Some critics charge that business schools are too academic and theoretical.
But the research and mindset that they incubate have powerful real-world applications.
By Thomas F. Cooley
raduate schools of business face a tough educational challenge: we have two years to prepare young college graduates (typically with some meaningful work experience) for a career that is likely to last 35 years. Now 35 years ago, large parts of the world economy were governed by socialist principles, trade was highly restricted, inflation was endemic in most economies, and the personal computer and the Internet were not even a gleam in someone’s eye. The most popular word processing tool was a pencil. One hesitates to project what sorts of changes we might see by 2042.
To aggravate matters, business education is under attack. Recent articles in the business and mainstream press have asserted that even the best business schools fail to impart useful skills, don’t prepare students to be leaders, and don’t instill ethical standards in graduates. A popular view holds that business schools are failing because they are too focused on scientific research, and not enough on the so-called “real world” skills and applications needed to succeed in today’s complex marketplace. In an impassioned critique in the Harvard Business Review, Warren G. Bennis and James O’Toole argued that the model of academic excellence embraced by most leading business schools, which is based on the theory that business schools should deliver a long-term educational foundation rather than a set of short-term vocational skills, is the major culprit for this failure. Bennis and O’Toole report with breathless amazement that there are tenured professors of management who have never set foot inside a real business except as customers. In a similar vein, Jeffrey Garten, former dean of the Yale School of Management, told The New York Times that business school education should be more “clinical” and that business school faculty should be required to have more practical experience in business. And this spring, an Association to Advance Collegiate Schools of Business (AACSB) task force issued a draft report on research. Among its conclusions: that business schools should “demonstrate the impact of faculty intellectual contribution to targeted audiences,” and that AACSB should “develop mechanisms to strengthen interaction between academics and practicing managers in the production of knowledge in areas of greatest interest.”
I’m convinced that the critics of business school education have it exactly backwards: the pressure business schools face to give in to a vocational focus means that students do not acquire the analytical and intellectual training needed to inform a leadership career, and that enables businesspeople to deal with a range of variables far greater than a purely vocational “how to” approach can address.
Business schools do have a scholarly mission. The mission is to understand markets, firms, and prices as well as to develop new strategies and discourses for understanding how they work and how they impact society. Business schools are entrusted by society with the culture of a profession, and have a responsibility to reinvigorate it through the education of each new generation. Therefore, their goal must be to provide a meaningful and serious intellectual experience that prepares students to be leaders in a complex evolving world. In addition to teaching the current accumulation of knowledge, business schools must, therefore, be actively engaged in creating the new knowledge that will drive business in the future. New knowledge creation is the key to success in business, and to the development of tools and analytical approaches that make such success possible. What’s more, the modern business corporation is one of the most important and complex drivers of economic and social change in the world. As such, it demands the serious study that only a research university can provide.
Beyond misunderstanding the crucial
role business education plays today, many contemporary business
school critics fail to grasp important lessons from its evolution.
During the 1950s, the Ford Foundation became interested in
enhancing business education, which it perceived as a bulwark
against the spread of communism. In a series of papers and
reports the Foundation supported, American business education
was characterized as a collection of trade schools without
any strong scientific foundation – “a wasteland
of vocationalism,” in the words of Nobel Laureate Herb
Simon. The reports suggested that the backward-looking, practice-based
approach of educating people for first jobs rather than for
their whole careers would ultimately hamper rather than help
Between 1954 and 1966 the Ford Foundation spent $35 million to foster business education and research at five schools: Carnegie-Mellon University, the University of Chicago, and Columbia, Harvard, and Stanford Universities. Using the transformation of medicine and engineering as a model, these schools invested heavily in research and in doctoral programs. The investments have clearly produced returns. In 1955-1956, graduate business education was virtually non-existent. Now, well over 100,000 graduate business degrees are awarded annually by 650 AACSB programs. Business schools now enjoy greatly improved status as professional schools, in large measure because the intellectual value of the undertaking is recognized. The widespread adoption of the MBA degree as a qualification for future business leaders has legitimized the position the Ford Foundation and others took 50 or more years ago.
erhaps more important, business schools have generated ideas of depth and daring that have changed business and financial markets in important ways. Professors Finn Kydland and Edward Prescott were awarded the 2004 Nobel Prize in Economics for work they did in the 1970s and 1980s at Carnegie-Mellon’s Graduate School of Industrial Administration, now called the Tepper School of Management. Their work on what is called “the inconsistency of optimal plans” established the foundation for an extensive research program on the credibility and political feasibility of economic policy, shifting the practical discussion of economic policy away from isolated policy measures toward the institutions of policy-making. Kydland and Prescott were also cited for having transformed our understanding of business cycles by integrating it with the theory of economic growth. A year earlier, the Nobel Prize in Economic Science for 2003 was awarded to Robert Engel and Clive Granger. The former is a professor of finance at NYU Stern, the latter a professor of economics at the University of California, San Diego. Engel’s work on what is called “autoregressive conditional heteroskedasticity” was originally published with an application to the variance of inflation in the UK, but its fruits have become indispensable tools in the analysis and management of financial risk.
"It is precisely because we don't yet know the problems that we will be facing that practice-driven education, focused on current solutions to current problems, will always fall short."
The aforementioned transformative ideas first appeared in apparently esoteric academic research journals, with no obvious relevance to business. Just as has been the case with basic research in sciences such as physics and chemistry, the researchers who developed these theories spent a great deal of time following blind alleys, engaging in trial and error, experimenting, meeting with failure and success. By definition, much of this research is impractical. And yet, just as has been the case with basic scientific research, this pioneering research quickly found unanticipated real-world applications. And there are dozens of other examples: agency theory and corporate governance, the capital asset pricing model, the Black-Scholes-Merton model and option pricing theory, conjoint analysis, auction theory, decision theory, game theory, pricing strategies and portfolio theory, queuing theory, risk management, and behavioral economics and finance. Which is precisely why I find the AACSB’s proposed guideline that business school professors focus efforts more on targeted research with immediate demonstrable impact to be somewhat wrongheaded.
Critics argue that while research itself might be a worthy undertaking, research-driven business schools are letting their students down by not giving them a sufficiently clinical education. But the best schools expect students to have two or more years of meaningful work experience before admission to their MBA program. Most stress the importance of an internship in the summer between the first and second years of study. And most business schools I know of employ a number of clinical faculty, chosen for their expert knowledge of institutions and practice, who bring an additional hands-on experience into the classroom.
Besides, the research mindset brings a unique and powerful focus to business education. It is forward looking rather than backward looking. It moves education away from teaching students a collection of facts to teaching them how to think. It moves them from a stultifying “best practice” mentality toward developing analytical ability. Would you rather have business school graduates who know what kinds of contracting structures businesses now use, or students who understand that contracts exist to solve moral hazard, asymmetric information, commitment, and agency problems? It is precisely because we don’t yet know the problems that we will be facing that practice-driven education, focused on current solutions to current problems, will always fall short.
One of my favorite business books of the past few years is Moneyball by Michael Lewis, the story of the Oakland A’s and their extremely successful general manager, Billy Beane. More important, it is the story of how baseball has been transformed by a generation of researchers (aka baseball nerds) whose major contact with the game is through data analyzed by increasingly complex computer programming. Beane understood that this apparently arcane research had the potential to create extraordinary value for his team. Indeed, under Beane’s leadership, the perennially undercapitalized A’s managed to reach the playoffs for four consecutive years. Over that period, their salary cost per victory was less than half of the next highest spending team and less than a quarter of teams like the New York Yankees.
Beane overturned the most basic principles of one of the most tradition-bound businesses in America – professional baseball – by using sophisticated statistical research in place of traditional “gut instinct.” Several major league general managers who have never played the game are now similarly schooled in the research tradition of “moneyball,” and executives in sports like basketball and football are catching on.
Moneyball is a good metaphor for what happens in academic research. You hire a bunch of bright, well-trained people with strong technical skills and a passion about what they study and turn them loose. With the right personnel, the right conditions, the right insights, and with a forward-looking rather than a backward-looking focus, exciting things can happen. And that research, applied in the right circumstances, has truly enormous potential for change.
Thomas F. Cooley is Richard R. West Dean and Paganelli-Bull Professor of Economics at NYU Stern.