Unpopular Thoughts About Business Education

Great article in the NYT about business education.

At the risk of being flayed for being a non-visionary, status-quoist, doofus, I'll respond with some thoughts about why business schools have somewhat of a harder time instilling "professional standards" and "codes of ethical conduct," at least compared to law schools and medical schools.

One big difference between law/medical schools and business schools is that business schools compete against non-consumption.

What does this mean?

If you want to be a lawyer, you need to go to to law school. There's no other way to do it. If you want to be a doctor, you have to go to medical school. There's no other way to do it. But if you want a career in business, you don't have to get an MBA. You don't even need to have a bachelor's degree in business. There are a thousand ways to have a business career that don't involve spending time at a business school.

This fact might make it harder for b-schools (relative to law schools and med schools) to require students to acquire skills that have social value but not private value.

Here's why:

When students decide whether to go to any kind of school, they compare the private value of going to school to the private cost. "Private value" here is the amount by which school will make the person's lifetime earnings higher. "Private cost" is the amount it costs the person.

Where does private value come from? Private value comes from the market value of the skills that the person will acquire. If we teach you how to apply the net present value rule and employers like that skill, then they'll be willing to pay you a higher wage as a result of your having gone to school. If we teach you how to make better ethical decisions and employers value that skill, then they'll be willing to pay you higher wages as a result. Both skills allow the student to capture some private value.

But suppose employers aren't willing to pay for skills involving ethical decision-making. Suppose these skills make the world a better place, but they don't make the employer a higher-profit firm. (You might, in fact, think that one reason to emphasize ethics is to help students make better decisions in cases where the profit motive and "what's right" don't line up.) In this case, we'd say that the skills have social value but not private value.

Developing these skills is still costly --- the school still has to pay the instructor --- but the skills don't allow the student to capture any direct benefit, because the employer isn't willing to pay higher wages as a result.

Now, schools could still require the student to get the skills because it's the right thing to do. But this raises the private cost of getting the education without raising the private benefit. And this makes getting the degree less attractive.

Here's where the difference between law/medical schools and b-schools really bites. Law schools don't face competition from non-consumption. Neither to med schools. So, pushing lawyers and doctors to get socially-but-not-privately-valuable skills doesn't have a significant effect on student demand for the degree.

I'd guess the same isn't true for b-schools --- pushing students to acquire socially-but-not-privately-skills might well have a larger effect on student demand here. Imagine a potential student saying "Why should I go to b-school where they'll teach me all that stuff I don't need? I'm just going to keep working and try to move up the ladder without the degree. I'll learn more practical skills here at work anyway."

So, competition against non-consumption is one possible reason why business schools differ from law/medical schools when it comes to professional standards.

To put this another way, if the schools have a monopoly on certifying people for a profession, then it's easier for the schools to impose good-for-the-world standards. If access to the profession is open, then it's harder for schools to insist on such standards; people might just opt out of school.

Now, my argument here relies on a number of assumptions that might not be true.

First, I've assumed that students look at private benefits and costs only, and aren't thinking too hard about whether their training will help them make the world a better place. If "student altruism" rises, then this assumption won't be true, and schools should respond with more ethics in the curriculum.

Second, I've assumed that employers might not have a sufficiently high willingness-to-pay for ethical decision-making skills. If, going forward, employers have a much higher willingness to pay for these skills, then b-schools can push curriculum that direction without reducing student demand. If employer willingness-to-pay for ethics rises, then more ethics-in-curriculum will actually increase student demand for the degree.