January 26, 2014 7:04 pm

Business schools are in thrall to economics

Under the banner “The world has changed, the syllabus hasn’t”, economics students at the University of Manchester have launched a “Post-Crash Economics Society” to explore alternatives to the neoclassical orthodoxy that still rules most academic economics departments. Similar movements have sprung up in London, Paris, Berlin and Vancouver. The students have drawn cautious support from some senior faculty.

Until now there has been little sign of similar movements in business schools. “It is very strange how, even as the dysfunctionality of the management model becomes increasingly apparent, its grip tightens,” sighs one prominent UK management professor.

The banks seem determined to underline how the current model has failed. In the UK, it has been alleged that far from supporting small businesses, RBS has been pushing them to the brink so that it can break them up or sell them on. RBS has rejected the allegation and instructed a law firm to investigate the matter. However it is one more item on a charge sheet against the sector that includes subprime mortgages, manipulating Libor and foreign exchange rates, money laundering and mis-selling products.

The smoking gun? “The most dramatic empirical finding in corporate governance in the aftermath of the financial crisis is that the banks … that got into the most trouble in 2008 were generally the ones with the most shareholder-friendly executive pay and governance arrangements [ie those that comply with officially sanctioned best practice]”, wrote Justin Fox, executive editor, New York, of the Harvard Business Review.

Under the surface something may be stirring after all. One reason is that current management theory is essentially a subbranch of economics, so any challenge to mainstream theories is likely to shift the managerial furniture too. Fox notes that “economists’ extremely influential grip on … the corporation may be loosening” – which can only be a good sign.

illustration of finger about to push a Reboot button©Andrew Baker

Many would argue that where management has gone wrong is in duplicating just the strategy that left economics speechless when the crisis struck. Confessing in his Nobel Prize acceptance lecture in 1974 that “as a profession we have made a mess of things”, free-market economist Friedrich von Hayek attributed the failure to economists’ desire “to imitate as closely as possible the … physical sciences”.

This was a “pretence of knowledge … which in our field can lead to outright error”. Just as economics was deformed by physics envy, so management suffered the same fate when it used economics as its role model for establishing scientific legitimacy, omitting anything that cannot be quantified and made subject to scientific proof.

The results speak for themselves. As another economist, John Kay, put it in 2010: “It is hard to overstate the damage done in the recent past by people who thought they knew more about the world than they really did. The managers and financiers who destroyed great businesses in the unsuccessful pursuit of shareholder value … The politicians who believed they could improve public services by the imposition of multiple targets.” And economists who thought they had abolished the business cycle.

Economists were like medieval priests who had a special relationship with God and spoke in Latin to the average punter, and said: ‘This is way above your head. Don’t worry about it.’

- David McWilliams, founder of Kilkenomics

Loosening economics’ stranglehold would allow theorists relieved of their cultural cringe to develop a managerial rather than economic theory of management, one that above all recognised it as a human technology for application to human organisations.

A starting point would be to junk ideology-based gloomy assumptions about human nature, freeing governance to focus on getting the best out of people rather than preventing them from doing their worst. And it would accept the point made obvious by the banking crisis that companies cannot prosper at the expense of the wider community but only when they pay attention to all their stakeholders.

Fox suggests economists may not be able to deliver this new framework. So who could? Sociologists? Or how about comedians? In November, the Irish town of Kilkenny staged a weekend of “Kilkenomics”, surely the world’s first comedy economics festival, in which audiences in the town’s pubs participated in passionate debates, moderated by comedians, with big-name economists. The FT’s Simon Kuper wrote that Kilkenomics recalled the 1960s “teach-ins” on US campuses. “It felt like democracy … It may be a model for the world.” Now there is an economics role model that management really could follow.

Copyright The Financial Times Limited 2014. You may share using our article tools.
Please don't cut articles from FT.com and redistribute by email or post to the web.

SHARE THIS QUOTE