Do Economists Breed Greed and Guile?

That is the title of the essay I published this morning at HBR's Great Debate  about business schools.  I argue that one cause of the greed that is reinforced by many business schools is that economists and their assumptions usually rule roost: Many economists teach and believe that humans are selfish and greedy.  For example, one of the most influential theorists is Oliver Williamson. Here is a quote from one of his papers:

"Transaction cost economics also subscribes to bounded rationality. Rather,however, than work out of a myopic setup, transaction cost economics assumes that many economic actors (especially within organizations) are capable of and engage in foresight.Such takes on special importance when coupled with the assumption that economic actors engage not merely in simple self-interest seeking but also engage in self-interest seeking with guile."

The word guile means "treacherous cunning, skillfull deceit."  Drawing on a paper that Fabrizo Ferraro, Jeff Pfeffer, and I published a few years back, I argue that traveling through life with this assumption has powerful effects.  If you believe that people are entirely out for themselves, will lie and cheat to get what they want, and are hardwired that way, then you would be a fool to act otherwise yourself.  But -- if you believe (as much research shows) that self-interest is a norm that can is stronger in some groups than others, and takes different forms in different groups than others, than this means that being a greedy selfish liar isn't our fate as human-beings, but is a consequence of the social group were are in, or how we are "primed" by what is going on around us. 

One small way that business schools can contribute to the greed problem is to teach students -- especially in economics classes -- that self-interest with guile is a norm, as is self-interest with grace and concern about others.  Indeed, I think that an interesting comparison here might be the internal norms at the now defunct Merrill Lynch versus Goldman-Sachs.  I have had Stanford students tell me for decades that Merrill is (or was) fundamentally dog eat dog world to live in and there is no incentive for helping coworkers and you get ahead by ignoring them, doing your work, and occasionally sticking a knife in their back.  Beyond my gossip, check out this little column by Dan and Chip Heath and Paul Stiles book Riding the Bull. Indeed, as former customer of Merrill, I saw this in small way, where every interaction we had with our stockbroker was aimed at creating churn rather than doing things in ur best interest -- and we were constantly getting screwed by unexpected and hidden fees... all these behaviors are consistent with norms about treating insiders and insiders in a way that is consistent with "self-interest with guile." In contrast, although Goldman-Sachs isn't perfect, they operate under a drastically different set of norms, where although yes, the profit motive is there as it should be, there are very strong norms for being responsive to colleagues, sharing information. for telling the absolute truth, for what I might call "self-interest with grace and concern for others."   A comparison of the assumptions made in these two firms, and the impact on practices and actions, could be most instructive for MBAs.

It is interesting that Steve Kerr -- former chief learning officer of Goldman -- is arguing that business schools don't matter much, but what really matters is what happens in companies.  That may be true, but perhaps he would agree with me that whether a company's practices and actions are (implicitly) based on "self-interest with guile" versus "self-interest with grace and concern for others" has a huge impact, and more generally, the assumptions that leaders and followers make about human nature have a huge impact on everything from hiring and firing practices, to incentive and promotion schemes, to whether or not people are truthful or deceitful during interactions with customers.

P.S. The paper I am basing this on is co-authored with Fabrizio Ferraro and Jeffrey Pfeffer: "Economic language and assumptions: How theory can become self-fulfilling, Academy of Management Review, 30:8-24"

Comments

[Brad Evans]

All this time I thought it was pay-for-performance that caused this financial crisis.

I will remember a study, "the Good Samaritan" study, where students at a religious school were to make a powerpoint presentation on the moral of the "Good Samaritan" and had to hurry across campus in order to deliver the talk. One of the investigators was laying on the sidewalk, seemingly quite ill. The students stepped over him and hurried on the their talk.

[michael webster]

Bob, I would suggest that the current game theory view of the world is entirely solipsistic - there really aren't any other people in the world, because the agent who is trying to pick a strategy in which it doesn't matter what anyone else does.

Nash equilibrium strategies are acceptable to people who don't have to really think about how to coordinate with others.

Even greedy people have to deal with others, but the current game theory focus on nash equilibrium strategies makes the other dispensable, which is the real shame.

[Bret Simmons]

It might just be me, but most economists I've met sincerely believe that they know something about everything. They seem to operate on the assumption that there is nothing that cannot be explained by economic theories.

Since our students usually pass through lower level ECON courses before they get to upper level MGMT courses, it can be tough to challenge ingrained assumptions they learn in those courses. Most see employees as costs and not assets, as opportunistic actors that will slack off or screw us any change they get. Many students find it difficult to swallow the logic of the service-profit chain, that concern for others - employees and customers - increases profits by growing revenues and decreasing costs.