Want to Kill Your Economy? Have MBA Programs Churn out Takers Not Makers.

Why has business education failed business?

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By Rana Foroohar

After the financial crisis of 2008, many people predicted that there would be a crisis of capitalism. The best and the brightest would forgo careers filled with financial ledgers and become teachers or engineers, or start small businesses. Needless to say, that didn’t happen. In fact, getting an MBA has never been a more popular career path. The number of MBAs graduating from America’s business schools has skyrocketed since the 1980s. But over that time, the health of American business has decreased by many metrics: corporate R&D spending, new business creation, productivity, and the level of public trust in business in general.

There are many reasons for this, but one key factor is that the basic training that future business leaders in this country receive is dictated not by the needs of Main Street but by those of Wall Street. With very few exceptions, MBA education today is basically an education in finance, not business—a major distinction. So it’s no wonder that business leaders make many of the finance-friendly decisions. MBA programs don’t churn out innovators well prepared to cope with a fast-changing world, or leaders who can stand up to the Street and put the long-term health of their company (not to mention their customers) first; they churn out followers who learn how to run firms by the numbers. Despite the financial crisis of 2008, most top MBA programs in the United States still teach standard “markets know best” efficiency theory and preach that share price is the best representation of a firm’s underlying value, glossing over the fact that the markets tend to brutalize firms for long-term investment and reward them for short-term paybacks to investors. (Consider that the year Apple debuted the iPod, its stock price fell roughly 25 percent, yet it rises every time the company hands cash back to shareholders.)

This dysfunction is reflected at both a philosophical and a practical level. Business schools by and large teach an extremely limited notion of “value,” and of who corporate stakeholders are. Many courses offer a pretense of data-driven knowledge without a rigorous understanding and analysis of on-the-ground facts. Students are given little practical experience but lots of high-altitude postulating. They learn complex mathematical models and ratios, but these are in many cases skills that are becoming somewhat devalued. As Nitin Nohria, dean of the Harvard Business School, admits, “anyone can teach you how to read a P&L [profit-and-loss statement] or value a derivative; those kinds of things have become commoditized.” The bigger challenge is to teach America’s future business leaders how to be curious, humane, and moral; how to think outside the box about problems like funding the research for a new blockbuster drug. And how to be strong enough to stand up to Wall Street when it demands the opposite.

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Sadly, most business schools in America aren’t doing that. What’s more, unlike those in many other countries, they aren’t so much teaching the specifics of the industries students want to enter, or even broader ideas about growth and innovation, as they are training future executives to manage P&Ls. It is very telling that Finance 101 is always a mandatory MBA course, while most others are not. But finance isn’t taught in a way that is rigorous, or truly representative of the real world. Financial risk modeling, one of the basic concepts taught in business schools, is an inexact science at best; many people feel it’s more like rune reading. After all, it involves throwing thousands of variables about all the bad things that could happen into a black box, shaking them up with the millions of positions taken daily by banks, and extrapolating it all into a simple, easy-to-understand number about how much is likely to be lost if things go belly-up. What could possibly go wrong, especially when you’re relying on past assumptions (“the sovereign debts of the United States and Europe will never be downgraded!”) and don’t account for the fact that market-moving events often create their own momentum? Yet the notion that financial models can reveal truth is still taken as fact in most business schools—that was, of course, one of the key factors that fueled the great financial crisis of 2008. “The premise of financial theory [taught in MBA programs] is bogus,” says Robert Johnson, an economist and former quantitative trader for George Soros’s Quantum fund who now heads the Institute for New Economic Thinking, an influential group that, among other things, is trying to broaden the nature of economics and business education. “That’s why we end up living with very thin margins of safety—because of the pretense of knowledge and precision about the future which does not exist.”

Meanwhile, the social, moral, and even larger macroeconomic consequences of corporate actions are largely ignored in the case studies students pore over. Even after the financial crisis, a survey of the world’s one hundred top business schools (most of them in the United States) found that only half of all MBA programs make ethics a required course, and only 6 percent deal with issues of sustainability in their core curriculum, despite the fact that a large body of research shows that firms that focus on these issues actually have higher longer-term performance. Instead, students are taught that what matters most is maximizing profits and bolstering a company’s share price. It’s something they carry straight with them to corporate America.

People do keep heading to business school, though—in large part because business, and in particular the business of finance, is where the money is. A full quarter of American graduate students earn a master’s degree in business, more than the combined share of master’s degrees sought in the legal, health, and computer science fields (business is also far and away the most popular undergraduate degree). The greatest percentage of those who receive an MBA degree end up not in industry, but in some area of finance. Although figures have dropped somewhat since the financial crisis of 2008, the financial conglomerate—banking, insurance, hedge funds, investment management, and consulting firms—is still the largest single block of MBA employers, along with the accounting and finance departments of Fortune 500 companies. Given that the quickest path to being a CEO these days is through a finance track, many of the top decision makers in the largest and most powerful firms not only have an MBA, but come from one of a handful of elite programs, like Harvard, Chicago, Columbia, and Wharton. “[Within] the first three months of your MBA program, you’re surrounded by people in suits,” says one 2015 graduate of Columbia Business School. “It’s not peer pressure, but there’s definitely a social element to feeling like you want to revert back to mainstream [areas of employment] with job security.” She, like most of her peers, is planning to work for a consulting firm, an investment bank, or a private equity shop upon graduation. Given the six-figure cost of an MBA education, that’s not so much a choice for many students as it is a financial necessity.

Yet ironically, many business leaders, even those who have MBAs themselves, have begun to question the value of these programs. “I went to business school before I knew any better, kind of like sailors get tattoos,” jokes former GM vice chairman Bob Lutz, whose book Car Guys vs. Bean Counters decries the rise of the MBAs. The problem with business education, according to him, is that students are taught not what happens in real business—which tends to be unpredictable and messy—but a series of techniques and questions that should take them to the right answers, no matter what the problem is. “The techniques, if you read the Harvard Business School cases, they are all about finding efficiencies, cost optimization, reducing your [product] assortment, buying out competitors, improving logistics, getting rid of too many warehouses, or putting in more warehouses. It’s all words, and then there’s a sea of numbers, and you read it all and analyze your way through this batch of charts and numbers, and then you figure out the silver bullet: the problem is X. And you’re then considered brilliant.” The real problem, says Lutz, is that the case studies are static—they don’t reflect the messy, emotional, dynamic world of business as it is. “In these studies, annual sales are never in question. I’ve never seen a Harvard Business School case study that says, ‘Hey, our sales are going down and we don’t know why. Now what?’

Lutz believes this kind of approach was one of the things that tanked the American automobile industry and manufacturing in general from the 1970s onward. He’s not alone. Many of America’s iconic business leaders believe an MBA degree makes you less equipped to run a business well for the long term, particularly in high-growth, innovation-driven industries like pharmaceuticals or technology, which depend on leaders who are willing to invest in the future.

MBAs are everywhere, yet the industries where you find fewer of them tend to be the most successful. America’s shining technology and innovation hub—Silicon Valley—is relatively light on MBAs and heavy on engineers. MBAs had almost nothing to do with the two major developments in the American business landscape over the last forty years: the Japanese-style quality revolution in manufacturing and the digital revolution. Indeed, the top-down, hierarchical, financially driven management style typically taught in business schools is useless in flat, nimble start-up companies that create the majority of jobs in the country. Moreover, when that style is imposed on Silicon Valley firms, they typically falter (think of John Sculley, the Wharton MBA who made the ill-fated decision to oust Steve Jobs after his first tenure at Apple, or the reign of Carly Fiorina at HP, during which that company’s stock lost half its value). One of the scariest trends in business these days is the increased movement of MBAs and finance types into the technology industry. They now are bringing their focus on financial engineering and balance sheet manipulation to firms such as Google, Apple, Facebook, Yahoo, and Snapchat—a shift that, if history is any indicator, doesn’t bode well for the future of such firms.

Why has business education failed business? Why has it fallen so much in love with finance and the ideas it espouses? It’s a problem with deep roots, which have been spreading for decades. It encompasses issues like the rise of neoliberal economic views as a challenge to the postwar threat of socialism. It’s about an academic inferiority complex that propelled business educators to try to emulate hard sciences like physics rather than take lessons from biology or the humanities. It dovetails with the growth of computing power that enabled complex financial modeling. The bottom line, though, is that far from empowering business, MBA education has fostered the sort of short-term, balance-sheet-oriented thinking that is threatening the economic competitiveness of the country as a whole. If you wonder why most businesses still think of shareholders as their main priority or treat skilled labor as a cost rather than an asset—or why 80 percent of CEOs surveyed in one study said they’d pass up making an investment that would fuel a decade’s worth of innovation if it meant they’d miss a quarter of earnings results— it’s because that’s exactly what they are being educated to do.

cover.makersandtakersAdapted from Makers & Takers: The Rise of Finance and the Fall of American Business Copyright © 2016 by Rana Foroohar. Published by Crown Business, an imprint of Penguin Random House LLC.

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  • Bob McInnis

    It would seem that most MBA’s are following the same models and superstitions that governments use to create nonsensical plans with limited accountability beyond the next cycle. Economies don’t function outside of humanity (or at least the theories that are concocted aren’t) yet most who use theories ignore us and our fickleness and fallibilities. Crowding vision and mission into an arbitrary 12 month spin when a realistic time-change measure is now two months and most social results still take decades speaks to the folly. We need to step away from orthodoxy of economics and embrace the new praxis.

  • Peter Shoobridge ن

    Excellent article!

    One should not presume that any student, of whatever prior life experience, has a developed ethical compass. I would therefore advocate that business students be grounded in Ethics, as both a philosophical and an eminently practical concept, as it relates to business.

    In most MBA programs, and similarly in professional qualifications, business ethics is given very short shrift. It’s something no one really feels is essential, other than to pass their exams. But in a broader macroeconomic context, the level of ethical behavior has manifold repercussions.

    Of course, the environment in which newly formed business professionals operate will shape later conduct in profound ways. But one must start somewhere. And, perhaps, a concerted effort by business schools and professional bodies to delivering to the world people who can demonstrate, at the minimum, a residue of awareness that some things are beyond the pale, would benefit wider society.

    Excessive financialization of the economy is, as the sage Minsky advised us all, dangerous to the stability of economies. A focus on creating real productivity, pursued within a solid ethical framework, must become the counterbalance to finance as an end, in and of itself. In my judgment, only “internalized ethics” can make that essential shift in priorities.

  • expeedee

    The bigger challenge is to teach America’s future business leaders how to be curious, humane, and moral… ALERT.. These qualities are genetic and cannot be taught. I am always amazed of how little academics know about behavioral genetics (see Robert Plomin, et al)

    • Peter Shoobridge ن

      If these qualities are genetic and cannot be taught, then there can be no challenge to teach these personality traits. That’s a rather pessimistic viewpoint.

      The problem, as I see it, is that crucial elements of what it is to be an empathetic human are not being inculcated, either by parents or the school system. While empathy might not be teachable, the awareness of empathy is teachable, to some extent. If higher education must make amends for deficiencies elsewhere, then it must.

    • Dr. Red

      These qualities (intellectual dispositions) are social and cultivable in facilitative environments. I am amazed how little academics and laypersons know of social and moral philosophy. Business practices subordinated to moral conduct is an oxymoron schema, though Ethics courses could help mitigate business cynicism. Short-termism reflects the Zeitgeist (get as much money as you can now and disregard the future of the firm, of the community, of the nation, of the planet). To introduce ideas of long-term corporate sustainability a cultural revolution needs to shake up the business world. A condition not in sight presently. If money-making keeps being the supreme value to the detriment of all else, business corruption and demoralization will intensify regardless what novice business students and practitioners will be taught.

      • expeedee

        You are simply wrong. Curiosity, humanity and morality are all universal traits that have evolved with humans in social settings (see E.O. Wilson). Primates even display these qualities naturally. We are naturally curious, morality does not have to be taught and we instinctively understand right and wrong, when we cheat or steal. Going to church does not make a person more moral or humane, and atheists are just as moral and humane as anyone who practices a religion. Many college graduates remain uncurious throughout their lives. All these positive psychological (behavioral) traits vary with individuals, much like phenotype of height or weight. I think that academia is the last place to attempt to instill morality.

        • Dr. Red

          Wilson is a sociobiologist who reduces the social to the biological and does not express the social scientific consensus. Neither of the three dispositions is a universal. If morality was universal we would not have immoral actions and attitudes nor criminality. That primates are naturally endowed with ”humanity” is a blatant absurdity. The ‘humanity’ of lemurs transcending perhaps the ‘lemurianism’ of the humans. If curiosity was a universal then the great social mystery would be how to explain its ubiquitous absence from most societies (including the college graduates you invoke, an assertion that self-destroys your point). If a quality is a ‘natural universal’ then it must appear in all cases and then we would have had to explain the few aberrant cases it does not appear. Socio-historically, the attitude of curiosity presupposes a society capable to posit the enigma of nature as an object of reflection. Such attitude emerged explicitly in the ancient Greek civilization, encapsulated in Aristotle’s value of contemplation that originates from his so-called ‘wonderment about the universe’.

          • expeedee

            Let us just conclude that I disagree. Robert Wright’s The Human Animal is a good read along with The Blank Slate by Steven Pinker and On Human Nature by E.O. Wilson. Gregory Clark U.C. Davis has written several books on economics e.g. Farewell to Alms which also provides a different view.

            I have said that these traits (morality, humanity???, curiosity) have all evolved with homo sapiens, but they are not all distributed equally. Some people are more curious than others, and college does not instill life-long curiosity. Morality is knowing and acting on what is right and wrong and homo sapiens have evolved this naturally. Just because we know instinctively what is right or wrong does not mean that we always choose what is right, as we all eventually succumb to the strongest urge. Rather than teach morality I think we might be better off teaching self control, or whatever feels like self control, and apply strict laws to better shape behavior.

          • Dr. Red

            These ‘traits’ have ‘evolved’ and regressed not with homo sapiens but in accordance with social norms shaping distinctive historical eras. Is it right or wrong to ‘steal’ food when someone is starving? In the middle Ages there was the so-called ”right of necessity” that obligated the rich to feed the hungry and if a destitute person demanded food, was refused it and ‘stole’ it, the rich or well-off owner was prosecuted, not the hungry thief. Today, in capitalism where the private property principle has become absolutized the hungry thief is criminalized and condemned. There is nothing instinctual behind such historical change in ‘ethical normativity’. College students are dissuaded from cultivating curiosity because this presupposes critical thinking and disciplinary higher education treats them (mostly, not always, depending on the institution and the field of study) as ‘productive machines’ that need to absorb massive quantities of information and pre-digested ‘knowledge repositories’ within set patterns of thinking left unexamined and unquestioned. Is it right or wrong that the higher purpose of education has shifted from attaining knowledge for knowledge’ sake (which is the orientation satisfying curiosity) and the formation of the democratic citizen to supplying ready-made knowledge packages fit for quick entrance into knowledge-demanding labour markets? Is such anti-Enlightenment crass instrumentalization of knowledge (that marginalizes also ”basic research” in favour of ”applied research”) a result consequent on the emergence of mutant human beings?

    • Peter Burns

      I admire the qualities of ‘curious, humane, moral’ and aspire to them myself. However, I cannot agree that they are genetic. I think they are absorbed by contact/ living in that type pf society/ community. In tis sense, they can certainly be taught.

  • JeffMowatt

    When Geof Mulgan of Nesta wrote a book about the future of capitalism he used locusts and bees as metaphors for the predators and pollinators of our economy

    “Capitalism has always comprised both predators and
    creators (locusts and bees) and if the recent financial crisis taught us
    anything, it is that crises occur when capitalism’s predators become
    too powerful – extracting value rather than creating it.”

  • Robert Lapsley

    We can only model our world, test our notions, consider the returns, and amend the rules of our engagements as needed to home in on our goals; policies point us toward the objects of our intention; we evolve subject to policies, economic, political, in all social relations, for the intent purpose of…. That is the question that has interested me. Two and a half thousand years of ethical discourse, and we’ve not managed to resolve the question: what is it that we’re substantively driving and striving for as individuals or as populations?

  • John M Legge

    I believe that the first Japanese MBA students graduated in the same year that Japan began its long stagnation. During the Japanese miracle period Japanese universities were not permitted to offer MBA courses.
    In the USA first, but spreading to other countries, management educators following Peter Drucker and practicing reality based teaching were largely displaced by economics “retreads”: new economics PhDs who couldn’t get a economics teaching position and so branded themselves as management, marketing or finance educators.
    Since they had no practical knowledge of any of these topics, they treated the various assumptions and axioms of neoclassical economics as if they were facts. The consequences are as this article describes them.

    • E4439qv5

      Wow. I… misread your “retreads” as “retards” at first.

      I’ll take that as a sign to redouble my efforts to stay off Facebook. :

  • planckbrandt

    Educated to do and also the debt money system compels the behaviour. The education just gives a moral justification for the behaviour. The debt system compels the short-term behaviour in the first place. Every penny of money in circulation is issued to some poor slob as an interest-bearing debt. They are on the hook to pay interest every day and repay that debt. This compels short-term behaviour in everyone from corporations to young people with mortgages. The two things, compelled behaviour and justification in our minds go hand in hand. The MBA schools got a new generation to go along with the business cycle system unquestioningly, unlike our grandparents’ generation who questioned it. No wonder they got so much money thrown behind them.

  • Timmy

    Very interesting article. I really appreciate your guy’s mission in changing economics. I kinda wanted to do the same thing and an currently studying economics. I was wondering is it a good idea and will majoring in economics teach me the wrong way to think about stuff?

    • E4439qv5

      Economics is a valuable lens through which to view the world. You can go ahead and specialize in it, just please be aware that it’s one of many such lenses and not the “be-all-end-all” predictor of human behavior some professors make it out to be.

      Be an economist. Be the best economist you can be, just don’t become a reductionist along the way. ‘Cause that won’t do you (or anyone else) any real good. 🙂

  • seazen

    Spot on! As a seriously privileged and automatically respected Harvard MBA (many years ago), I found the whole experience to almost totally absent any sense of responsibility with outcomes beyond the bottom line. There was a single class “Business and Society” that peeked into the broader connections our business activities might have with the world around us but it did not last. Collateral damage was neatly tucked into some vague bucket of “externalities” and there was serious assertion that social issues should not be addressed by business. They were the responsibilities of others.
    Moreover, the venerated Case Study approach was designed to encourage more “Art of the Deal” advocates able to stand and insist their solution was “the best” and if you didn’t agree you were just a putz.
    It was also true that vast majority of the students were among the most privileged in the country(s) they represented. Few had actually ever worked but expected they deserved to manage others after just two additional years of interacting with their peers at the school. Jobs that followed were driven by connections within the family/friend networks we all came from and we joined the club we were meant to from birth. It was training for young aristocrats then, and it still is.

  • Nah, this is an old debate, as old as socialism vs capitalism debate. For many many years the socialism ( in the former communist/socialist states ) claimed and prided themselves they are , from an economic point of view, thinking long term, planning long term and strategically developing the economy with future in mind.
    Since the future cannot be predicted ( but we keep trying to do that ) we should rather live in the now/here realm.
    All the best to you Utopians !

  • Reinaldo Martinez

    The core problem is hardly what the author states. The problem in the insistence in fitting all people in the same mindframe. The goal is, of course, widen the share of profit by reaching more and more customers, cocacola kind of marketing. But human diversity is as vast as human opinions. We will never find a single economic method for success. Some use intuition, others get under the bonnet, yet other simply marry millionaires.