There is little mistaking the growth of business schools, especially as the economy contracts and jobless bankers seek to boost their qualifications
Textbook Economics | Matthew Lynn
When King Henry VIII broke with the church in Rome, he shut England's monasteries. When Fidel Castro took power in Cuba, he did the same with Havana's casinos.
In the past 20 years, the master of business administration (MBA) factories have created the conditions that helped land the global economy in the current mess. They legitimized a pseudo-scientific approach to finance that turned out to be bogus; they promoted a management style that was too mechanistic; and they formed a managerial elite more interested in rewards than producing lasting wealth for the economies they operate in.
There is little mistaking the growth of business schools, especially as the economy contracts and jobless bankers seek to boost their qualifications. Applications to MBA programmes in 2008 rose at the fastest pace on record, according to the Graduate Management Admission Council in McLean, Virginia. The trouble is, the last batch of MBA graduates who rose to the top made such a hash of things it is hard to believe the next will do much better.
The people who steered the global economy onto the rocks in the past year all benefited from the finest management education that money can buy.
Richard Fuld, chief executive officer of Lehman Brothers Holdings Inc. when it collapsed, has an MBA from New York University. John
Thain, the former CEO of Merrill Lynch and Co., is a graduate of Harvard Business School. Christopher Cox, the former chairman of the Securities and Exchange Commission, has an MBA from Harvard University. And so does former US president George W. Bush.
The record isn't much better in Europe. Andy Hornby, the chief executive officer of British bank HBOS Plc. is another Harvard Business School alumnus. HBOS had to be bailed out in a merger with Lloyds Banking Group Plc. and then both had to be rescued by the UK government.
Peter Wuffli, who as chief executive officer presided over the huge losses that took Zurich-based UBS AG to the brink of disaster, studied management at Switzerland's University of St Gallen.
Of course, it is unfair to assign all blame to business schools. Over the last three decades, taking an MBA has become just another qualification, a hoop to be jumped through on your way to getting a good job on Wall Street, or in London or Zurich's financial centres. If we studied the records, we would probably find that most of the chief executives who led us into the crisis also did finger painting at kindergarten—and it would be wrong to pin the credit crunch on that.
Still, it raises the issue of what business schools are teaching, and how they managed to create leaders who were so unable to spot the flaws in the companies they were running. If a flight-training school produced this number of crashes, we would be asking some questions. There is no reason that business studies should be exempt from the same kind of scrutiny.
The schools should be called to account for several things. First, they encouraged a quasi-scientific approach to business, sermonizing that everything could be nailed down in a textbook. By preaching a set series of formulas, they encouraged students to believe that running a company could be mastered by anyone. The entire private-equity industry is founded on that principle. So are mergers and acquisitions.
In reality, management is a skill that is acquired through experience, judgement and flair. Billions are about to be wasted relearning a simple fact that should never have been forgotten. Second, the intellectual tools that led us into the financial meltdown were largely invented within academia. Complex models for pricing risk created the market for the options and derivatives contracts that have caused so much trouble in the past year.
The business schools took something that was mysterious and unknowable—risk—and tried to make it as easy to count as peas in a pod. By doing so, they encouraged a whole generation of young men and women to go into investment banking armed with the belief that they had mastered risk, that it had been tamed and brought under control. The truth, of course, turned out to be different. Bankers can no more tame risk than sailors can tame the oceans. All they can hope to do is steer a safe course through it.
Third, the schools created a managerial elite that acted like a caste apart. One reason the bonus culture ran out of control was that many of the people involved were trapped in a bubble. They thought guaranteed bonuses, private jets and multimillion-dollar pay-offs were normal. That process started in business schools. No doubt, we will hear a lot in the next year about how the schools are reorganizing themselves. We will see lots of papers and proposals, and probably a few equations, explaining how to stop the credit crunch from happening again.
But as Henry VIII and Castro both concluded, for different reasons, sometimes an institution is beyond redemption. It can't be fixed, simply because it is the problem.
Just shut them down.
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