WEBVTT NOTE Are Business Schools to Blame? 1 00:00:00.000 --> 00:00:05.800 Well, good morning. It's a pleasure to see all of you here. It's a great pleasure to be back in California. 2 00:00:05.800 --> 00:00:11.160 I have spent many enjoyable years here on the West Coast, as Doug mentioned, as a graduate student, 3 00:00:11.160 --> 00:00:17.440 at that notorious hotbed of libertarian sentiment and Austrian economic thinking. 4 00:00:17.440 --> 00:00:23.080 University of California, Berkeley, somehow they managed to let me through. 5 00:00:23.080 --> 00:00:29.880 Indeed, some of, as you know, there's sort of a revolving door in Washington 6 00:00:29.880 --> 00:00:59.880 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 7 00:00:59.880 --> 00:01:07.480 Back to the University with the Change Administration, and now many of them are back serving with 8 00:01:07.480 --> 00:01:14.480 Obama as well. In fact, Obama's chief economic advisor, Christina Romer, was one of my professors 9 00:01:14.480 --> 00:01:22.520 and a former employer. They're nice people, but they're misguided in one or two areas, 10 00:01:22.520 --> 00:01:24.680 which we'll be talking about this weekend. 11 00:01:24.680 --> 00:01:54.680 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 12 00:01:54.680 --> 00:02:08.680 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. 13 00:02:08.680 --> 00:02:22.680 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. 14 00:02:22.680 --> 00:02:29.240 A few people, mostly crazy Austrian economists, thought that monetary policy might just have 15 00:02:29.240 --> 00:02:35.640 something to do with it. Now, as the crisis continued and developed into a full-blown 16 00:02:35.640 --> 00:02:42.440 global recession, a new script emerged, however. Yes, it is said there may have been particular 17 00:02:42.440 --> 00:02:49.440 problems in particular markets like housing. Yes, government policy may bear some responsibility, 18 00:02:49.440 --> 00:03:03.440 and notably because regulators were, you know, quote, asleep at the wheel during the wild capitalist dog-eat-dog laissez-faire bush years. 19 00:03:03.440 --> 00:03:10.440 But the real underlying problem many people are now telling us is very simple, greed. 20 00:03:10.440 --> 00:03:17.440 Selfish, naked greed. Homeowners were greedy for more house than they could afford. 21 00:03:17.440 --> 00:03:23.040 Greedy for new cars and vacations financed out of their ever-increasing home equity values. 22 00:03:23.040 --> 00:03:28.840 Banks were greedy to make money by taking advantage of poor hapless consumers, 23 00:03:28.840 --> 00:03:36.640 offering them tempting adjustable rate mortgages and credit cards with irresistible teaser rates. 24 00:03:36.640 --> 00:03:41.640 Financial intermediaries were greedy to stuff their pockets with profits 25 00:03:41.640 --> 00:03:45.640 by securitizing and bundling mortgages and other financial instruments 26 00:03:45.640 --> 00:03:57.800 Capitalism, we are told, is a system that is based on greed, a system that fosters greed, 27 00:03:57.800 --> 00:04:03.140 that encourages greed, that exploits greed, that enhances greed, all for the benefit of 28 00:04:03.140 --> 00:04:09.640 a few fat cats and at the expense of the common man. It was greed which was allowed to flourish 29 00:04:09.640 --> 00:04:18.640 in these wild, unregulated, free market days in the unbridled capitalist system that, of course, we have, as you all know. 30 00:04:18.640 --> 00:04:24.640 That's what caused the housing bubble. That's what caused the financial crisis. That's what caused the recession. 31 00:04:24.640 --> 00:04:34.640 Now, if you think about it just a little bit, appeals to greed cannot possibly explain the timing of the financial crisis. 32 00:04:34.640 --> 00:04:38.640 This cannot be any sort of scientific explanation for what happened. 33 00:04:38.640 --> 00:04:43.640 It doesn't explain the cause of the crisis or any economic phenomenon. 34 00:04:43.640 --> 00:04:51.640 If by greed we simply mean self-interest, well, I mean, sure, there was greed during the boom years. 35 00:04:51.640 --> 00:04:53.640 You know, there's greed now. 36 00:04:53.640 --> 00:04:57.640 There was greed in our parents' day and in our grandparents' day. 37 00:04:57.640 --> 00:05:02.640 As my former colleague Larry White puts it, blaming the financial crisis on greed 38 00:05:02.640 --> 00:05:09.240 is like blaming a plane crash on gravity. Greed is ubiquitous, right? Greed is all around us. 39 00:05:09.240 --> 00:05:14.040 People were just as greedy 10, 20, 50, 100 years ago as they are today. 40 00:05:14.040 --> 00:05:21.840 It isn't the case that before, let's say, 2005, homeowners didn't care how big their houses were. 41 00:05:21.840 --> 00:05:25.440 They didn't care what car they drove or how many vacations they took. 42 00:05:25.440 --> 00:05:30.340 The developers and home builders didn't care how many projects they had. 43 00:05:30.340 --> 00:05:33.580 Banks and brokerage houses didn't care about their bottom line. 44 00:05:33.580 --> 00:05:36.620 And then all of a sudden people decided to get more greedy. 45 00:05:36.620 --> 00:05:40.840 That doesn't make any sense at all. Right? To explain the behavior 46 00:05:40.840 --> 00:05:45.580 of homeowners, of financial institutions, of people in housing and securities and 47 00:05:45.580 --> 00:05:46.380 other markets. 48 00:05:46.380 --> 00:05:50.260 Right? We have to ask why their ever-present greed 49 00:05:50.260 --> 00:05:53.540 was, you know, sort of channeled into one particular market, 50 00:05:53.540 --> 00:05:58.980 into particular activities like housing and mortgages and so on. 51 00:05:58.980 --> 00:06:07.480 To explain the crisis, we have to look beyond sort of silly, facile explanations like, well, people are just greedy. 52 00:06:07.480 --> 00:06:16.480 Now, of course, it's true that people's values, beliefs, and preferences are critically important in determining what goods and services get produced, 53 00:06:16.480 --> 00:06:25.480 what entrepreneurs succeed and fail, unless you're the entrepreneur running Citibank or AIG or General Motors, it's a different case. 54 00:06:25.480 --> 00:06:34.080 You know, what cities will or neighborhoods and towns and cities will thrive, which ones will shrink, etc. 55 00:06:34.080 --> 00:06:39.080 Right? This is what Mises emphasized in his analysis of consumer sovereignty. 56 00:06:39.080 --> 00:06:45.680 Ultimately, it is consumer decisions that determine the allocation of resources in a market economy. 57 00:06:45.680 --> 00:06:54.480 But when we look to explain macroeconomic fluctuations, what Rothbard called the cluster of errors that constitutes the business cycle, 58 00:06:54.480 --> 00:07:02.480 We cannot just simply assert random, unexplained, exogenous changes in greed or something like that. 59 00:07:02.480 --> 00:07:08.480 To explain stock market bubbles or crashes in terms of waves of irrational exuberance 60 00:07:08.480 --> 00:07:13.480 or sudden increases in pessimism is not to explain them at all. 61 00:07:13.480 --> 00:07:20.480 Those are just-so stories, explanations invented after the fact that it could explain anything 62 00:07:20.480 --> 00:07:23.480 and therefore explain absolutely nothing. 63 00:07:23.480 --> 00:07:39.480 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. 64 00:07:39.480 --> 00:07:47.480 To that, of course, we need to look toward monetary policy, as Doug already explained and as other speakers will describe throughout the day. 65 00:07:47.480 --> 00:07:55.480 But back to these critics for just a moment, back to the critics of capitalism, the critics, those who blame the crisis on greed. 66 00:07:55.480 --> 00:08:05.480 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. 67 00:08:05.480 --> 00:08:13.480 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. 68 00:08:13.480 --> 00:08:16.480 What could have made people so greedy? 69 00:08:16.480 --> 00:08:20.480 What could explain an increase in greed over years or decades? 70 00:08:20.480 --> 00:08:28.480 Well, I mean, the natural explanation is right-wing pro-capitalist propaganda, right? 71 00:08:28.480 --> 00:08:39.480 It's the talk show hosts and the think tanks, the laissez-faire ideologues that dominate the Republican Party. 72 00:08:39.480 --> 00:08:42.480 That's a joke, by the way. 73 00:08:42.480 --> 00:08:49.480 It's right-wing bloggers, it's libertarian economists, especially those evil Austrian economists who make people greedy. 74 00:08:49.480 --> 00:08:56.480 After all, we Austrians do teach that human action is purposeful, as Mises said. 75 00:08:56.480 --> 00:08:59.480 That human actors deliberately choose among alternatives. 76 00:08:59.480 --> 00:09:03.480 Worst of all, that they choose their highest valued alternative. 77 00:09:03.480 --> 00:09:07.480 That people generally strive to make themselves better off. 78 00:09:07.480 --> 00:09:37.480 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 79 00:09:37.480 --> 00:09:59.480 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. 80 00:09:59.480 --> 00:10:03.480 Now, if you think I'm exaggerating, I'll give you some examples. 81 00:10:03.480 --> 00:10:12.480 Consider a 2002 paper by management superstar Henry Mintzberg, written with co-authors Robert Simons and Kunal Basaw, 82 00:10:12.480 --> 00:10:15.480 titled Beyond Selfishness. 83 00:10:15.480 --> 00:10:19.480 You can imagine, just based on the title, what this article is going to contain. 84 00:10:19.480 --> 00:10:22.480 There's a nice summary that was published in the Sloan Management Review. 85 00:10:22.480 --> 00:10:24.480 Let me just quote from that summary. 86 00:10:24.480 --> 00:10:54.480 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 87 00:10:54.480 --> 00:11:01.480 This mean and mean organization has driven a wedge of discontinuity between short-term and long-term goals. 88 00:11:01.480 --> 00:11:03.480 A lot of wedges going on. 89 00:11:03.480 --> 00:11:07.480 And the convenient, widely held notion that a rising tide lifts all boats, 90 00:11:07.480 --> 00:11:14.480 associated with such great right-wing ideologues as John F. Kennedy, 91 00:11:14.480 --> 00:11:20.480 creates a disparity between the prime beneficiaries of stock price increases, a few wealthy people, 92 00:11:20.480 --> 00:11:30.480 In other words, economic man is selfish man, and we should stop talking about economics. 93 00:11:30.480 --> 00:11:37.480 We should stop doing research in economics. We should stop teaching economics to make people less selfish, less greedy. 94 00:11:37.480 --> 00:11:47.480 Now, you might wonder, you know, to believe this sort of story, you not only have to believe that economics, 95 00:11:47.480 --> 00:11:55.480 You would also have to explain how economics has somehow become more influential than it used to be. 96 00:11:55.480 --> 00:11:59.480 Economic analysis and economic education have been around for many years. 97 00:11:59.480 --> 00:12:06.480 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? 98 00:12:06.480 --> 00:12:10.480 Well, this is sort of hard to explain. 99 00:12:10.480 --> 00:12:21.480 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. 100 00:12:21.480 --> 00:12:29.480 Economics books have not become runaway bestsellers, unless the authors are names like Paul Woods, DeLorenzo, etc. 101 00:12:29.480 --> 00:12:36.480 Economists aren't particularly influential as policy advisors, more so today than they were in the past. 102 00:12:36.480 --> 00:12:48.480 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. 103 00:12:48.480 --> 00:12:59.480 Now, one thing that the sort of econ bashers have appealed to is the increasing influence of economics in management education. 104 00:12:59.480 --> 00:13:05.480 And indeed it's true that economics has become a more prominent part of most business school curricula. 105 00:13:05.480 --> 00:13:15.480 The most sort of economics friendly majors or concentrations like finance and accounting attract increasing number of MBA students 106 00:13:15.480 --> 00:13:23.480 compared to the sort of softer fields like organizational behavior and leadership and change management and so on. 107 00:13:23.480 --> 00:13:29.720 and so on. Even fields like human resources, competitive and corporate strategy and so 108 00:13:29.720 --> 00:13:35.580 on are more and more influenced by economic theory and applied economics than they were 109 00:13:35.580 --> 00:13:41.540 a generation or two ago. So naturally, it didn't take long for some commentators to 110 00:13:41.540 --> 00:13:47.600 begin blaming the financial crisis on business schools, claiming that business schools dominated 111 00:13:47.600 --> 00:13:52.420 by economists and teaching students how to be greedy are responsible for the troubles 112 00:13:52.420 --> 00:14:22.420 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' 113 00:14:22.420 --> 00:14:27.380 You know, Bet Noir, the concept of shareholder wealth maximization. 114 00:14:27.380 --> 00:14:30.620 According to Fissman and Corona, quote, 115 00:14:30.620 --> 00:14:35.620 business schools promote a particular brand of free market ideology. 116 00:14:35.620 --> 00:14:39.900 You know, if only that were true. 117 00:14:39.900 --> 00:14:44.820 This ideology, they say, is squarely focused on shareholder maximization theories, 118 00:14:44.820 --> 00:14:50.660 and it forms the staple fare of MBA and executive education courses today. 119 00:14:50.660 --> 00:15:07.660 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. 120 00:15:07.660 --> 00:15:12.660 If I get $100 in compensation, the thinking goes it is because I deserve it. 121 00:15:12.660 --> 00:15:16.660 There's no discussion of the role of circumstance, luck or market failure. 122 00:15:16.660 --> 00:15:24.660 It's the type of thinking that has resulted in literally hundreds of billions of dollars being transferred away from organizational resources 123 00:15:24.660 --> 00:15:30.660 into the personal bank accounts of CEOs and is now bringing capitalism to its knees. 124 00:15:30.660 --> 00:15:37.260 These. So it's economic theory, the concept of shareholder wealth maximization in particular 125 00:15:37.260 --> 00:15:43.820 that is now bringing capitalism to its knees. In other words, teaching future managers how 126 00:15:43.820 --> 00:15:51.320 the price system works, teaching them how managerial behavior affects shareholder value, 127 00:15:51.320 --> 00:15:56.280 how marginal productivity affects wages, and these sorts of things. That's equivalent to 128 00:15:56.280 --> 00:16:00.440 encouraging managers to lie, to cheat and to steal. 129 00:16:00.440 --> 00:16:04.360 I suppose it would be better to teach 130 00:16:04.360 --> 00:16:10.320 that water runs uphill, that central planning works, that it's more efficient in the free market, 131 00:16:10.320 --> 00:16:12.800 that men are angels and so on. 132 00:16:12.800 --> 00:16:17.840 And I'm sure the next wave in the curriculum will be the introduction of 133 00:16:17.840 --> 00:16:22.120 socially responsible statistics, 134 00:16:22.120 --> 00:16:24.680 accounting and so on. 135 00:16:24.680 --> 00:16:54.680 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, 136 00:16:54.680 --> 00:16:59.440 Somehow endorsing the behavior that we're seeking to explain. 137 00:16:59.440 --> 00:17:03.920 The late Sumantra Gosal, a very prominent management scholar who died a couple of years 138 00:17:03.920 --> 00:17:09.040 ago and was a long-time professor at the London Business School, wrote a series of papers 139 00:17:09.040 --> 00:17:14.760 blaming economics, blaming economic theory for destroying management practice and by 140 00:17:14.760 --> 00:17:20.000 implication for harming the performance of many companies, of Western companies. 141 00:17:20.000 --> 00:17:24.540 Unfortunately, Gosal did not understand economics very well. 142 00:17:24.540 --> 00:17:29.620 He was acquainted with the so-called principal agent theory. He knew a little of transaction 143 00:17:29.620 --> 00:17:34.260 cost associated with Oliver Williamson, whom Doug mentioned. He didn't understand even 144 00:17:34.260 --> 00:17:39.380 those very well. He certainly knew nothing of Austrian economics. In his last published 145 00:17:39.380 --> 00:17:46.180 paper titled Bad Management Theories Are Destroying Good Management Practices, which appeared 146 00:17:46.180 --> 00:17:52.820 in 2005, he argued that by teaching students how people make decisions, how institutions 147 00:17:52.820 --> 00:18:00.060 enable and constrain individual choice, how firms emerge to exploit the division of labor, 148 00:18:00.060 --> 00:18:04.580 what Mises called the fundamental sort of law of social interaction, and so on, these 149 00:18:04.580 --> 00:18:12.500 are my words, we're transforming people from some kind of loving, benevolent, other-centered, 150 00:18:12.500 --> 00:18:19.660 altruistic, well, socialists, to sort of mean, selfish, money-grubbing capitalists. 151 00:18:19.660 --> 00:18:49.660 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, 152 00:18:49.660 --> 00:19:19.660 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 153 00:19:19.660 --> 00:19:24.620 And Enron, Global Crossing, Tyco and scores of other companies granted themselves excessive 154 00:19:24.620 --> 00:19:29.300 stock options, treated their employees very badly and took their customers for a ride 155 00:19:29.300 --> 00:19:30.300 when they could. 156 00:19:30.300 --> 00:19:35.400 Okay, so the problems with companies like Enron and Tyco and Global Crossing, according 157 00:19:35.400 --> 00:19:39.700 to Gosal, had nothing to do with government policy, right? 158 00:19:39.700 --> 00:19:46.480 The fact that these were all politically connected firms who excelled, Enron in particular, right? 159 00:19:46.480 --> 00:19:52.160 and what might be called regulatory arbitrage. Ken Lay, the former CEO of Enron was of course 160 00:19:52.160 --> 00:19:58.520 a former Carter administration energy department official who understood better than any of 161 00:19:58.520 --> 00:20:03.960 his rivals, any of his contemporaries in the private sector, in the so-called private sector, 162 00:20:03.960 --> 00:20:10.000 how to work Washington D.C., how to navigate the labyrinthine rules associated with energy 163 00:20:10.000 --> 00:20:16.440 policy. So firms like Enron, Tyco and so on excelled in managing the public-private nexus 164 00:20:16.440 --> 00:20:22.440 in exploiting regulations, regulatory loopholes and so on to earn profits for themselves. 165 00:20:22.440 --> 00:20:29.440 Perfect example of how one gets ahead in the mixed economy as opposed to how one gets ahead in the free market. 166 00:20:29.440 --> 00:20:36.440 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? 167 00:20:36.440 --> 00:20:44.440 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? 168 00:20:44.440 --> 00:20:51.940 It's sort of the natural or default condition of mankind, corrupted only by exposure to economics. 169 00:20:51.940 --> 00:20:58.040 Of course it's true, I would add, that in socialist societies, like the former communist countries, 170 00:20:58.040 --> 00:21:05.740 where sound economics was thoroughly suppressed, there were no agency problems, there was no opportunism, 171 00:21:05.740 --> 00:21:10.240 there was no mistrust, there was no competition among people who ought to be cooperating, 172 00:21:10.240 --> 00:21:40.240 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, 173 00:21:40.240 --> 00:21:54.240 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. 174 00:21:54.240 --> 00:22:07.240 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. 175 00:22:07.240 --> 00:22:18.240 He actually calls the assumption of self-interest an ideologically based gloomy vision, which he actually blames on classical liberalism explicitly. 176 00:22:18.240 --> 00:22:24.240 He cites Locke and Hume and Bentham and so on as having a corrupting influence on social science. 177 00:22:24.240 --> 00:22:32.240 His only source for all this, for the philosophy of science that he includes in his articles, 178 00:22:32.240 --> 00:22:40.240 The great philosopher, but Goeschel's knowledge of intellectual history is not particularly deep. 179 00:22:40.240 --> 00:22:49.240 For example, he confuses methodological individualism, the principle of explanation that Austrian economists and most other economists use 180 00:22:49.240 --> 00:22:55.240 in tracing social phenomena to their origins in terms of purposeful human choices. 181 00:22:55.240 --> 00:23:01.240 He confuses that with a kind of normative or ontological or existential individualism, 182 00:23:01.240 --> 00:23:19.240 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. 183 00:23:19.240 --> 00:23:21.240 How did all this happen? 184 00:23:21.240 --> 00:23:24.240 Well, Goeschel hints at some dark conspiracies. 185 00:23:24.240 --> 00:23:27.240 He even refers to the, quote, Chicago agenda. 186 00:23:27.240 --> 00:23:35.240 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. 187 00:23:35.240 --> 00:23:44.240 So, according to hard left thinkers like the late Professor Goeschel, greed is an artifice of a certain kind of thinking, 188 00:23:44.240 --> 00:23:57.240 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. 189 00:23:57.240 --> 00:24:11.240 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. 190 00:24:11.240 --> 00:24:36.240 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. 191 00:24:36.240 --> 00:24:41.440 Again, you can infer the contents based on the title. 192 00:24:41.440 --> 00:24:45.640 You know, what they say is really, it has to be read to be believed. 193 00:24:45.640 --> 00:24:50.040 For example, they have a passage where, of course, they begin talking about Enron, 194 00:24:50.040 --> 00:24:54.940 and Global Crossing, and Halliburton, and Tyco, and so on. 195 00:24:54.940 --> 00:25:02.640 They say, you know, millions of jobs and tens of millions of retirement plans have been lost. 196 00:25:02.640 --> 00:25:06.240 11 of the 17 major fisheries in the world are commercially extinct. 197 00:25:06.240 --> 00:25:09.040 I'm not exactly sure what Enron had to do with that. 198 00:25:09.040 --> 00:25:13.540 The United States needlessly allows thousands of people to die each year. 199 00:25:13.540 --> 00:25:17.540 Behind each of these disasters is the hand of economic logic, 200 00:25:17.540 --> 00:25:23.040 the dominance of this logic to the exclusion of other useful social sciences. 201 00:25:23.040 --> 00:25:28.340 I actually think economic logic has something interesting to say about why fish become extinct, 202 00:25:28.340 --> 00:25:32.660 having to do with the lack of property rights in fish stocks and oceans and rivers and so on. 203 00:25:32.660 --> 00:25:42.860 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. 204 00:25:42.860 --> 00:25:50.540 The authors go on to list what they call five myths of economics, some of which are actually reasonable critiques of neoclassical choice theory, 205 00:25:50.540 --> 00:25:54.660 like, for example, quote, people have stable and consistent preferences. 206 00:25:54.660 --> 00:25:59.660 I mean, as described in neoclassical theory, I mean, yeah, I mean, I think that is incorrect. 207 00:25:59.660 --> 00:26:04.060 But they also add bizarre things that they classifies myths, such as, quote, 208 00:26:04.060 --> 00:26:06.860 free markets solve economic problems. 209 00:26:06.860 --> 00:26:10.660 That's one of the great, the five great myths that they seek to combat. 210 00:26:10.660 --> 00:26:15.260 Doug mentioned my service on the Council of Economic Advisors. 211 00:26:15.260 --> 00:26:21.760 These particular authors urge the creation of a Council of Psychological Advisors 212 00:26:21.760 --> 00:26:27.040 to set up shop in Washington D.C. and help to run the country, I guess. 213 00:26:27.040 --> 00:26:32.440 We do have, you know, the president is the sort of, you know, mourner-in-chief that when 214 00:26:32.440 --> 00:26:37.480 we have tragedies like, you know, the Fort Hood disaster, it's up to the president. 215 00:26:37.480 --> 00:26:42.360 I can't remember who wrote that only the U.S. president can fully express the empathy 216 00:26:42.360 --> 00:26:46.560 of the American people, you know, towards the victims of any tragedy because he, like 217 00:26:46.560 --> 00:26:51.560 Caesar embodies America in his own person. 218 00:26:51.560 --> 00:26:56.560 Now, are business schools really that bad, or you might say that good? 219 00:26:56.560 --> 00:27:01.560 And the answer is no. It's certainly far from true 220 00:27:01.560 --> 00:27:06.560 that business schools are populated by free market ideologues. 221 00:27:06.560 --> 00:27:11.560 Indeed, some of the most important trends in management education in recent years 222 00:27:11.560 --> 00:27:21.560 They've been all the usual kind of lefty things, corporate social responsibility, emphasis on creating value for stakeholders rather than shareholders, 223 00:27:21.560 --> 00:27:30.560 anything green, you name it. If you just do a Google search for green across different business school course catalogs, 224 00:27:30.560 --> 00:27:35.560 I'm sure you'll find more courses listed under green than just about any other subject heading. 225 00:27:35.560 --> 00:27:47.560 Needless to say, anything in the softer areas of management that deals with gender, race, national origin, what I think they call sexual identity, 226 00:27:47.560 --> 00:27:54.560 you're bound to get a full class, lots of students to sign up for something like that, administrators will love you. 227 00:27:54.560 --> 00:28:04.560 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. 228 00:28:04.560 --> 00:28:11.760 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 229 00:28:11.760 --> 00:28:21.160 Strategic Organization, along with three co-authors, Roshari Agarwal, Jay Barney and Nikolai Foss. And we point out that not only are 230 00:28:21.160 --> 00:28:27.360 business schools in this sort of silly way we've been talking about not to blame for the financial crisis, but management theory 231 00:28:27.360 --> 00:28:34.760 actually does have some useful lessons, some important things to teach our Keynesian macroeconomist colleagues, right? 232 00:28:34.760 --> 00:28:45.160 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, 233 00:28:45.160 --> 00:28:53.760 that capital and labor are specialized for particular projects and activities, that people are different, that workers are different, people are distinct, right? 234 00:28:53.760 --> 00:28:58.760 This is ubiquitous in the theory and practice of management, particularly strategic management. 235 00:28:58.760 --> 00:29:08.760 What strategy theorists call competitive advantage arises from heterogeneity, from doing something different from the competition, from being better than the competition. 236 00:29:08.760 --> 00:29:18.760 As a consequence, management scholars think of firms as bundles of heterogeneous resources or assets. 237 00:29:18.760 --> 00:29:30.760 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. 238 00:29:30.760 --> 00:29:44.760 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. 239 00:29:44.760 --> 00:29:52.080 You know, to most ordinary people this sounds obvious and indeed trite, but look at mainstream 240 00:29:52.080 --> 00:29:58.560 economics. Look at mainstream economics. Here homogeneity, not heterogeneity rules the 241 00:29:58.560 --> 00:30:04.440 roost. Economic models of firms and industries typically start with what are called representative 242 00:30:04.440 --> 00:30:09.280 firms, right, which are identical to each other, implying that all firms in an industry 243 00:30:09.280 --> 00:30:17.280 are alike. Of course, Arkansian macroeconomist colleagues are the worst transgressors in this regard. 244 00:30:17.280 --> 00:30:28.280 They model entire economies consisting of homogeneous factors of production. Labor means all labor mixed together. 245 00:30:28.280 --> 00:30:33.280 Capital is the same. It's just sort of a big homogeneous blob. 246 00:30:33.280 --> 00:30:40.280 What the Nobel laureate Robert Solow described as shmoo. 247 00:30:40.280 --> 00:30:43.280 Some of you old timers may remember the shmoo from Little Abner. 248 00:30:43.280 --> 00:30:47.280 Shmoos were these sort of mythical creatures, little white blobs that you could, 249 00:30:47.280 --> 00:30:51.280 they could reshape themselves into any object. 250 00:30:51.280 --> 00:30:56.280 Capital is treated as shmoo in mainstream macroeconomics 251 00:30:56.280 --> 00:30:59.280 to capture this kind of homogeneity. 252 00:30:59.280 --> 00:31:09.280 We thought, many of us thought that mainstream macro had moved beyond this very crude level of homogeneity. 253 00:31:09.280 --> 00:31:13.280 But you would never know it from the discussions of the financial crisis, 254 00:31:13.280 --> 00:31:19.280 in which everything was described in terms of very crude aggregates. 255 00:31:19.280 --> 00:31:25.280 The problem with the credit crunch, the problem was that banks aren't lending. 256 00:31:25.280 --> 00:31:30.280 You need to get banks to lend. To whom do they lend? It doesn't matter. 257 00:31:30.280 --> 00:31:37.280 Businesses, consumers can't get loans. Firms have all these bad assets on their books. 258 00:31:37.280 --> 00:31:44.280 But which firms? Which people can't get credit? Which banks aren't lending to which customers? 259 00:31:44.280 --> 00:31:48.280 Which firms have bad investments on their books and so on? 260 00:31:48.280 --> 00:31:54.280 You'd never know this from listening to the mainstream discussions of the last year or so. 261 00:31:54.280 --> 00:32:05.280 There are so many things about crude economy-wide aggregates, the total amount of lending, total employment, total spending and so on. 262 00:32:05.280 --> 00:32:12.280 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. 263 00:32:12.280 --> 00:32:18.280 It isn't the case that every mortgage is a good thing and that every person having a mortgage is a good thing. 264 00:32:18.280 --> 00:32:26.280 Don't even get me started on the stimulus package and the so-called shovel-ready criterion for stimulus spending. 265 00:32:26.280 --> 00:32:32.280 It doesn't matter what you're spending the money on as long as you spend it on something. 266 00:32:32.280 --> 00:32:41.280 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. 267 00:32:41.280 --> 00:32:50.280 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. 268 00:32:50.280 --> 00:32:57.280 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. 269 00:32:57.280 --> 00:33:06.280 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. 270 00:33:06.280 --> 00:33:20.280 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? 271 00:33:20.280 --> 00:33:30.280 Well, we have to keep at it. Indeed, we should continue to push economic analysis into applied fields such as management. 272 00:33:30.280 --> 00:34:00.280 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, 273 00:34:00.280 --> 00:34:06.280 and Sound Management Practice. Is this going to help? Well, I mean, I don't know. I don't know if it will. 274 00:34:06.280 --> 00:34:10.280 But remember Mises' motto that he adopted from Virgil, right? 275 00:34:10.280 --> 00:34:14.280 Do not give in to evil, but proceed ever more boldly against it. 276 00:34:14.280 --> 00:34:19.280 I mean, now, in the midst of a horrifying Keynesian renaissance 277 00:34:19.280 --> 00:34:27.280 and the rise of bad thinking about economics and the role that economics plays in management education, 278 00:34:27.280 --> 00:34:33.680 and business schools, now is the time to be bold, as Mises said, more so than ever. Thank you.