Share this post

🔢 Key Takeaways

  1. MBA programs have professionalized company leadership, leading to a prioritization of shareholder value over employee well-being. It is important to value employee well-being and prioritize ethical business practices instead of focusing solely on profit generation.
  2. Acemoglu believes that achieving a fair society and understanding the economy requires examining the complex interplay between economics, politics, and broader social factors such as cultural beliefs and ideas. This approach is essential to understanding historical and modern economic outcomes.
  3. Rent-sharing between workers and firms is essential for reducing wage stagnation and inequality in the US economy. The education level of CEOs also affects wages and labor share in the economy.
  4. Research shows that firms run by business managers are less generous towards employees, leading to a decline in labor share. This trend has implications for future labor policy.
  5. Hiring business school managers may lead to a decrease in employee wages and a smaller piece of the economic pie. It is important to consider the impact of such hires on overall economic efficiency and employee well-being.
  6. Business schools prioritize maximizing shareholder value, leading to companies paying employees less. Reevaluating the teachings of business schools may be necessary to address the larger issue of wage stagnation.
  7. M.B.A. programs provide a rigorous education in core business areas, but having an M.B.A. boss does not necessarily lead to significant changes in a company's trajectory. Future business leaders should prioritize the welfare of employees and stakeholders.
  8. Business schools are recognizing the importance of balancing the interests of stakeholders, but there are still variations in emphasis among schools. Student attitudes are shifting away from maximizing profit, but it is unclear if this will lead to significant changes in corporate behavior.
  9. A recent study found that C.E.O.s with an M.B.A. degree paid their employees less, but the data used in the study did not accurately represent recent graduates who would now be serving in top positions. Furthermore, business schools have been evolving to address ethical concerns.
  10. Attending business school may cause managers to view workers as costs rather than stakeholders, leading to more selfish behavior. It's important to consider the influence of business school on managerial decision-making regarding worker compensation.
  11. Business schools prioritize cost-cutting and lean corporations, leading to the reduction of labor costs. The focus on shareholder interests and management consulting firms can be traced back to influential ideas. However, the negative long-term effects of rent-seeking should also be acknowledged.
  12. The behavior of leaders in business and politics is shaped by societal norms, which can impact their policies and management style. However, excessive rent extraction can result in segregation between the powerful and less fortunate. Education for leaders should address this influence.
  13. Politics plays a significant role in the economy, evident in the textbook and real estate industries. Online textbooks have helped reduce rent extraction, while China and Turkey's practice of selling quarter-constructed apartments can provide a source of investment.
  14. Companies in China and Turkey are engaging in risky financial practices that prioritize short-term gain over innovation. It is important to study business priorities and values to avoid potential defaults and long-term negative consequences.

📝 Podcast Notes

The Impact of MBA Programs on Corporate Leadership and Employee Treatment

In a recent episode of Freakonomics Radio, Daron Acemoglu, an institute professor at M.I.T, discussed the impact of MBA programs on corporate leadership and employee treatment. Acemoglu's research suggests that the professionalization of company leadership, due to the prevalence of MBAs, has led to a prioritization of shareholder value over employee well-being. While some argue that an MBA education equips leaders with a broader skill set, there is a need for MBA programs to address the negative consequences of this trend. The discussion highlights the importance of valuing employee well-being and prioritizing ethical business practices, rather than solely focusing on profit generation.

Economics, Politics, and Society: Daron Acemoglu's Approach to Understanding the World

Daron Acemoglu believes in pursuing questions that are interesting and novel, while also being motivated by his overall belief in how the economy should function and what a fair society is. As an undergraduate studying economics, he felt that the questions being asked weren't what he was expecting, but he never lost his drive to investigate the relationship between economics and politics. He believes that economic choices, institutions, incentives, equality, inequality, and innovation cannot be understood without thinking about politics and broader social forces such as norms, cultural beliefs, and ideas. Acemoglu's book, Why Nations Fail, explores the origins of power, prosperity, and poverty, emphasizing the importance of politics in shaping economic outcomes.

The Impact of Rent-Sharing and Education on Wage Stagnation in the US Economy.

Acemoglu explores the idea of rent-sharing between workers and firms and its impact on wage stagnation in the US economy. Rent-sharing is the practice of sharing the benefits or profits between workers and employers. The lack of rent-sharing has resulted in declining wages and inequality, despite the growth of the economy and profits. Acemoglu's recent paper reveals that there is a significant difference in wages between companies with CEOs who have an MBA or other business degree and those who do not. This highlights the impact of education on wages and the labor share in the US and Denmark economies.

The Decline of Labor Share: The Role of Managerial Professionalization

Acemoglu's research reveals that the professionalization of the managerial class is a key factor in the declining labor share in the U.S. and Denmark. Through high-quality data analysis, he found that firms run by business managers are less generous towards employees than those run by non-business managers. This trend has been on the rise since the 1980s, causing a drop in labor share. Acemoglu used a variety of strategies to ensure that this correlation was causative, and his findings have important implications for future labor policy.

The Negative Impact of Hiring Business School Managers on Wages and Labor Share

Hiring business school managers leads to a relative decline in wages and labor share, resulting in 6% lower wages in the US and 3% lower wages in Denmark as compared to comparable firms. While this results in increased profits for shareholders and investors, it does not necessarily increase the size of the pie, as firms do not see an increase in investment, sales, productivity, exports, or innovation under business school managers. In fact, firms under these managers may simply be giving employees a smaller piece of the pie. It is important to consider the impact of business school managers on employee wages and overall economic efficiency.

How M.B.A. Bosses Contribute to Wage Stagnation

The rise of M.B.A. bosses is contributing to wage stagnation and declining labor share, accounting for about 15 to 20 percent of the issue. Business schools are teaching their students to prioritize maximizing shareholder value, an idea popularized by economists such as Milton Friedman. This doctrine has become hugely influential in business schools and has led to firms choosing to pay their employees less. The courses taught in business schools, such as finance and economics, are prescriptive and teach students how they should behave to achieve this objective. This finding suggests that reevaluating the teachings of business schools may be necessary to address the larger issue of wage stagnation.

The Impact of M.B.A. Programs on Business Leadership

M.B.A. programs teach a rigorous core curriculum that includes statistics, accounting, economics, strategy, finance, and valuation. While some argue that business-school training encourages lower pay through a focus on the bottom line, research suggests that companies with M.B.A. bosses are not changing the trajectory of their firms in any big way. Instead, the focus should be on finding ways to address the losers from globalization and technological change. Future business leaders can make the world a better place by seeking to transform business and forge leaders who prioritize the welfare of their employees and other stakeholders.

Understanding the Impact of M.B.A. Education on Corporate Behavior

The impact of M.B.A. education on corporate behavior has been a topic of much debate. Harrison's critique of Acemoglu's paper raises concerns about the representativeness of the data sample as only three business schools were heavily represented. While there seems to be a growing recognition among business schools of the importance of considering and balancing the interests of all stakeholders, including workers and the environment, there are still significant differences in how much emphasis each school places on these topics. The opinions of students also seem to be shifting away from the sole focus on maximizing profitability towards valuing a company's role in society overall. However, it remains to be seen if these changing attitudes will lead to significant changes in corporate behavior.

C.E.O.s with M.B.A. degree may pay less, but times are changing

A new study shows that C.E.O.s with an M.B.A. degree are more likely to pay their employees less than those without one. However, economist Ann Harrison argues that this finding may not be a cause for concern because business schools and M.B.A. programs have been evolving over the past few decades. The data used in the study covers the years 1980 to 2020, with the earlier period being more heavily reflected in the findings. Acemoglu and his colleagues measured how wages declined after five years of a C.E.O.'s tenure. As such, the study does not accurately represent recent M.B.A. graduates who would now be serving as C.E.O.s in major corporations. Some business schools have introduced ethics courses to address the values and ideas of top executives, but their effectiveness remains uncertain.

The Impact of Business School on Managerial Mindset

Attending business school and being exposed to the environment of successful individuals may lead to managers viewing workers as cost sources rather than stakeholders in the company. While the syllabus itself may not be the sole cause, the overall atmosphere and peers in the business school could be influential. Research is ongoing to determine the true causal mechanisms, but studies like one by Harvard economist Gautam Rao show that privileged environments may lead to more selfish behavior. The findings suggest the importance of considering the impact of a business school education on managerial mindset and decision-making when it comes to worker compensation.

The Influence of Business Schools on Cost-Cutting and Lean Companies

Business schools place a strong emphasis on cost-cutting and creating lean companies through re-engineering corporations, often resulting in the reduction of labor costs. This focus on shareholder interests and cost-cutting can be traced back to influential ideas such as Milton Friedman's Friedman Doctrine and the concept of reengineering the corporation. Management consulting firms, often staffed with M.B.A. graduates, have played a role in this focus on cost-cutting. However, the precise extent of their influence is not yet clear. Business schools could benefit from offering courses on the negative long-term effects of rent-seeking at American firms, while still acknowledging the importance of M.B.A. programs.

The Influence of Societal Norms on Business and Political Leaders

Norms of society play a significant role in shaping the behavior of business and political leaders. The power and influence of these leaders is dependent on societal acceptance of their policies and management styles. Despite the potential for strong financial incentives to inspire investment in society, research shows that high rent extraction among American and Danish firms results in increased dividends and stock repurchases rather than increased investment. This is indicative of a broader segregation between the powerful and the less fortunate, leading to potential difficulty in identifying with the less fortunate. It is necessary to exercise caution when attempting to change societal ideas, and the education of business and political leaders should address this societal influence.

The Influence of Politics on Economics and Rent Extraction in Education and Real Estate

Politics drives everything, including economics. The textbook industry is a perfect example of high-end rent extraction, as students are forced to pay exorbitant prices. However, the situation has improved with the introduction of online textbooks. Another strategic way for firms to collect money long before goods or services are rendered is quite prevalent in other economies like China and Turkey, where developers sell quarter-constructed apartments and invest that money in new ventures. The influence of politics on the economy is undeniable, and understanding this relationship is crucial to bring about positive change.

Risks of Financialization in Business Practices

According to Daron Acemoglu, some firms, particularly in China and Turkey, engage in a quasi-pyramid scheme that involves leveraging credit from both the banking system and consumers, but can lead to default when money dries up. This is part of the trend of financialization where companies invest in financial products and engage in risk-taking, potentially hurting their ability to innovate. This highlights a need to study priorities and values in business practices. Acemoglu is a knowledgeable analyst of the modern economy and conversations like this one on Freakonomics Radio provide valuable insights.