SPEAKER_08: Freakonomics Radio is sponsored by Twizzlers. No matter the situation, Twizzlers is the perfect candy to relieve your boredom. And in a world where other candy is just too sweet and overpowering, Twizzlers is the perfect level of sweet and comes in the perfect chewy twist. Twizzlers are an enjoyable relief from the monotony of everyday life, and they taste great too. Head to the store and enjoy Twizzlers today. Freeconomics Radio is sponsored by Capital One Bank. With no fees or minimums, banking with Capital One is the easiest decision in the history of decisions, even easier than deciding to listen to another episode of your favorite podcast. And with no overdraft fees, is it even a decision? That's banking reimagined. What's in your wallet? Terms apply, see capitalone.com slash bank, Capital One NA, member FDIC. Capital One NA, member FDIC. Hey there, it's Stephen Dubner. Before we get to this episode, I'd like to say a couple of words about another episode we recently put out. It was called nuclear power isn't perfect, is it good enough? At the end of that episode, we asked for your feedback and we received a lot of feedback on both sides of the ledger. The biggest complaint from the anti-nuclear listeners was that we didn't spend a lot of time on the nuclear power, and the biggest complaint from the anti-nuclear listeners was that we didn't spend nearly enough time talking about nuclear waste storage and safety. Also, they wanted to hear about how uranium is mined. Some pro-nuclear listeners also wanted to know more about nuclear waste storage, but they thought we should have pointed to the positive developments in that realm and how some radioactive waste is now being recycled into fuel for further power generation. So, we asked the question, what are the major challenges about newer nuclear technologies or even the possibilities of generating electricity from nuclear fusion? The fact is, we could have made two or three episodes on this topic and maybe we should have, maybe we will. To all of you who took the time to let us know where we could have done better, thank you. We love your high standards and we try to live up to them. As always, thanks for listening, and now on to today's episode. And now on to today's episode.
SPEAKER_06: And now on to today's episode. And now on to today's episode. And now on to today's episode. Many of my students and many of my friends teach at business schools, and the reaction I get for this paper from people in business schools is either, yes, you're right and we've known this, or you're a fool, you don't understand anything.
SPEAKER_08: That is Daron Asimoglu, and he is not a fool.
SPEAKER_06: I'm an Institute Professor at MIT and I'm in the Economics Department. I work on political economy, inequality, technological change, economic development, and that sort of fun stuff.
SPEAKER_08: So the small issues that economists work on, yeah?
SPEAKER_06: Yeah, absolutely, absolutely trivial stuff.
SPEAKER_08: Within the economics profession, Asimoglu is considered one of the most substantial thinkers around. A lot of his research covers global and historical topics like why some nations fail while others prosper. In a new paper, he has turned his attention to something more contemporary and very much of the moment, how companies treat their employees.
SPEAKER_06: It's about priorities, values, what is right, what is viewed as right, what is viewed as good business practice and so on.
SPEAKER_08: One big management trend over the past few decades has been the professionalization of company leadership. More and more firms are run by people who've gone through an MBA program. Technically, that stands for Master of Business Administration, some prefer master badass. Today on Freakonomics Radio, how does a boss with an MBA affect the company and especially its employees? Are the schools that give out MBAs aware of these effects? And if so, what are they doing about it?
SPEAKER_04: I guarantee you that my colleagues were not saying, let's cut wages relentlessly and find the least expensive place to produce. Maybe they're not saying it, but are they doing it?
SPEAKER_08: Let's find out. This is Freakonomics Radio,
SPEAKER_05: the podcast that explores the hidden side of everything with your host, Steven Dubner.
SPEAKER_08: I'm curious if you have an overarching philosophy when you pursue this kind of research project, because you know, life is short. These projects are incredibly time-consuming and labor-intensive, so you have to pick carefully. With a project like the new paper we're talking about today, how does it tie in to how you think as a human about how an economy should function?
SPEAKER_06: My philosophy is that I try to go after questions that I find interesting and I find novel. It's more satisfactory when you feel at least that you are attempting to go after something new, something big. And often what I think is big and important is motivated by my overall belief about how the economy functions, what a fair society is, and so on. When you started to study economics as an undergrad,
SPEAKER_08: did you feel that the field of economics actually does a pretty good job of thinking about what is a fair society?
SPEAKER_06: No, I didn't. I grew up in Turkey when I was around 12 or 13. There was a military coup, and even though the military sort of withdrew from the scene in name, its influence was palpable throughout my teenage years. And those events made me wonder what's the relationship between economics and politics. Is it the case that Turkey has a problematic economy, high inflation, high unemployment, lots of inequality because it has non-democratic politics, or is it the other way around? So those were the kinds of issues that drew me to economics. And actually economics wasn't what I expected it to be. Its questions weren't, at least at the undergraduate level, weren't about these issues. You're saying maybe the questions
SPEAKER_08: were not as good as the tools? The questions weren't what I was expecting.
SPEAKER_06: For good reason, if you let 19-year-olds loose on these big questions, perhaps it wouldn't have led to a happy ending. Asi Moglu left Turkey for college in England,
SPEAKER_08: and he stayed there to get his PhD at the London School of Economics. In 1993, he went to MIT, the Massachusetts Institute of Technology, where he has been teaching and doing research ever since.
SPEAKER_06: But I never lost my initial drive for these sorts of issues. And as soon as I could muster the ability to ask these questions, I started investigating them. You know, Why Nations Fail, the book that I wrote with Jim Robinson, for example, was really what I would have loved to write as a teenager.
SPEAKER_08: Why Nations Fail was published in 2012. Its subtitle is The Origins of Power, Prosperity, and Poverty.
SPEAKER_06: You cannot understand economic choices, economic institutions, economic incentives, equality, inequality, innovation, without thinking about the politics. But the same thing also applies for broader social forces. Undoubtedly, norms matter, cultural beliefs matter, and ideas matter. Ideas matter in the long run,
SPEAKER_08: when you try to sort out economic history, but they also matter in the here and now.
SPEAKER_06: Part of what I'm trying to do right now is to think about these idea-related phenomena and how they impact the economy. For instance, if we all start believing that it's completely okay for the poor to be hungry, it builds character or something like that, that's gonna lead to very different dynamics in the job market, in inequality, for opportunities, for children's education.
SPEAKER_08: This brings us to the big idea that Asamooglu explores in a recent paper he co-authored with Alex Hahn and Daniel Lemaire. It's called Eclipse of Rent Sharing, the effects of managers' business education on wages and the labor share in the US and Denmark. Don't worry, the paper is not as boring as the title makes it sound. It looks at what happens when a company gets a new CEO who has an MBA or other business degree. Let's have some background first.
SPEAKER_06: There is a real puzzling development over the last three, four decades, which is that wages have grown much slower than productivity. If you look at the real wages of workers with a high school degree, it increased about 2.5% a year in real terms between 1945 and the late 1970s. Remarkable increase. Since 1980, it has been declining in real terms every year. So a large fraction of the US population has been becoming poorer and poorer, even as we are building the most amazing technologies. The largest companies humanity has seen, the most modern economy. There is something really wrong in the US economy, and it's very unfair, it's very unequal. And it becomes then not so surprising that there is huge social discontent in the US. I'd like to ask you to give me a really quick description
SPEAKER_08: of the paper on a few dimensions I'll ask you about. So first of all, what's the main title mean? What do you mean by the eclipse of rent sharing? I believe, as some other economists believe,
SPEAKER_06: that wages are influenced by the standard economic forces of supply and demand, but there's also a significant element of sharing rents or sharing benefits, profits between workers and firms. This is because of bargaining, collective bargaining with unions, individual bargaining, but also because employers try to build goodwill with their employees so that they can motivate them. Some people are nice and they don't wanna make huge profits while their workers go hungry or a pittance, so they become a little bit more generous. So that's what economists mean by rent sharing. And eclipse of rent sharing is, actually we're not sharing the rents as much. Employers have become less generous towards their employees. And let me just check.
SPEAKER_08: The reason you say wage stagnation is a puzzling development, it's puzzling because firms themselves in the markets have done well, right? It's not like the economy is in decline. It's that part of the economy is still climbing, but the wage part of the economy is stagnating, yes? Absolutely, profits are at an all-time high.
SPEAKER_06: Productivity growth hasn't been amazing over the last three decades. But it's decent. But it's pretty decent, yeah. Okay, and now talk about the data
SPEAKER_08: that you had for this paper. We use US and Danish data,
SPEAKER_06: and in both cases, this is really high quality data. It's from firm level accounts matched to worker level social security type information. So you can track both workers and firms and have pretty good information about their earnings and other information. And why were those the two countries
SPEAKER_08: whose data you're looking at, were they what was available? I mean, the US obviously is important. Yeah, US is important,
SPEAKER_06: and Denmark has very, very high quality data. We can do a lot of things in Denmark that is harder to do in the US, and choosing two countries that are kind of different from each other also appeal to us.
SPEAKER_08: Say what you can about the methodology of this paper. What was the fun of solving this puzzle, really?
SPEAKER_06: The main empirical strategy is actually very simple, enabled by the high quality data. We essentially track what happens to, say, the same worker when he or she is under one type of manager, and then there is a switch from one manager to another. So you can really very sharply identify what happens upon impact to a worker when there's a switch from one manager to another, and then you can trace what's happening thereafter. This analysis was inspired by a correlation
SPEAKER_08: that Asamoglu had observed, and he wanted to know if this correlation rose to the level of causality. At the same time as employers were becoming, as Asamoglu puts it, less generous toward their employees, there had also been a sharp rise in the share of companies run by someone with an MBA or other business degree. If you go back to the 1980s, just over 25% of US firms in the data Asamoglu used were run by what he and his co-authors call business managers. By 2020, that share was over 40%. Over that same period, the share of GDP that goes to workers, this is what economists call labor share, that has been declining from 63% in the 1980s to 58% today. Asamoglu wanted to know if or how those two trends were connected. Did the professionalization of the managerial class cause the labor share to fall? The answer wasn't obvious. How do you know that something else isn't going on
SPEAKER_06: at the same time, even if you can show that there isn't a downward trend or something happening before the switch? It could also be that the kind of firm
SPEAKER_08: that brings in a business manager is just different from a firm that doesn't. To help control for all these factors, Asamoglu ran his US and Danish data through a variety of extra tests.
SPEAKER_06: So we sort of worry about that using a number of different strategies, different checks, bringing in additional data and so on. And then if we were in an elevator, let's say,
SPEAKER_08: you told me about this paper, I have 20 floors to hear what the main findings are. How would you describe the main findings? The main findings are actually very simple.
SPEAKER_06: As soon as you have a business school manager, you see a relative decline in wages and labor share. So within five years, the wages of business school manager operated firms is about 6% lower than comparable firms in the US and about 3% lower in Denmark than comparable firms. Now, if I'm a CEO or a shareholder
SPEAKER_08: or someone who prizes economic efficiency, my conclusion might be, oh, that's wonderful. That means that if you hire professional managers, someone who's been trained in an MBA program or even an undergraduate business program, what they do is they come in and they increase profits while paying less to labor, which means that they're finding efficiencies. That sounds kind of great. Why is that not kind of great?
SPEAKER_06: So you're 80% right, but you use the word efficiency twice, and I think that's wrong. So if you're a shareholder, you will of course like to get more profits. And if the pie remains constant and the slice that you get gets bigger, that's more profits for you. But the question is, are they also making the pie bigger?
SPEAKER_08: Ah, that is a good question. Do bosses with MBAs actually grow the pie or are they just giving employees a smaller piece and keeping more for themselves and their investors? That's coming up after this break. I'm Stephen Dubner, and this is Freakonomics Radio. Freakonomics Radio is sponsored by Canva. If you need to design visuals for a brand, the online design platform Canva makes it easy. With Canva, you can keep your brand's fonts, colors, logos, and graphics right where you design presentations, websites, videos, and more. Create brand templates to give anyone on your team a design headstart, drag and drop your logo into a website design, or click to get your social post colors on brand. With just a few clicks, you can save time resizing social posts too with Canva magic resize. If you are a designer, Canva saves you time on repetitive design tasks. No design resource, just design it yourself. With Canva, you don't need to be a designer to design visuals that stand out and stay on brand. Start designing today at canva.com, the home for every brand. Strong bonds lead to lasting relationships. At Vanguard, their active fixed income team knows that strong relationships can build strong bond funds. Vanguard's active bond funds are backed by a collaborative culture and expert team. Vanguard is designed to keep fees low, creating an easier path for their active managers to seize the right opportunities to outperform at the right time. Vanguard knows active bond funds that help stabilize portfolios and generate income, can give clients peace of mind so they may focus on more important things like lasting relationships. At Vanguard, clients are more than just investors, they are owners. Vanguard strives to do what's best for its clients and their financial success. That's the value of ownership. Learn more at vanguard.com slash vanguardactive. Visit vanguard.com to obtain a fund prospectus or summary prospectus containing investment objectives, risks, charges, expenses, and other information. Read and consider carefully before investing. All investing is subject to risk. Investments in bonds are subject to interest rate, credit and inflation risk. Fund shareholders own the funds that own Vanguard, Vanguard Marketing Corporation distributor. The MIT economist Daron Acemoglu and his co-authors wanted to know what happens when a CEO with a business degree like an MBA takes over from a CEO without a business degree. They found that once you control for all other factors, employees at the firms run by business school managers saw their wages fall over the following five years compared to similar firms. A wage drop of 6% in the US and 3% in Denmark. The researchers also found that paying workers less does make those firms a bit more profitable, but, and this is a big but, those firms don't actually increase their output. And we look at all sorts of ways in which they could be
SPEAKER_06: increasing quote unquote economic efficiency or other aspects of efficiency. We look at investment, sales, productivity, exports, and you see none of that. What about innovation? Innovation we don't look at in great detail. You need to bring additional data in there, but investments certainly they don't seem to invest more. So for all practical purposes, those new managers are not changing the trajectory of the firm in any big way.
SPEAKER_08: Is there an easy answer for why the wages fall so much more in the US than in Denmark? Does Denmark have protections for workers that American workers for instance don't have?
SPEAKER_06: Yeah, absolutely. So the Danish labor market is much better for workers in terms of protections. Unions have become less important in Denmark over time, but they're still much more important. So in fact, we were expecting to find somewhat of a bigger contrast between the US and Denmark. Could you distinguish union labor firms in the US
SPEAKER_08: from non-union labor? Or were there any union labor firms in your US data?
SPEAKER_06: Yes, there are. And we haven't disclosed the results with unions. For census data in the US, confidentiality is a big issue. So I can't actually discuss the union results in the US, but in Denmark, we look at them in detail and there is a slight decline in unionization after business school managers take over, but the negative effects are present both for union and non-union firms.
SPEAKER_08: I'm curious how this finding fits into the economic issues we've all been hearing about and thinking about, not just inflation, but especially wage stagnation overall. To what degree would you say your paper is an answer to that question? In other words, how much of wage stagnation is being caused by this high level of rent extraction at the top of firms? I mean, if I had to guess, I would say it may be significant, but it can't be that big compared to things like globalization and automation and so on.
SPEAKER_06: You're 100% right. That's exactly what we find. It is a non-trivial factor. It might account depending on whether you look at the slowdown or wage growth or the decline in the labor share, something like 15, 20%, but yes, automation and globalization are bigger deals.
SPEAKER_08: Okay, so Osamoglu says we can only attribute 15 to 20% of wage stagnation and declining labor share to the rise of the MBA boss. Still, that's a significant share, especially since setting employee wages is a choice that a firm can directly control, unlike the effects of globalization and automation, and firms that are run by business school managers are choosing to pay less. The next question you might ask is what exactly is being taught in those business schools?
SPEAKER_06: Many of the courses such as finance and economics and accounting, they are both positive and prescriptive. They are teaching business school students how the world works and how they should behave. And almost all of these courses, you're told, the objective of the firm is to maximize shareholder value.
SPEAKER_08: This argument was popularized decades ago by the University of Chicago economist Milton Friedman.
SPEAKER_06: Who is one of the most brilliant, but also most controversial economists. And what is called the Friedman doctrine is the idea that you shouldn't care about broad stakeholders. The business of business is to maximize profits for shareholders. Then this is sometimes viewed as the beginning of a shareholder value revolution, which then becomes amplified by a Harvard Business School professor, Michael Jensen. So those ideas have been hugely influential in economics. Many economists, including myself, grew up with these ideas, meaning that, yeah, that's what firms should do and do in practice, but they have been even more influential in business schools.
SPEAKER_08: Okay, maybe it's time to hear about business schools from people who have spent time there. What does an MBA program actually teach you?
SPEAKER_07: They force you to do a rigorous core curriculum, which includes statistics, accounting, economics, strategy, finance, valuation. That is Tim Kobol. I am a first year student in Columbia Business School's two year MBA program. Before business school, I was working at the Federal Reserve Bank of San Francisco. And what has Kobol been learning about the relationship
SPEAKER_08: between a firm and its employees?
SPEAKER_07: We talk a lot about the different stakeholders in different businesses, whether that be the communities that are impacted, the environment, the customers, as well as the employees of the company. I would say the one area that I could see business school training encouraging or incentivizing lower pay would be through an extra focus on the bottom line in the accounting classes that we take. We are learning that labor is a large share of the cost. And so you can help company become more profitable and potentially more innovative if there's more money to fund research and development, if there's less money spent on labor costs.
SPEAKER_08: Although let's remember what Daron Acemoglu told us he found in his paper. He said that companies with MBA bosses are not quote, "'changing the trajectory of their firms in any big way.'"
SPEAKER_04: I very much admire Acemoglu and his co-authors. They are absolutely brilliant, but I must say, I'm not at all convinced by this paper.
SPEAKER_08: Okay, let's hear from another MBA insider.
SPEAKER_04: Absolutely, I'm Anne Harrison. I'm the Dean of the Haas School of Business at UC Berkeley.
SPEAKER_03: Berkeley Haas is one of the top ranked
SPEAKER_08: business schools in the world.
SPEAKER_04: We're really seeking to transform business and to forge business leaders who will make the world a better place.
SPEAKER_03: Does making the world a better place
SPEAKER_08: include teaching future business leaders to pay their workers less?
SPEAKER_04: If you look at the data in this paper, what I think is actually going on is that there's been this enormous shift towards a more global economy, towards an economy that's replacing low skilled workers with machines and companies have struggled. And as they've struggled, they've made changes to their leadership, which is trying to avoid making things worse. More and more are business school trained CEOs. That's happening exactly when globalization is really becoming big. So I think the focus should be on finding ways to address the losers from globalization and the losers from technological change, rather than focusing on who the CEOs of the companies are.
SPEAKER_08: Anne Harrison is also an economist and some of her research has looked at how globalization and automation have affected domestic workers, especially in manufacturing.
SPEAKER_04: In 1984, one in four workers in the US were in manufacturing and those were great jobs. Now it's less than one in 10. And typically, if you're in a manufacturing job, you make more money than if you would move to a service job. The same worker who would move from a job in manufacturing to a job in services in the same occupation would have a reduction in their income of as much as 20%.
SPEAKER_08: So Harrison wants Asimo Glue to dig a bit deeper.
SPEAKER_04: I would take out all the manufacturing, the firms that are actually engaged in globalization. I would just look at firms that are domestically oriented and I would try to see if the result still holds.
SPEAKER_08: We went back to Asimo Glue with Anne Harrison's critique. He told us he actually did look at whether his results were driven by specific industries like manufacturing. And it turns out that industry didn't matter, but that wasn't part of the paper he published. Still, Harrison has another concern with his paper having to do with what type of MBA education was represented in Asimo Glue's data sample.
SPEAKER_04: In the US, there are 600 accredited business schools. There are 900 in the world. So there's a lot of variety, and I would say not all business schools are alike. Yet a large percentage of the CEOs in the sample come from only three business schools.
SPEAKER_08: Those three schools are Harvard Business School, the Wharton School of the University of Pennsylvania, and the Stanford Graduate School of Business.
SPEAKER_04: And so those schools could have been very much influenced by, for example, Milton Friedman.
SPEAKER_04: But other schools might be very different, as for example, UC Berkeley Haas. We've actually created a specialization in sustainability, and a huge percentage of our MBA students have signed on for that. I would say we are seeing a recognition all over business schools of the importance of thinking about stakeholders and not just shareholders, but there are different degrees to which business schools do that.
SPEAKER_08: In other words, some business schools may be much more cutthroat than others. Harrison herself used to teach at Wharton, but even there, she says,
SPEAKER_04: I guarantee you that my colleagues were not saying, let's cut wages relentlessly and find the least expensive place to produce. If that was what they were teaching, then all companies would have moved to Burundi, right, where wages are really low. And I also taught at Columbia Business School, and there, the name of the student newspaper was the bottom line. So you can imagine that at Columbia, there is a strong emphasis on the bottom line. Students congregate towards places where they feel comfortable.
SPEAKER_07: My favorite class right now is Business Strategy. And that, again, is Tim Kobaugh,
SPEAKER_08: the first-year MBA student at Columbia.
SPEAKER_07: Today, we were debating how pharmaceutical companies should address environmental sustainability and governance practices. There were different quotes on how business should function in society. One of them was Milton Friedman, and we didn't vote on it, but you could feel in the room that when he posted the Friedman quote in that all a business should do is maximize profitability, almost all the students disagreed with that principle and that firms have a really big role in society, and it should not just be solely about making profit.
SPEAKER_08: Coming up after the break, will that feeling in the room translate into a different kind of CEO, and will that translate into higher wages for workers? I'm Stephen Dubner. This is Free Economics Radio. We'll be right back. Hey, everyone, there is a new show for you. It's the story of a woman who discovers her uncle's secret life buried inside a low-budget 90s thriller that starred Rob Lowe and Ice-T. The podcast is called Magnificent Jerk. It's a journey through Chinatown gangs, drug robberies, Hollywood reinvention, and a family confronting its unspoken past. Magnificent Jerk, the true story of a fake story about a real life. Magnificent Jerk is an Apple original podcast produced by Pineapple Street Studios, available on Apple Podcasts.
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SPEAKER_08: I know I can count on you. The economist Daron Asumoglu has published a new paper which argues that CEOs who have an MBA degree tend to pay their employees less than other CEOs. The economist Anne Harrison, who is also the Dean of Berkeley's Business School, doesn't think that Asumoglu's critique is as worrisome as it may sound. And here's her biggest reason for saying so.
SPEAKER_04: What all business schools are teaching today feels very different from what they were teaching in the 1980s, where a lot of these CEOs got their education.
SPEAKER_08: Asumoglu's data covers the years 1980 to 2020, but it is true that the earlier period is more heavily reflected in the findings, since it takes a while for an MBA graduate to become a CEO, and since what he and his colleagues were measuring was how wages declined after five years of a CEO's tenure.
SPEAKER_06: We are looking at people who are CEOs between in early 1990s and essentially today, so that means we're looking at many people who got their MBAs in the 80s, 90s, in the 70s, and there are very few people who got their MBA in the 2010s and would be a CEO in a major corporation.
SPEAKER_08: It sounds like you're suggesting that MBA programs may have been evolving over the past couple decades.
SPEAKER_06: Exactly, we don't know whether they have or not, but I'm saying may have been evolving. Look, I don't think we're ever going to have a society in the US in which some people are not more powerful than others. That's just the nature of market economy and especially the US market economy.
SPEAKER_08: I think it's the nature of humankind, honestly.
SPEAKER_06: It's the nature of humankind, absolutely. I also cannot see a situation in which the leading universities, leading business schools are not going to be disproportionately producing some of those more powerful individuals. So I would like to think that our paper is a wake-up call saying, well, you know, the values and ideas of these people matter, so we should pay more attention to that. And in fact, some business schools have moved in that direction. Some of them have introduced ethics courses from very early on. They must have been worried about something, right? Although, you know, it's a common saying
SPEAKER_08: that by the time you adopt an ethics code or a course, that actually can be an indicator that you're in worse trouble than you think.
SPEAKER_06: Well, you know, Steven, pay attention to the language that I used. I didn't say the ethics courses were going to be effective. I said, the fact that they introduced them is a sign, right?
SPEAKER_08: Understood, understood. But you know, it can be hand-waving. It can be virtue signaling. Look, we have this cutthroat MBA program, but we teach ethics too.
SPEAKER_06: Absolutely. If everything else is going in the other direction and you have an elective ethics course, it may have no effect.
SPEAKER_08: So Asamoglu is convinced that getting a business education seems to cause a CEO to pay workers less. But what exactly within that education is causing this? Is it the MBA syllabus itself?
SPEAKER_06: We don't know that they are being affected by the business school syllabi. It could be something else going on in business school. And then there's another issue. We show that it is managers who have attended business school. Those are the ones that cut wages or reduce labor share. Now that immediately asks a question, is that in the jargon of economics, the true effect of business schools or is it a selection effect? Meaning that perhaps students of a certain type go to a business school and even if they hadn't gone to a business school, they would have behaved that way. But our read of that is yes, it is the effects of business school. Even then, it doesn't say that it's the business school syllabus. It could be something in the corridors of business schools or it's the peers in business schools that generate a particular type of idea or ideological dynamics.
SPEAKER_08: So what do you suspect are the causal mechanisms?
SPEAKER_06: I'm not sure entirely. So that's our second project. We're working on it right now, trying to look at whether we can detect any effects from syllabi. I actually think it's not all syllabi. It's something else. There's a really cool study by a Harvard economist called Gautam Rao in India. And he looks at a school reform that makes it compulsory for different caste children to study together. So before then, high caste children studied mostly with high caste children and that changes. And then he looks at what are the consequences of this and what he finds is really fascinating. You might expect that something like this is going to make high caste children more sympathetic to low caste children because previously they were in separate worlds and now they are getting to know them. So this sort of familiarity is going to make them more altruistic, more understanding and in fact, that's exactly what you find. But plus, and this is a puzzling and interesting thing, high caste children now become more altruistic and nicer to even other high caste children. So what's going on? One hypothesis is that, you know, if you create a very privileged environment, people become more selfish towards everybody. And I think one issue is perhaps business schools are just, you're together with all these high flyers. Everybody there is going to be super successful. They're already successful. They're going to be the richest people. And that makes you much less sensitive to the plight of others. And perhaps that's the mechanism. I don't know whether it is or not, but I'm just formulating that as an alternative idea. It may not be syllabus, it may be something else.
SPEAKER_08: In the paper, you write that some managers over time, especially those going to business school, started to view workers not as stakeholders in the corporation, but rather as sources of costs to be reduced. So look, you're at MIT. MIT has one of the most famous business schools in the world, the Sloan School of Management. You're next door to Harvard. That's another quite well-regarded business school. You must know something about how management is being taught and I'm not saying there's a class called how to pay your workers less, but do you see anything that leads you to think that it's actually a strategy being taught? Both talking to business school faculty
SPEAKER_06: and also reading what I view as the most influential ideas in business schools, I think there is this emphasis on cost-cutting and looking after the interests of shareholders. And I would trace that to two sorts of important ideas. One is Milton Friedman, the Friedman Doctrine, another very important set of ideas. It started actually in the MIT Sloan School of Management and Harvard Business School more or less around the same time is re-engineering the corporation, creating lean corporations. What does that mean? Well, a lot of it is technological introduced, digital tools, better systems, and so on and so forth, but often what you're saving is labor costs. So a lot of them focused on there's a lot of middle managers that are not that useful, lots of office workers that you can do it much better with automation. So there was a general idea of good managers are those that create lean companies by re-engineering corporations. And again, that emphasizes that labor costs are a cost, they're not just a resource.
SPEAKER_08: I'm curious whether one explanation for your finding may be that perhaps the CEOs who are trained at MBA programs have a lot of friends who happen to work for management consulting firms who often have trained at MBA programs as well. And management consulting firms are really excellent tools for coming in from the outside and helping trim staff. They get to play the bad guy and the CEO doesn't have to take responsibility for that. Do you know anything about the role of management consulting here?
SPEAKER_06: I would love to investigate that. The re-engineering the corporation is something that was spearheaded by management consulting, you know, Arthur Anderson, McKinsey, Accenture. And unfortunately we don't have that data. We suspect that that's some of what's going on, but some of it is independent as well. After all, a lot of companies during this time period used management consulting quite intensively, even if they did not have a MBA CEO, but you're right perhaps that MBA CEOs are more likely to use them. I don't know, like in Germany, qualitative accounts suggest there are fewer MBA managers, but there is quite a lot of use of management consulting, especially since 2000.
SPEAKER_08: So let's say I come in as a provost or a dean of a business school and I say, you know, Darren, I feel your research is really insightful and important in this realm. And none of us here are arguing that we should shut down our MBA programs, but let's say I'd like you to come teach a course on rent-seeking at American firms to show the history, how easy it can be to do, but the antisocial effects it has long-term. What's your best argument?
SPEAKER_06: We're talking about norms and ideas. I think it's imprudent to take a very strong social engineering perspective and say, we don't like these ideas, we're gonna change them. I think that our past is littered with examples of social engineering gone wrong. So I would, first of all, suggest great caution. That being said, I would suggest two sets of avenues for further thought. One is, however powerful a business leader is, or even a political leader is, even a dictator is, their power is embedded in the norms of society. If the norms of society are not permissive, you're not gonna be able to do this sort of thing. U emblematic of the forces that we're talking about is people like Jack Welch. Jack Welch is as powerful as any CEO would be, and he is an example of CEOs that have cut wages and so on. But Jack Welch would not have been able to do what he did if society wasn't accepting his friends and neighbors, his shareholders were not accepting of the policies and management style that he brought. What is it that their friends, their country club peers are going to say, yes, it is acceptable, kudos, or they're gonna say, no, no, you've gone too far. And second, what is it that we really teach people in these positions of power? So that we come back to syllabi, we come back to subtle cues that people get in business schools or in other similar environments, including perhaps in management consulting firms.
SPEAKER_08: Now, if we wanted to make the devil's advocate argument for the high rent extraction among American firms and Danish firms, you'd think one of the positives would be that these really strong financial incentives at the top increase and inspire investment in areas that might otherwise never receive investment, some of which may be great for society, right?
SPEAKER_06: Absolutely, and again, that was my prior going into it, that we would see more investment together with more profits. In fact, that's almost automatic because many companies invest out of retained earnings. The more retained earnings they have, the more they invest. So if you reduce wages by so much that you have now substantially more retained earnings, you should see more investments, but we don't. What those firms do is that they do more stock repurchases, they pay more dividends, and they just don't invest more. One thing I would say is like, how does this more broadly fit into what's going on in US society? One hypothesis would be that this is the tip of the iceberg. It's part of a broader segregation between the powerful and the less powerful. And as that happens, you may get less and less ability for the fortunate to identify with the less fortunate.
SPEAKER_08: You know, as a journalist, I've always loved ignoring politics because it was just such an unappealing arena to cover for what strikes me as obvious reasons. I know a lot of economists and other academics also love to ignore politics because it just seems so grubby and opaque. But the more I talk to you today and others like you, the more I realize that, as you've been saying all along, politics drives everything that we've been talking about today, whether you like it or not.
SPEAKER_06: Indeed, indeed. And this is something, you know, one of the famous economists of the 1940s, 50s, Abba Lerner, said, economics became the queen of social sciences by focusing on politically solved problems. You know, it's great in textbooks and in our discussions to talk about supply and demand in a perfectly functioning labor market, but that's not reality. I see that in 2014, you co-authored an econ textbook,
SPEAKER_08: Principles of Economics textbook. Now, from what I can tell, the business model for economic textbooks is that the authors get paid wonderfully, extravagant sums to write them, and then the publisher recaptures that sum by charging exorbitant prices to university students who have no choice but to buy the textbook. So the other day I looked on Amazon, your book was selling for $210. Oh my God, yes. I'm sure it's a very good book, okay? And that's good for you and your co-authors, but that markup doesn't look all that different from the kind of high-end rent extraction you're describing in this paper.
SPEAKER_06: I absolutely 100% agree. I feel very bad about that. I think it's the only way that the textbook market works. You will not be able to negotiate a different price with the publishers because that's their business model, but I think it's a problematic business model. I think it has moved in a little bit of a better direction, which is online textbooks are cheaper, and the students actually rent textbooks. So few people would pay those exorbitant prices, but what they pay is still exorbitant. Let me ask you about another just piece
SPEAKER_08: of how the economy works that I'm interested in. I'm curious if you have any thoughts. I think of it as banks that aren't actually banks. That is firms whose business model allows them to collect money long before the services or goods are rendered. So airlines are one example, although weirdly hotels are not, right? Sports gambling sites now are accruing massive bank rolls. Even a firm like Starbucks where people will willingly give Starbucks a bunch of money upfront for coffee that they will buy later. Do you know anything about how much that is a strategic way for firms to basically take in money, use that float to invest or do whatever they want to? Do you know anything about that? I don't know anything systematic on this,
SPEAKER_06: but I think it's a big deal. Let me say two things on that. One is actually, it's a much bigger deal in other economies than in the US, and it may become a bigger deal in the US. So if you look at Turkey or China, a lot of real estate development takes that form. People actually pay money to buy apartments in quarter constructed developments. And then what happens, the developers take that money and then invest it in a new set of ventures. So there is sort of a quasi pyramid scheme in there, and then it takes a long time for that to be delivered. And you're essentially using credit from the banking system and also credit from the consumers at the same time. It's a very lucrative business, but it's a very unstable business. We're gonna see probably quite a lot of problems out of that, both in China and Turkey. Because these firms often get over-leveraged,
SPEAKER_08: they get in trouble.
SPEAKER_06: They're over-leveraged and they have many developments that are half finished and they haven't delivered it. And suddenly when the money dries out, they can't finish them. So they're gonna default both on banks and consumers at the same time. But the other thing is that it's part of a bigger trend, which is sometimes what people call financialization. If you think of a manufacturing company in the 1950s or 60s, what they do is manufacturing. Their top echelons are made up of people from the production side or supply chain management side or engineering side, and that's what they're focused on. Today, look at a manufacturing company and half of what they do is financial products. They invest in financial products, they borrow in complex products, they engage in mergers and acquisition, they do a lot of hedging, they do a lot of risk-taking in foreign currency markets and so on and so forth. So a lot of the focus of the companies goes to the financial side, which might, perhaps might, hurt their possibility to engage in as much innovation. So there are issues that I think run deeper here that we need to study.
SPEAKER_08: This brings me back to how today's conversation with Daron Acemoglu started.
SPEAKER_06: It's about priorities, values, what is right, what is viewed as right, what is viewed as good business practice and so on.
SPEAKER_08: I have to say, I am so glad Acemoglu took the time to speak with us today, not just because his new paper about business schools and wages is so interesting, but because he's clearly one of the smartest and most thoughtful analysts of our modern economy. I'm not saying that the pundits who go on TV or social media to shout at us aren't as smart or thoughtful or as smart as they are. They're not as smart or thoughtful or as unbiased, but well, yeah, maybe I am. You can draw your own conclusion if you'd like. But this was the kind of conversation that makes me really grateful to have a show like Freakonomics Radio and listeners like you who appreciate this kind of conversation.
SPEAKER_08: Coming up next time on the show.
SPEAKER_03: There are some pretty significant differences between what economists would recommend and what these popular authors recommend.
SPEAKER_08: Where do you get your financial advice? For most of us, it is not from economists.
SPEAKER_03: How many people has Dave Ramsey helped out of debt versus the average academic economist? It's a million to one.
SPEAKER_08: Economists versus the popular finance authors, a smackdown with your money in the middle. That's next time on the show. Until then, take care of yourself and if you can, someone else too. Freakonomics Radio is produced by Stitcher and Renbud Radio. You can find our entire archive on any podcast app and we can be reached at radio at freakonomics.com. This episode was produced by Ryan Kelly. Our staff also includes Neil Carruth, Gabriel Roth, Greg Rippon, Zach Lipinski, Rebecca Lee Douglas, Julie Canfer, Morgan Levy, Catherine Moncure, Jasmine Klinger, Eleanor Osborn, Jeremy Johnston, Daria Clenard, Emma Terrell, Lyrick Bowditch and Alina Cullman. Our theme song is Mr. Fortune by the Hitchhikers. All the other music was composed by Luis Guerra. If you would like to read a transcript or the show notes to take a look at the underlying research of any of our episodes, that is all at freakonomics.com where you can also sign up for our newsletter and leave comments. As always, thanks for listening.
SPEAKER_06: We'll see you next time.
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