
That's a joke, by the way.
It's right-wing bloggers, it's libertarian economists, especially those evil Austrian economists who make people greedy.
After all, we Austrians do teach that human action is purposeful, as Mises said.
That human actors deliberately choose among alternatives.
Worst of all, that they choose their highest valued alternative.
That people generally strive to make themselves better off.
Like Mises, we assume that if most people prefer prosperity and health and happiness, right, to financial collapse and disease and death and so on,ivid even our neoclassical economist colleagues express much the same sentiment though in a more clumsy way by referring to people maximizing utility or firms maximizing profits. They're still getting at the basic idea of purposeful human behavior though with some methodological
According to these critics, in doing economic analysis, in thinking and writing and teaching about economics, we are teaching people to be greedy. We are training people to be materialistic, to be selfish, to put profits over people, and this sort of thing.
Now, if you think I'm exaggerating, I'll give you some examples.
Consider a 2002 paper by management superstar Henry Mintzberg, written with co-authors Robert Simons and Kunal Basaw,
titled Beyond Selfishness.
You can imagine, just based on the title, what this article is going to contain.
There's a nice summary that was published in the Sloan Management Review.
Let me just quote from that summary.
quote, our narrow view of ourselves as economic man has driven a wedge of distrust between our individual wants and our social needs. A distorted view of shareholder value has driven a wedge of disengagement between those who create economic performance, I guess that's workers, and those who harvest it, that would be capitalists. Our obsession with heroic leadership has created a wedge of disconnection between leaders and everyone else. The glorification of the
This mean and mean organization has driven a wedge of discontinuity between short-term and long-term goals.
A lot of wedges going on.
And the convenient, widely held notion that a rising tide lifts all boats,
associated with such great right-wing ideologues as John F. Kennedy,
creates a disparity between the prime beneficiaries of stock price increases, a few wealthy people,
In other words, economic man is selfish man, and we should stop talking about economics.
We should stop doing research in economics. We should stop teaching economics to make people less selfish, less greedy.
Now, you might wonder, you know, to believe this sort of story, you not only have to believe that economics,
You would also have to explain how economics has somehow become more influential than it used to be.
Economic analysis and economic education have been around for many years.
If they've always been trying to make people greedy, why did it succeed all of a sudden when it hadn't in generations past?
Well, this is sort of hard to explain.
We haven't seen a surge of economics majors at colleges or universities, though economics is a more popular subject to some degree than it was before.
Economics books have not become runaway bestsellers, unless the authors are names like Paul Woods, DeLorenzo, etc.
Economists aren't particularly influential as policy advisors, more so today than they were in the past.
Now, Austrian economics is on the rise, to be sure, thanks to the influence of institutions like the Mises Institute, but is still, you know, sort of, obviously, unfamiliar to the average American.
Now, one thing that the sort of econ bashers have appealed to is the increasing influence of economics in management education.
And indeed it's true that economics has become a more prominent part of most business school curricula.
The most sort of economics friendly majors or concentrations like finance and accounting attract increasing number of MBA students
compared to the sort of softer fields like organizational behavior and leadership and change management and so on.
and so on. Even fields like human resources, competitive and corporate strategy and so
on are more and more influenced by economic theory and applied economics than they were
a generation or two ago. So naturally, it didn't take long for some commentators to
begin blaming the financial crisis on business schools, claiming that business schools dominated
by economists and teaching students how to be greedy are responsible for the troubles
Consider a December 2008 piece in Forbes magazine written by two important management professors, Raymond Fissman of Columbia and Rakesh Khurana of Harvard, which traces the source of the crisis not to monetary policy or underwriting standards or government guarantees against market discipline and so on, but to business schools and to the critics'
You know, Bet Noir, the concept of shareholder wealth maximization.
According to Fissman and Corona, quote,
business schools promote a particular brand of free market ideology.
You know, if only that were true.
This ideology, they say, is squarely focused on shareholder maximization theories,
and it forms the staple fare of MBA and executive education courses today.
In the worldviews that underlie modern business education, the market always gets prices right, with scare quotes. Managers are merely agents for shareholders. An individual's worth can be reduced to one's worth in the market.
If I get $100 in compensation, the thinking goes it is because I deserve it.
There's no discussion of the role of circumstance, luck or market failure.
It's the type of thinking that has resulted in literally hundreds of billions of dollars being transferred away from organizational resources
into the personal bank accounts of CEOs and is now bringing capitalism to its knees.
These. So it's economic theory, the concept of shareholder wealth maximization in particular
that is now bringing capitalism to its knees. In other words, teaching future managers how
the price system works, teaching them how managerial behavior affects shareholder value,
how marginal productivity affects wages, and these sorts of things. That's equivalent to
encouraging managers to lie, to cheat and to steal.
I suppose it would be better to teach
that water runs uphill, that central planning works, that it's more efficient in the free market,
that men are angels and so on.
And I'm sure the next wave in the curriculum will be the introduction of
socially responsible statistics,
accounting and so on.
Note, if you're paying attention, these authors, they're very confused, for example, on the differences between scientific analysis, which is necessarily value-free in a particular sense, and normative ethical propositions about people's behavior, as if writing a history of Soviet Russia or Nazi Germany makes the writer some sort of totalitarian, that by explaining behavior and phenomena and circumstances,
Somehow endorsing the behavior that we're seeking to explain.
The late Sumantra Gosal, a very prominent management scholar who died a couple of years
ago and was a long-time professor at the London Business School, wrote a series of papers
blaming economics, blaming economic theory for destroying management practice and by
implication for harming the performance of many companies, of Western companies.
Unfortunately, Gosal did not understand economics very well.
He was acquainted with the so-called principal agent theory. He knew a little of transaction
cost associated with Oliver Williamson, whom Doug mentioned. He didn't understand even
those very well. He certainly knew nothing of Austrian economics. In his last published
paper titled Bad Management Theories Are Destroying Good Management Practices, which appeared
in 2005, he argued that by teaching students how people make decisions, how institutions
enable and constrain individual choice, how firms emerge to exploit the division of labor,
what Mises called the fundamental sort of law of social interaction, and so on, these
are my words, we're transforming people from some kind of loving, benevolent, other-centered,
altruistic, well, socialists, to sort of mean, selfish, money-grubbing capitalists.
Quote, in courses on corporate governance, grounded in agency theory, we have taught our students that managers cannot be trusted to do their jobs, which of course is to maximize shareholder value, he means that ironically, and that to overcome agency problems, managers' interests and incentives must be aligned with those of shareholders, by for example making stock options a significant part of their pay. In our courses on organization design, grounded in transaction costs,
and Cost Economics. We have preached the need for tight monitoring and control of people to prevent what Williamson calls opportunistic behavior. In our strategy courses, we have presented the Five Forces Framework, some of you know that from famous management theorist Michael Porter, which suggests that companies have to compete, not only with their competitors, but even with their suppliers, their customers, employees, regulators. Right? Goshell goes on, why then do we feel surprised by the fact that executives and
And Enron, Global Crossing, Tyco and scores of other companies granted themselves excessive
stock options, treated their employees very badly and took their customers for a ride
when they could.
Okay, so the problems with companies like Enron and Tyco and Global Crossing, according
to Gosal, had nothing to do with government policy, right?
The fact that these were all politically connected firms who excelled, Enron in particular, right?
and what might be called regulatory arbitrage. Ken Lay, the former CEO of Enron was of course
a former Carter administration energy department official who understood better than any of
his rivals, any of his contemporaries in the private sector, in the so-called private sector,
how to work Washington D.C., how to navigate the labyrinthine rules associated with energy
policy. So firms like Enron, Tyco and so on excelled in managing the public-private nexus
in exploiting regulations, regulatory loopholes and so on to earn profits for themselves.
Perfect example of how one gets ahead in the mixed economy as opposed to how one gets ahead in the free market.
So, you know, according to Goshell, it's as if the, you know, sort of the, what they used to call the new socialist man, right?
The obedient servant of society and servant of the state, you know, the character that even today's socialists have given up trying to create, right?
It's sort of the natural or default condition of mankind, corrupted only by exposure to economics.
Of course it's true, I would add, that in socialist societies, like the former communist countries,
where sound economics was thoroughly suppressed, there were no agency problems, there was no opportunism,
there was no mistrust, there was no competition among people who ought to be cooperating,
If you combine agency theory with transaction cost economics, add in standard versions of game theory and negotiation analysis, and the picture of the manager that emerges is one that is now very familiar in practice, the ruthlessly hard-driving, strictly top-down, command-and-control-focused, shareholder-value-obsessed, win-at-any-cost business leader,
Chainsaw Al Dunlop and Tycho's Dennis Kozlowski are only the most extreme examples, this is what Isaiah Berlin implied when he wrote about absurdities in theory leading to dehumanization of practice.
So Chainsaw Al, Dennis Kozlowski's problems, the fall of Enron and so on, these are all the fault of economists and economics for corrupting the business school curriculum.
He actually calls the assumption of self-interest an ideologically based gloomy vision, which he actually blames on classical liberalism explicitly.
He cites Locke and Hume and Bentham and so on as having a corrupting influence on social science.
His only source for all this, for the philosophy of science that he includes in his articles,
The great philosopher, but Goeschel's knowledge of intellectual history is not particularly deep.
For example, he confuses methodological individualism, the principle of explanation that Austrian economists and most other economists use
in tracing social phenomena to their origins in terms of purposeful human choices.
He confuses that with a kind of normative or ontological or existential individualism,
Right? That by explaining social phenomena in terms of individual choice, you necessarily assert that people are isolated, atomistic, individualists with no social ties, who don't care about other people and so on, which, of course, is complete nonsense.
How did all this happen?
Well, Goeschel hints at some dark conspiracies.
He even refers to the, quote, Chicago agenda.
I'm sure if he had heard of Austrian economists, he would have thought the Viennese agenda or the Auburn agenda was vastly more sinister.
So, according to hard left thinkers like the late Professor Goeschel, greed is an artifice of a certain kind of thinking,
A certain way of understanding human behavior that takes the individual as the unit of analysis, that focuses on purposeful human action, that rejects treating society as a causal agent.
If you eliminate economics from the curriculum of business schools, and I guess universities more generally, or at least reduce its importance, you know, some kind of new socialist man, or I guess the old socialist man will emerge yet again.
I should add, another amusing, something else that amused me in a sort of a train wreck kind of way was a 2000 book called Social Psychology and Economics, an edited volume, one of the chapters by Max Bazerman and Deepak Malhotra, both of Harvard, is titled Economics Wins, Psychology Loses and Society Pays.
Again, you can infer the contents based on the title.
You know, what they say is really, it has to be read to be believed.
For example, they have a passage where, of course, they begin talking about Enron,
and Global Crossing, and Halliburton, and Tyco, and so on.
They say, you know, millions of jobs and tens of millions of retirement plans have been lost.
11 of the 17 major fisheries in the world are commercially extinct.
I'm not exactly sure what Enron had to do with that.
The United States needlessly allows thousands of people to die each year.
Behind each of these disasters is the hand of economic logic,
the dominance of this logic to the exclusion of other useful social sciences.
I actually think economic logic has something interesting to say about why fish become extinct,
having to do with the lack of property rights in fish stocks and oceans and rivers and so on.
If Walter Block were here, he would have three or four lectures prepared on how to assign property rights to the deep oceans and far reaches of outer space and so on.
The authors go on to list what they call five myths of economics, some of which are actually reasonable critiques of neoclassical choice theory,
like, for example, quote, people have stable and consistent preferences.
I mean, as described in neoclassical theory, I mean, yeah, I mean, I think that is incorrect.
But they also add bizarre things that they classifies myths, such as, quote,
free markets solve economic problems.
That's one of the great, the five great myths that they seek to combat.
Doug mentioned my service on the Council of Economic Advisors.
These particular authors urge the creation of a Council of Psychological Advisors
to set up shop in Washington D.C. and help to run the country, I guess.
We do have, you know, the president is the sort of, you know, mourner-in-chief that when
we have tragedies like, you know, the Fort Hood disaster, it's up to the president.
I can't remember who wrote that only the U.S. president can fully express the empathy
of the American people, you know, towards the victims of any tragedy because he, like
Caesar embodies America in his own person.
Now, are business schools really that bad, or you might say that good?
And the answer is no. It's certainly far from true
that business schools are populated by free market ideologues.
Indeed, some of the most important trends in management education in recent years
They've been all the usual kind of lefty things, corporate social responsibility, emphasis on creating value for stakeholders rather than shareholders,
anything green, you name it. If you just do a Google search for green across different business school course catalogs,
I'm sure you'll find more courses listed under green than just about any other subject heading.
Needless to say, anything in the softer areas of management that deals with gender, race, national origin, what I think they call sexual identity,
you're bound to get a full class, lots of students to sign up for something like that, administrators will love you.
At the same time, management theory does have some useful lessons for the financial crisis, lessons that I think haven't been understood at all.
at All. And of course, I have nothing to do with what these critics are talking about. I have an article forthcoming in a journal called
Strategic Organization, along with three co-authors, Roshari Agarwal, Jay Barney and Nikolai Foss. And we point out that not only are
business schools in this sort of silly way we've been talking about not to blame for the financial crisis, but management theory
actually does have some useful lessons, some important things to teach our Keynesian macroeconomist colleagues, right?
The most important is the notion of heterogeneity, heterogeneity, you know, the idea that resources, firms, industries and so on are different from each other,
that capital and labor are specialized for particular projects and activities, that people are different, that workers are different, people are distinct, right?
This is ubiquitous in the theory and practice of management, particularly strategic management.
What strategy theorists call competitive advantage arises from heterogeneity, from doing something different from the competition, from being better than the competition.
As a consequence, management scholars think of firms as bundles of heterogeneous resources or assets.
Assets can be specific to particular firms. They can be co-specialized with other assets and with other firms, so that they generate value only when used in particular combinations.
As any accountant knows, assets have different economic life expectancies. Unique and specialized assets can be intangible, as in worker-specific knowledge, firm-specific capabilities.
You know, to most ordinary people this sounds obvious and indeed trite, but look at mainstream
economics. Look at mainstream economics. Here homogeneity, not heterogeneity rules the
roost. Economic models of firms and industries typically start with what are called representative
firms, right, which are identical to each other, implying that all firms in an industry
are alike. Of course, Arkansian macroeconomist colleagues are the worst transgressors in this regard.
They model entire economies consisting of homogeneous factors of production. Labor means all labor mixed together.
Capital is the same. It's just sort of a big homogeneous blob.
What the Nobel laureate Robert Solow described as shmoo.
Some of you old timers may remember the shmoo from Little Abner.
Shmoos were these sort of mythical creatures, little white blobs that you could,
they could reshape themselves into any object.
Capital is treated as shmoo in mainstream macroeconomics
to capture this kind of homogeneity.
We thought, many of us thought that mainstream macro had moved beyond this very crude level of homogeneity.
But you would never know it from the discussions of the financial crisis,
in which everything was described in terms of very crude aggregates.
The problem with the credit crunch, the problem was that banks aren't lending.
You need to get banks to lend. To whom do they lend? It doesn't matter.
Businesses, consumers can't get loans. Firms have all these bad assets on their books.
But which firms? Which people can't get credit? Which banks aren't lending to which customers?
Which firms have bad investments on their books and so on?
You'd never know this from listening to the mainstream discussions of the last year or so.
There are so many things about crude economy-wide aggregates, the total amount of lending, total employment, total spending and so on.
Well, you know, a loan isn't a loan isn't a loan. As Doug pointed out, you know, maybe some people should not have a mortgage.
It isn't the case that every mortgage is a good thing and that every person having a mortgage is a good thing.
Don't even get me started on the stimulus package and the so-called shovel-ready criterion for stimulus spending.
It doesn't matter what you're spending the money on as long as you spend it on something.
As Keynes famously argued, you can pay people to dig holes in the ground, and you can pay other people to cover them up, and that brings us economic prosperity.
Now, every manager knows that this is nonsense, right? That directing specialized resources to the wrong projects is a bad thing. That's a bad bet.
Right? Even though it may lead to a slight boost in short-term earnings, it's certainly harmful to the entity in the long run.
You know, a mistaken focus on homogeneity in the interest of a quick fix, right, is only going to lead us into deeper and deeper problems.
What can we do about this? How can we improve the quality of sound economic thinking in our business schools, in our universities and in the general public?
Well, we have to keep at it. Indeed, we should continue to push economic analysis into applied fields such as management.
Right? We should strive ceaselessly to get the right kind of economics, to get Austrian economics into the curriculum, to challenge mistaken economic reasoning, to try to slay the Keynesian monster wherever we find it, whether it be in business schools, in economics departments, in the media, in government and so on, in any place in society. You know, is this going to work? We're continuing to teach, to do research, to speak and write on sound economics,
and Sound Management Practice. Is this going to help? Well, I mean, I don't know. I don't know if it will.
But remember Mises' motto that he adopted from Virgil, right?
Do not give in to evil, but proceed ever more boldly against it.
I mean, now, in the midst of a horrifying Keynesian renaissance
and the rise of bad thinking about economics and the role that economics plays in management education,
and business schools, now is the time to be bold, as Mises said, more so than ever. Thank you.