b-school, Business, Economics, Henley, Management, MBA, Thoughts

The darker side of economics (how well intended theories can get the worst out of MBAs)

Those that hold a degree in economics will surely know three different and diverse theories: (just follow the link to know more about them)

  • The agency theory: that describes how managers and shareholders pursue different objectives and thus need to be aligned through both control and appropriate rewards. Shareholders will want returns and value, managers will want their own returns, power, and to increase their personal value.
  • Transaction cost economics, defined like the additional costs to a product than those to produce it, that is to control its fair use and distribution, the cost of formalising the relationships between the product and the user, to prosecuting breaches of contract and punishing offenders.
  • The five forces analysis, by Porter. This one needs no presentation. This model describes the strategic positioning based on the bargaining power of customers, the bargaining power of suppliers, the threat of new entrants, and the threat of substitute products as well as the level of competition in an industry.

I could mention many more. But those three are specially interesting. What do they have in common?

10sumantra.jpg

Sumantra Ghoshal (1948-2004) is known about his theories about transnational companies, and the matrix structure (my beloved matrix structure, I must say, this morning I was proposing using it for a new project… but thats a whole new story)

Ghoshal worked in a couple of well known business schools, and ended up founding the Indian School of Business, so he was not an enemy of the MBA spirit, but he directly blamed corporate scandals such as Enron on MBA courses. Why?

Because business is a social science. (Remember the reflection I made, long ago, about Economy as a Science?) Well, sciences must be held with care. Sciences must be thoroughly studied, interpreted and understood.

Specially social sciences. Those do not only describe reality, but they are also able to change it. I reflected long ago on how a science like Economics could rewrite itself (See the Phillips Curve in the previous link). Ghoshal thought the same. In fact Ghoshal thought that the (incomplete) knowledge of a social science could change our mindset. Like those that can be taught in a fast, practical course such as an MBA.

Now let’s go back to the question I left unanswered. Yes, there is something in common between those theories…

They distrust people. They focus on the darker side of humanity: managers will cheat, companies won’t collaborate, customers will breach the contracts… all of them need badly to be controlled, sometimes even prosecuted. That’s the way. Some cheat, some control and the bottom line: it’s all a trade-off.

Those that excel are those that are able to play with the system and not to get caught. Does that ring a bell? Enron’s managers got it very clearly. They played, they tried, they lost. And not only them, many more did.

enron.jpg

The title focused on MBAs but that can be true for any executive education. Our mindset defines our behaviour. And even well intended theories can made us adopt an incorrect mindset, inadvertently. A mindset that can make managers behave opportunistically, drawing conclusions from incorrect assumptions: people will try to cheat you.

And if you, as a manager, interiorise that, to hell with positive theories about managing people.

Well, some people will try to cheat you, but some will not. It’s not a definite behaviour. What about ethics? People do have a choice! And people can still have integrity. And you have the choice to manage with integrity.

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6 thoughts on “The darker side of economics (how well intended theories can get the worst out of MBAs)

  1. All the mainstream economics is based on egoistic assumptions. Adam Smith noted this in The Wealth of Nations “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.”. Principal-agent theory, Nash equilibria, transaction economics and indeed Porter’s five forces are based on this (Porter comes from industrial economics).

  2. Yes, but engaging in negative management leads nowhere. The underlying theories must be understood and carefully applied. This is not physics or calculus but a social science.

    Sometimes we tend to believe we hold absolute truths, or that people behave badly per se. Well, let’s think twice. We can be still right… or maybe not.

    What Ghoshal clearly denounced was the attitude of many people that, in possession of a title or a certificate, envision themselves as fair unbiased possessors of truth.

    Let me give you back another quote, this time from Keynes, written in 1953:

    “Practical men, who believe themselves to be quite exempt from
    any intellectual influences are usually the slaves of some defunct economist. . . . It is ideas, not vested interests, which are dangerous for good or evil”

  3. The big problem is not that MBAs teach all this stuff: it is that a majority of people (with or without managerial education) prefer greed to cooperation. Several experimental studies dealing with this issue have found that altruism does not belong to the mainstream.

    Having said that, I agree with Ghoshal and you that holding a master degree does not entitle you to have the absolute true. In fact absolute trues are only suitable for narrow-minded people.

    Probably this article maybe of your interest: The Management Myth. It tackles similar issues discussed by your entry. You can find a sample at http://www.theatlantic.com/doc/prem/200606/stewart-business If you want the full article I can send it to you.

  4. Thanks for the article, David, I’m checking this out.

    I tend to disagree with one thing, though. It has been proved that some people tend to greed, that’s for sure, but it has also been proved that others do not. And it’s the attitude to presume all people to be greedy that precisely helps people to become that.

    Think of it from an economist point of view, why not if there are gains to be reaped from it and it has already been discounted?

    The same happens in organisational situations, treating employees as if they were children… does anyone really expect to enforce their initiative, their thinking that way? Is it the chain of command a way to ensure system thinking? I do not think so 😉

    Thanks for the link, I’ll check it out too.

    Best regards

  5. Pingback: Maximising shareholder value (a mantra that is half a lie) « Gabriel’s scarcity rent - it’s management stupid!

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