What follows is a remarkably pithy yet insightful explanation of both the underpinnings of, and casual damage to, the increasingly fragile American body economic. Moreover, the snarky, tough guy tone of the author serves as an excellent mechanism for the distribution of this analysis. Enjoy-- and then go fix the world.
Source: http://master-of-none.tumblr.com/post/207991990/reprogram-the-reaganites
Reprogram the Reaganites
In BusinessWeek, a Harvard Business School (HBS) alumnus blames the MBA farms for the current crisis. I think he’s right to blame the schools, in part, but wrong about why.
The author says we went astray by orienting business education away from relationships (good managers, customer service) and towards processes (efficiency, business channel segmentation). And this supposedly leads companies to make bad decisions. I don’t buy it.
He is correct, however, when he says that ethics don’t enter into the debate: “Subordinating everything to shareholder value is, literally, anti-ethical.”
Anti-ethical, and yet this is what we require from our CEOs and management teams. By law, the CEO is required to do everything legally possible to achieve gains for his shareholders.
If we are getting bad outcomes from this arrangement, we need to make more bad stuff illegal.
And the reason we haven’t made more bad stuff illegal is because of two ideas popularized in the 1980’s:
Free markets are good (courtesy of Milton Friedman, University of Chicago)
Markets are efficient (courtesy of Eugene Fama, University of Chicago)
For the record, I do believe that free markets are usually a good thing (i.e. self-interest is a strong natural motivator), and I agree that large well-trafficked markets are usually efficient. The dangers to society (and the bad outcomes) happen when these theories are taken to the extreme, like religious fanaticism.
Some academics, many management teams, almost every bank CEO, countless right-wing think tanks, and the mainstream media (especially CNBC), will absolutely demonize any deviation from these two principles (or for that matter any deviation from the belief that stocks outperform in the long-run, which happens to be grossly inaccurate).
But, in any case, society is harmed by both of the extreme versions of these theories.
Do you like really free markets? How about we bring back slavery, then? And I suppose people don’t really need to be licensed to practice medicine? Where do we draw the line? How dangerous is too dangerous for an outsourced petrochemical plant? Profit-seeking managers will likely generate worse outcomes than than a robust legislative system, when it comes to this type of debate.
Efficient markets don’t get a free pass, either. The article’s use of the mortgage industry as an example is a good one: “It was completely redesigned since the 1980s along good HBS guidelines—to maximize efficiency, lower costs, and increase liquidity. Collateral damage: no relationships, skewed incentives, incompetent regulation, and greed run amok.”
What really happened was that “easy” short-term profit-seeking activities (how hard is it to swindle from the poor uneducated masses, really?) undermined the long-term viability of corporate institutions (and therefore the entire financial system). If markets are efficient, they will allocate capital to viable long-term enterprises with net positive returns. That didn’t happen. Not by a long shot.
So, we need to re-educate the Reagan generation:
Fair markets, with strong rules that don’t let corporations hurt societies, are good
Some markets are efficient, others aren’t, and irrationality exists
There. Now go fix the world.
(A cynic would argue that right now the short-term profit seekers are getting in the way of making more bad stuff illegal. Call it regulatory capture. Or state-capture. But as Alton Brown would say, that’s another show.)
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