2014 Government Regulations & Business Summit
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The recent scandals at Barclays PLC, JPMorgan Chase & Co., Goldman Sachs Group Inc. and other banks might give the impression that the financial sector has some serious morality problems. Unfortunately, it’s worse than that: We are dealing with a drop in ethical standards throughout the business world, and our graduate schools are partly to blame.
Consider, for example, the revelations about two top executives at the elite consulting firm McKinsey & Co.. McKinsey Director Anil Kumar – a graduate of the University of Pennsylvania’s Wharton School – pleaded guilty to providing insider information to hedge-fund manager and fellow Wharton alumnus Raj Rajaratnam. Rajat Gupta, a graduate of Harvard Business School who served for nine years as McKinsey’s worldwide managing director, was convicted of insider trading in the same case.
While every firm can have its bad apples, when these bad apples are at the top it suggests that a company has either a corrupt culture, a defective selection process, or both. This is particularly troubling at a company like McKinsey, which cites the integrity and quality of its consultants as key advantages.
Where did Gupta, Kumar and others get the idea that this kind of behavior might be OK? Most business schools do offer ethics classes. Yet these classes are generally divided into two categories. Some simply illustrate ethical dilemmas without taking a position on how people are expected to act.
Others hide behind the concept of corporate social responsibility, suggesting that social obligations rest on firms, not on individuals.
Oddly, most economists see their subject as divorced from morality. They liken themselves to physicists, who teach how atoms do behave, not how they should behave. But physicists do not teach to atoms, and atoms do not have free will.
Experimental evidence suggests that the teaching of economics does have an effect on students’ behavior: It makes them more selfish and less concerned about the common good.
My colleague, Gary Becker, pioneered the economic study of crime. Employing a basic utilitarian approach, he compared the benefits of a crime with the expected cost of punishment. While very insightful, Becker’s model, which had no intention of telling people how they should behave, had some unintended consequences.
A former student of Becker’s told me that many of his classmates interpreted Becker’s descriptive model of crime to be prescriptive. They perceived any failure to commit a high-benefit crime with a low expected cost as a failure to act rationally, almost a proof of stupidity.
In other words, if teachers pretend to be agnostic, they subtly encourage amoral behavior without taking any responsibility.
When the economist Milton Friedman famously said the one and only responsibility of business is to increase its profits, he added “so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”
Lobbying to secure a competitive advantage from the government certainly does not represent “open and free competition.” Not to mention using clients’ confidential information for personal gain, manipulating a major interest-rate benchmark such as Libor, or selling financial products you know to be flawed.
The best way to combat this behavior is to make ethics an integral part of the so-called core classes – such as accounting, corporate finance, macroeconomics and microeconomics – that tend to be taught by the most-respected professors. These teachers should make their students aware of the reputational (and often legal) costs of violating ethical norms in real business settings, as well as the broader social downsides of acting solely in one’s individual best interest.
Of course, no amount of instruction can prevent some people from engaging in bad behavior. It can, however, contribute to a social consensus that would discourage diffuse fraud. •