How Harvard Flunked Economics
In the aftermath of the 2008 financial crisis, much of the country was enraged because not a single Wall Street hotshot—the guys who got us into the mess—was prosecuted. While there are many financiers who could have been made to take the perp walk, there’s also a case to be made that the fault lies with those who laid the intellectual foundation upon which a market-driven financial crisis could happen in the first place.
That brings us to Michael Jensen, a tenured finance professor at Harvard Business School, where he has spent the bulk of his career. Few still believe in the message he sold everyone on in the 1980s—not even at HBS—but the damage is done, and his legacy is an ugly one. So why does he still have a job? He has tenure, for starters, but the other reason is that when Harvard Business School talks about making the world a better place, it’s just posturing. What it’s about is making money. And in the 1980s, Jensen brought the school a lot of money and (for a few years) intellectual credibility. But that’s getting ahead of the story.
In 1970, Nobel Prize–winning economist Milton Friedman published an essay in The New York Times Magazine titled “The Social Responsibility of Business Is to Increase Its Profits.” Flouting the midcentury view (and that of the most influential faculty at the Harvard Business School) that the best type of CEO was one with an enlightened social conscience, Friedman claimed that such executives were “highly subversive to the capitalist system.” His tone was snide. “[Businessmen] believe that they are defending free enterprise when they declaim that business is not concerned ‘merely’ with profit but also with promoting desirable ‘social’ ends, that business has a ‘social conscience’ and takes seriously its responsibilities for providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of reformers. In fact they are—or would be if they or anyone else took them seriously—preaching pure and unadulterated socialism.”
He then described the concept of the executive as “agent” of the company’s shareholders: “In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society.”
Friedman didn’t shy away from taking alarmist stances. If you want to get noticed in economics, you pretty much have to do so—just ask Paul Krugman. “[Speeches] by businessmen on social responsibility,” Friedman wrote, “may gain them kudos in the short run. But it helps to strengthen the already too prevalent view that the pursuit of profits is wicked and immoral and must be curbed and controlled by external forces.
