Why economists are liars (and other stories)

Josh Booth
March 14, 2013

A new generation of universities is cultivating a new generation of  liars – liars who have become our economic elite. Not because the  latest boom industry in higher education, Massive Open Online Course (MOOC) platforms such as Sebastian Thrun’s Udacity, are running classes in mendacity, but because business and economics are gaining popularity as higher education options. And students of business and economics, it turns out, may be much more likely to lie than students of other subjects.

The generational transformation is, after all, a matter of simple  economics. A business school boom, beginning in the US thirty to forty  years ago and spreading across Europe and Asia, has seen a massive rise in access to training in a very particular style. This is a training that students are willing to pay big money for (the global average cost of an MBA standing at $35,000) because it offers such high returns  for graduates – big money that higher education institutions welcome,  especially when their funds are being cut back. Courses in business and  economics provide a win-win resolution of both parties’ financial  predicament.

But as with many deals that on the face of it make perfect sense,  this one involves an ugly trade-off. Along with theoretical models that “obscure rather than clarify the way organisations work”,  business schools will apparently teach you to lie. Presumably not  directly, but rather through the ways in which courses in business and  economics train students to think about the world. A series of experiments  conducted by Raúl López-Pérez and Eli Spiegelman of the Universidad  Autonoma de Madrid found that students majoring in business or economics  were more likely to lie when they could gain financially by doing so  than students majoring in other subjects.1 Whereas humanities students were honest more than 50 per cent of the time, students of business and economics only told the truth 23 per cent of the time.

Part of this story was told by LSE Professor Robert Wade  this week at a Cambridge seminar on economists’ contribution to the  second Great Depression. At first glance it’s a striking indictment of  academic economics, and a welcome weapon in the arsenal of social  scientists wanting to take another shot at those arrogant, imperialist,  orthodox economists. But it’s also a story that points beyond itself to a  much more recent development – one that actually does implicate Udacity  founder and Google Glass pioneer Sebastian Thrun – and to another more complex story involving bombs, the Ford motor company, and the self-fulfilling prophecy.

The Rise to Power of Economics

In a 2009 article  Philip Delves Broughton, a graduate of the Harvard Business School,  wrote that “[f]rom Royal Bank of Scotland to Merrill Lynch, from HBOS to  Lehman Brothers, the Masters of Disaster [MBA graduates] have their  fingerprints on every recent financial fiasco”. Not only were graduates  of business schools central players in the financial crisis but business  schools’ models, based on case studies of, among other institutions,  the disgraced RBS, were being widely implemented. Combined with powerful  economic theories, these models became the blueprint for an unstable  financial system.

Former Dean of the Yale School of Management and Director of Research at Harvard Business School, Joel M. Podolny, traces the roots of business schools’ inadequate training back to a 1959 report commissioned by the Ford Foundation. Gordon and Howell’s report was published five years after the Foundation had begun a programme to reform business education in the United States. In a fascinating paper,  Marion Fourcade and Rakesh Khurana discuss the context in which Ford’s  programme transformed the role of economics in twentieth-century  America. The Second World War had brought significant changes to the  American economy: conflict demanded a massive increase in industrial  production and many large corporations emerged from the war operating  across multiple industries where they had previously confined their  business to only one. Growing sales and spreading risk across industries  and product lines became the key to firms’ survival, whereas before the  war they might have tried to increase the efficiency of their work  organisation or the competitiveness of their prices. This required a new  set of skills in managing supply chains and forecasting demand.

But there was another important motivation for Ford’s programme.  After the 1929 stock market crash and the Great Depression of the 1930s,  capitalism’s social benefit had been cast into doubt. Prominent  corporations such as Ford faced the challenge of rebuilding their public  legitimacy. The programme to reform business education was a way for  Ford to tie itself publicly to a new form of management that broke with  the traditions of pre-war capitalism. Handled with care, novelty could  provide the tonic the corporation needed.

So it was novelty that Gordon and Howell’s report recommended.  A new style of management required the “judicious use of clinical  materials and methods”; business schools should hire staff from  traditional academic backgrounds emphasising quantitative methods:  economists, statisticians, and operations researchers. Their ideal hire  probably looked a lot like future president of Ford and later Secretary  of Defense, Robert McNamara,  then one of the “Whiz Kids” hired to turn the corporation’s post-war  fortunes around. During the war McNamara had moved straight from a  teaching post at Harvard Business School to an operating group in the  Army Air Corps where, as Marion Fourcade and Rakesh Khurana clinically put it,  he “used life expectancies of air crews, the application of stochastic  simulation, queuing theory, and other new statistical techniques, to  formulate acceptable kill ratios, bombing runs and airplane production  runs”. War had developed both the prototype for the companies that would  come to shape the postwar economy, and the prototype for their academic  gurus.

The institutional model for the Ford Foundation’s ideal business  school was not, however, the Harvard Business School; this honour went  to Carnegie’s Graduate School of Industrial Administration (GSIA), where  during the war the U.S. Air Force had set up a research centre tasked  with developing mathematical models that could improve industrial  operations. The close relationship that developed between Ford and the  GSIA’s dean, Lee Bach, was to be mutually beneficial. As an economics  graduate from the University of Chicago frustrated at what he saw as the  discipline’s irrelevance during the Great Depression, Bach intended to  transform economics into a discipline capable of solving social  problems. Ford’s championing of the GSIA’s application of economics to  business education was exactly the right vehicle for this  transformation. The GSIA’s work gave greater legitimacy to Ford’s  business strategies, and Ford’s endorsement gave greater legitimacy to  the GSIA.

As Howell later claimed,  his report “was the strategic force behind the reorientation of one of  the largest sectors in American higher education; and it was by far the  single most powerful force in bringing about that reorientation”. Ford’s  $35 million investment in US business schools – of which the Harvard  Business School and Chicago were two of the main recipients – helped set  the standards for business schools first across America and later  across the world. Managerial and financial elites would from this point  forward be trained in the clinical style of a war-fashioned prototype.  And the discipline of economics would secure its place at the heart of  economic life.

The history of the modern business school helps us to understand why  economics is such a formative discipline today. Its prominence has been  ensured by particularly hospitable conditions within business and state  institutions; but this prominence has gone on to perpetuate itself as  the discipline of economics has in turn shaped business and state  institutions in its image. The symbiotic relationship between Ford and  the GSIA was only the start of a kind of looping effect that has  continued since the 1950s.

An important consequence of this looping effect is that whether or  not economic models are accurate or inaccurate may be a moot point.  Under the right conditions – conditions in which corporations,  governments, individuals are susceptible to the kind of thinking that  economics promotes (conditions where a corporation such as Ford, for  instance, is in search of a novel source of legitimacy) – economics may  take root, thrive, and even cultivate the conditions for its own  survival.

On Self-fulfilling Prophecies

To see what is really at stake here, we have to move beyond Delves  Broughton’s and Podolny’s critique of business schools. These insiders  direct their ire at the application of inaccurate knowledge to the  economy due to business courses that are too narrowly focussed on  inaccurate academic knowledge – specifically economic knowledge. But  López-Pérez and Spiegelman’s truth-telling experiment might be  interpreted as suggesting that the problems are deeper than those of  inaccurate knowledge. The academic discipline of economics may actually  have the capacity to shape reality in the image of the theories it  propounds – in this case to shape people so that they conform to the  utility-maximising calculators around whom the models of neoclassical  economics are based. Perhaps the academic discipline of economics does  not just attempt to describe the economy, but rather helps produce it.

This is the basic claim of the “performativity” thesis, stated in its earliest form by the French sociologist of innovation Michel Callon.  At its simplest, the performativity of economics can be understood as a  species of the self-fulfilling prophecy. In this case the prophecy is  delivered in the form of economic models that purport to describe the  way the world operates. These are taken up and used to build  institutions – stock exchanges, market regulations, businesses, even  business schools – even if they do not provide accurate descriptions of  reality, and for motivations that may have little to do with their  efficacy as models. But over time, as institutions operate on the  assumptions embedded in these economic models, the models become  true. People and the apparatus that surrounds them (machinery, computer  programmes, risk analysis systems) start to conduct their business in  the grooves set down by the models. Eventually the prophecy of economics  is fulfilled.

Various studies suggest that economic performativity is something  that should be taken seriously: it seems to have been a factor in  developments as diverse as the modern derivatives trade, property titling systems in developing countries, and regional food markets in France.  Performativity should be taken seriously not because these developments  are necessarily bad ones, but because it suggests that academic  economics, or at least those able to employ academic economics to build  institutions, have an unsettling power to shape the world we live in. As  the Ford Foundation’s relationship with the GSIA (and McNamara)  illustrates, the power of an academic discipline such as economics is  just one component of an elite-based concentration of power. We might  reasonably be concerned about this simply because of the extent of this  concentration, irrespective of its particular effects. Do we really want  abstract models, conceived in the detachment of academic studies by a  few economists and seized on by politicians and managers in search of  novelty, to become the blueprints for a reality we all have to live in?

A Changing World?

But we may also reasonably be hopeful that things will change. The  story of Ford and the GSIA suggests that economics requires a hospitable  environment to gain so much power over the shaping of our institutions  and the cultivation of our selves. New forms of business may ally with  new ways of knowing that are not so tied to the detached, clinical  precision required to formulate acceptable kill ratios and bombing runs.  Legitimacy may be sought not in techniques associated with the glory of  having won wars, but rather in skills that allow businesses to make a  clean break with the discredited strategies of pre-financial crisis  capitalism. Had the Second World War not followed so closely on the  heels of the Great Depression, a similar break might have reshaped the  capitalism (and academia) of the 1950s.

There is already some evidence that this is happening. Traditional MBAs may be waning in their dominance as the salary boost they confer on graduates drops, as their efficacy comes under scrutiny, and as business schools begin to make space for social entrepreneurship,  driven by student demand. Partly thanks to an emphasis on soft skills  such as “creativity” within the Silicon Valley -based tech industry,  some (including pillars of business journalism such as Bloomberg and the Wall Street Journal) are starting to question whether design schools, with their focus on open-ended problem-finding and innovation,  will start to replace business institutes created in the image of the  GSIA and Chicago schools. Of course, academic institutions are still  valuable resources for those wanting to acquire these newly-legitimate  skills; but as notorious examples of tech enterprises started by  university dropouts such as Facebook illustrate, academia – and academic  research – no longer has a monopoly on legitimacy.

If we are worried about the power that an academic discipline has so  far wielded in its shaping of our common world, we should probably be  glad of this development. But we should not be too sanguine. These  developments are, for the moment, localised and may be counterbalanced  by the continuing dominance – and the continued export – of old models  to new places. Creative capitalism has taken root in California and  higher education is changing along with it at Stanford, but through  Massive Open Online Courses, California is directly exporting  educational programmes focussed on a narrow curriculum (so far MOOC  platforms are dominated by courses in mathematics, engineering and computer science) to developing-world countries.

Behind one of the pioneers of these platforms, Udacity, is the Ford  Foundation of the twenty-first century: Google. Udacity is run by  Sebastian Thrun, Google’s Vice President and founder of the  corporation’s secret research wing, the Google X Lab.2 It is part-funded by Google.  While Udacity may not be cultivating liars through its courses, we  should probably be asking what kind of worldview the technical knowledge  it promotes gives rise to, and what kind of people and institutions are  shaped by this knowledge. It seems fitting that Stanford was one of the  higher education institutions to be shaped most comprehensively  by the Cold War. In the near future we may have stories to tell that  are much more worrying than tales of mendacious business majors lying to  make a quick Euro.


  1. In these experiments participants sat in front of a screen  on which either a blue or a green circle would periodically flash up.  The participant (the ‘sender’) would then communicate the colour of the  circle to another party (the ‘receiver’) unable to see the screen. If  the sender claimed that a green circle was on the screen, he or she  would receive €15; otherwise the reward would only be €14. The receiver  was given €10 regardless of the circle’s colour or the sender’s  honesty. Participants’ responses when a blue circle flashed on the  screen – did they lie to gain a Euro? – were used to determine whether  their motivation to maximise profit trumped a preference for truth.
  2. Intriguingly, in 2009 Joel M. Podolny, the former business  school professor I referred to earlier, moved to become the Dean of  Apple’s new higher education venture, Apple University.
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Josh Booth