Economic Sense

Do Business/AgBusiness Schools Need a New Curriculum?

"Critics of business education have many complaints. Some say the schools have become too scientific, too detached from real-world issues. Others say students are taught to come up with hasty solutions to complicated problems. Another group contends that schools give students a limited and distorted view of their role — that they graduate with a focus on maximizing shareholder value and only a limitedunderstanding of ethical and social considerations essential to business leadership."

First, I think it is important that students be properly informed about what profit maximization implies: Profits represent the net contribution a firm makes to society. That is, when a firm produces a product or service, it imposes costs on society ( through the resources it uses, the leisure and time given up by laborers, and the use of scarce funding etc. ) but with a free market system that firm has to pay a price for those costs. People only buy a product or service from  a business if it benefits them as members of society in some way. The difference between a firm’s costs and the benefits it contributes to society represents that firm’s ‘net contribution to society.’  This is ‘profit.’

It follows then that  the ethical and socially responsible thing to do is to maximize the firm's net contribution to society, or in other words maximize profits, or as a close approximation, maximize shareholder value.

Now, what if there are cases where in the process, people in society are harmed as a result of the firm’s pollution or something of that nature? We learned from economists Ronald Coase and Howard Demsetz that most cases of these ‘externalities’ can be handled quite easily by the market as long as the government assigns and enforces property rights. With property rights and markets, all parties are forced to take the well being of others into account, and over time as new problems arise, new institutions and forms of property and markets evolve to deal with them. ( like selling carbon offsets or trading water quality permits)

One thing that may need more emphasis in business school however, is how to run a profit maximizing business in an environment of government intervention. With the current financial crisis we have seen what happens when the government manipulates interest rates ( see this piece from the Wall Street  Journal) and the risky incentive structure created by public-private partnerships and government sponsored enterprises ( see this piece from the Wall Street Journal).

 How many times have you heard it said that the current crisis is the result of failed market philosophies and deregulation?  Perhaps it is our political leaders and media that should be retrained . With an understanding of markets, profits, and incentives their stories may not end up so far off base.