A very controversial and strongly worded article by Luigi Zingales, who is a B-school professor himself. He is a prof. at Booth School at Chicago and writes on the need to have ethics in B-school training.
He says these recent scams like Insider trading, LIBOR fixing etc come from B-School and Econ training.
The recent scandals at Barclays Plc, JPMorgan Chase & Co., Goldman Sachs Group Inc. and other banks might give the impression that the financial sector has some serious morality problems. Unfortunately, it’s worse than that: We are dealing with a drop in ethical standards throughout the business world, and our graduate schools are partly to blame.
Consider, for example, the revelations about two top executives at the elite consulting firm McKinsey & Co., which has avoided public vilification despite the transgressions of its former employees. McKinsey director Anil Kumar, — a graduate of the University of Pennsylvania’s Wharton School — pleaded guilty to providing insider information to hedge-fund manager and fellow Wharton alumnus Raj Rajaratnam. Rajat Gupta, a graduate of Harvard Business Schoolwho served for nine years as McKinsey’s worldwide managing director, was convicted of insider trading in the same case.
Now, this is pretty lame reasoning really. Just because few people from B-schools are guilty, this does not mean the whole thing is faulty. And Zingales is a top notch econ and a pretty good writer. One would expect some better stuff from him.
Anyways what follows is more interesting:
Where did Gupta, Kumar and others get the idea that this kind of behavior might be OK? Most business schools do offer ethics classes. Yet these classes are generally divided into two categories. Some simply illustrate ethical dilemmas without taking a position on how people are expected to act. It is as if students were presented with the pros and cons of racial segregation, leaving them to decide which side they wanted to take.
Others hide behind the concept of corporate social responsibility, suggesting that social obligations rest on firms, not on individuals. I say “hide” because a firm is nothing but an organized group of individuals. So before we talk about corporate social responsibility, we need to talk about individual social responsibility. If we do not recognize the latter, we cannot talk about the former.
He says econ training is divorced from morality. This in a way leads to greed:
Oddly, most economists see their subject as divorced from morality. They liken themselves to physicists, who teach how atoms do behave, not how they should behave. But physicists do not teach to atoms, and atoms do not have free will. If they did, physicists would and should be concerned about how the atoms being instructed could change their behavior and affect the universe. Experimental evidence suggests that the teaching of economics does have an effect on students’ behavior: It makes them more selfish and less concerned about the common good. This is not intentional. Most teachers are not aware of what they are doing.
My colleague Gary Becker pioneered the economic study of crime. Employing a basic utilitarian approach, he compared the benefits of a crime with the expected cost of punishment (that is, the cost of punishment times the probability of receiving that punishment). While very insightful, Becker’s model, which had no intention of telling people how they should behave, had some unintended consequences. A former student of Becker’s told me that he found many of his classmates to be remarkably amoral, a fact he took as a sign that they interpreted Becker’s descriptive model of crime as prescriptive. They perceived any failure to commit a high-benefit crime with a low expected cost as a failure to act rationally, almost a proof of stupidity. The student’s experience is consistent with the experimental findings I mentioned above.
Though econs do not get into morality play, but understanding behaviors is crucial to economics:
In other words, if teachers pretend to be agnostic, they subtly encourage amoral behavior without taking any responsibility. True, economists are not moral philosophers, and we have no particular competence to determine what is ethical and what is not. We are, though, able to identify behavior that makes people better off. When a theater catches fire, the individual incentive is to rush to the exit as fast as possible. Yet if everyone in the audience rushed at once, the crowd near the door would allow fewer people to escape — indeed, many could die. Not surprisingly, there are social norms against this behavior. People who violate those norms are judged rude, egotistical, ill-behaved, or in certain cases even criminally negligent.
When the economist Milton Friedman famously said the one and only responsibility of business is to increase its profits, he added “so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” That’s a very big caveat, and one that is not stressed nearly enough in our business schools.
He says ethics should become a central/core subject and taught along with basics:
The way to teach these ethics is not to set up a separate class in which a typically low-ranking professor preaches to students who would rather be somewhere else. This approach, common at business schools, serves only to perpetuate the idea that ethics are only for those students who aren’t smart enough to avoid getting caught.
Rather, ethics should become an integral part of the so- called core classes — such as accounting, corporate finance, macroeconomics and microeconomics — that tend to be taught by the most respected professors. These teachers should make their students aware of the reputational (and often legal) costs of violating ethical norms in real business settings, as well as the broader social downsides of acting solely in one’s individual best interest.
Of course, no amount of instruction can prevent some people from engaging in bad behavior. It can, however, contribute to a social consensus that would discourage diffuse fraud, like the widespread misreporting of Libor rates or the willful self- delusion and dishonest dealing that helped turn the subprime crisis into a global financial disaster. The daily scandals that expose corruption and deception in business are not merely the doing of isolated crooks. They are the result of an amoral culture that we — business-school professors — helped foster. The solution should start in our classrooms.
How about starting at Booth School which is blamed for encouraging this rationalist/profit-seeking behavior? Can Prof. Zingales bring changes in his own den and set an example for others?
Overall what times we are living in. The list of victims of the crisis keep expanding …