Just how dangerous is economics for management practice?

It is often argued that academic ideas have no real significance for the world around us. Academics may profess high ideals about changing the world but their influence upon reality is limited. But there is a school of thought that says ideas stemming from academia do matter. Indeed, it is claimed that certain ideas professed by academics can effect changes in the world that are bad for the wider public.

This view has particular resonance in the world of business schools. Hence it is argued that ideas arising from business schools have led to malevolent practice within firms. Corporate fraud (think Enron) and toxic work practices (think Amazon) have been linked directly to the spread of ideas in and through business schools. This line of criticism, if valid, raises profound issues about the role that business schools can and should play in the world.

Economics as performing bad management

The ascendancy of economic ideas in business schools has come under critical scrutiny. The teaching of these ideas to actual and would-be managers, in particular, is blamed for the creation of bad management.

Consider the economic ideas currently taught in business schools. These ideas – linked to economic theories of agency and transaction costs – teach that human nature is motivated by self-interest. Managers are assumed to be self-regarding optimisers, who seek to maximise their own salary, at the expense of shareholders. Workers, for their part, are assumed to be shirkers or effort avoiders, who seek to minimise the amount of work they do. The above assumptions are routinely taught on MBA programmes and also figure on economics courses that form part of management degrees. Obviously, they also appear on economics degrees that now inhabit many business schools.

The effect of these assumptions, it is argued, is to change managers’ behaviour. Managers who internalise the economic ideas they are taught on MBA programmes will be more prone to act in self-interest when employed in the workplace. They will also be more inclined to treat workers as prone to shirking and to use incentives to gain their compliance.

By acting in the above ways, managers will create the kind of behaviour that economic ideas say exists. Managers themselves will be more likely to commit corporate crime, while workers will be more likely to shirk, given they are treated by managers as shirkers. Managers, in turn, will be required to use incentives to secure the consent of workers.

Here behaviour predicted by economic ideas is created not because these ideas are true but because they are believed to be true and acted upon in ways that make them true.

The effect is not just on current managers but also on students. Research shows how economics students are more likely to act in a self-interested way than other students. This research suggests that economic ideas can be transformative (hence, exposure to economics is seen to increase the likelihood of students acting in self-interest). Again, to the extent that students carry these ideas into the world of management, they may be expected to reproduce forms of behaviour consistent with economic theory.

The direct effect of economic ideas on management behaviour is captured by the idea of performativity. In applying this idea, critics have argued that economic ideas have produced inefficient and exploitative management in organisations. Further, they argue that these ideas should be resisted, in creating better or good management.

Limits to performativity

I have argued in my own research that the performativity thesis is important in stressing how ideas matter to the world around us, but that it overstates the significance of ideas in shaping the world as it is. In short, even if economic ideas had not gained influence in business schools, bad management would still be a problem in the world and one in need of reform.

The issue with linking economic ideas to bad management is that it misses how structural conditions in the economy have always favoured regressive forms of management. Capitalism features an imbalance of power between capital and labour that leads to regressive practices and outcomes. The latter may be supported and embedded by economic ideas, but they have not been created by them.

In recent years, the turn towards finance-led models of management have reflected shifts in the political economy of capitalism. While these shifts have been aided and abetted by economic ideas, they have also gained momentum from wider economic and political forces that have limited connection to the ideas promoted within business schools.

The problem with the performativity thesis is that it overplays the power of ideas and misses the power of capital in enforcing bad management in organisations. It also misses how broader change is required in society to challenge and resolve bad management. To think that a new set of ideas in business schools could create a different and better form of management is naïve at best and dangerously misleading at worst.

From performativity to a critical business school

What, then, should be the role of business schools in society? Two responses can be given here. Firstly, business schools have a role in resisting ideas – including those from economics – that condone (as opposed to necessarily create) bad management. Secondly, business schools should allow for the discussion of alternative ways of managing and organising economic activity. In particular, they should enable – via critical scholarship and teaching – forms of management and organisation that subvert the dominant shareholder value model.

Business school academics may not have the power to create the world, but they have a part to play in supporting and encouraging change in the world.

This article originally appeared on the LSE Business Review.