Though, the economist itself is clearly not in favour of the author’s conclusions, this tells of a very Austrian-sounding critique of pseudo-mathematical business school methodologies:
In a forthcoming article to be published posthumously in Academy of Management Learning & Education, Sumantra Ghoshal argues that many of the “worst excesses of recent management practices have their roots in a set of ideas that have emerged from business-school academics over the last 30 years.”
Mr Ghoshal was just such an academic, a professor at London Business School …. He believed that the desire of business schools to make the study of business a science, “a kind of physics”, has led them increasingly to base their management theories on some of the more dismal assumptions and techniques developed by economists, particularly by the “Chicago School” and its intellectual leader, Milton Friedman. These include supposedly simplistic models of individual human behaviour (rational, self-interested, utility-maximising homo economicus) and of corporate behaviour (the notion that the goal of a firm should be to maximise shareholder value). These assumptions, though in Mr Ghoshal’s view badly flawed, were simple enough to allow business-school academics to develop grand theories of management supported by elegant mathematical models and empirical analysis that appeared scientific, and thus earned their subject academic respectability, but were, in fact, a pretence of knowledge where there was none.
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Being familiar with Ghoshal’s writings, I’d urge caution. Ghoshal is a behaviorist whom I suspect would be equally hostile to the Austrian approach (were he familiar with it). His problem is not with formalization per se, but with the idea of human actors as purposeful decision makers. I think he expresses his concerns as criticisms of the neoclassical maximization hypothesis simply because it is so well known.
Humans are self-interested and do attempt to maximize utility, but building “grand theories” and “elegant mathematical models” based on this has many faults, not the least of which is that “utility” is a value judgment that varies subjectively by individual! This doesn’t lend itself well to modeling. Not all humans are rational, either – it’s very well known to behaviorists that, generally speaking, humans tend to believe what we want, over and above evidence to the contrary. This hit the web recently, a behavioral scientist pointed out a study where a group of participants were given a survey, and then exposed to a random amount of evidence regarding prisoner abuses during the Iraqi war. Whether or not they were convinced of the charges against the convicted soldier was statistically more a function of their political beliefs, than a function of the amount of evidence they were presented. This quirk of behavior is what contrarian investors capitalize on (pun intended).
In practice, the goal of firms today is to maximize the stock price. Does that maximize shareholder value? Is that value “speculative stock price,” or is that value ROE, or some other measure like dividends or EBITDA per share? Compensation of management through options has tended to steer the course towards managing to stock price, and stock prices are irrational, speculative, and irrelevant to the financial health of the company as an ongoing business, unless it falls a great deal below the book value per share (if that happens, I would warrant that the core business itself had issues).
Ghoshal’s writings have shed some light on management issues but he is no closer to any “truth” than the next enlightened thinker.
Specifically, to assert that theories espoused by business schools have single handily shaped business practice in the US or the world is absurd. Many green MBAs are confronted with reality very quickly upon taking their new assignments upon graduation. Business schools have been heavily influenced by business practice. The top business schools are very much anchored in management practice over theory (Harvard).
I will argue that Ghoshal’s attack on maximizing shareholder value is intellectually bankrupt on a number of fronts. Firstly, firms NEVER use it as the sole decision criteria (even when they say they do). Secondly, defining an objective function that is trackable is key to decision making. Thirdly, most of Ghoshal’s suggestions fail to provide material direction to decision makers (They are nice once we know what we are doing). Fourthly, businesses in the past thirty years has done more to improve the human condition than any other single institution on the planet.
You may be familiar with a small part of prof. Ghoshal’s writing to make such ill-informed commets. He was familiar with the Austrian school and NOT hostile to it. He does NOT have a problem with ‘human actors as purposeful decision makers’ as you allege. Infact his best known work, The Individualized Corporation rests on the very foundation of purposeful decision making by ALL levels of management, not just the senior leaders in a firm. Ghoshal’s attack is NOT on attacking shareholder value, but on putting ideas in the world that are based on flawed assumptions about human nature, because these ideas may create the flawed behavior like self-fulfilling prophecies. Yes — you are right that many of his suggestions only help those who know what they are doing. He beleived that everyone ought to know what they stand for. If you do NOT know what you are doing, then you should NOT be condemning those who do, but working on self-discovery to get to be a powerful individual capable of purposeful action.
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