The recent scandals at Barclays Plc, JPMorgan Chase & Co., Goldman Sachs Group Inc. and other banks might give the impression that the financial sector has some serious morality problems. Unfortunately, it\u2019s worse than that: We are dealing with a drop in ethical standards throughout the business world, and our graduate schools are partly to blame.<\/p>\n
Consider, for example, the revelations about two top executives at the elite consulting firm McKinsey & Co., which has avoided public vilification despite the transgressions of its former employees. McKinsey director Anil Kumar<\/a>, — a graduate of the University of Pennsylvania<\/a>\u2019s Wharton School — pleaded guilty to providing insider information to hedge-fund manager and fellow Wharton alumnus Raj Rajaratnam. Rajat Gupta<\/a>, a graduate of Harvard Business School<\/a> who served for nine years as McKinsey\u2019s worldwide managing director, was convicted of insider trading<\/a> in the same case.<\/p>\n Although Gupta had long left McKinsey when the actions leading to his conviction took place, it would be shortsighted not to take the problem seriously. While every firm can have its bad apples, when these bad apples are at the top, it suggests that a company has either a corrupt culture or a defective selection process, or both. This is particularly troubling at a company like McKinsey, which cites the integrity and quality of its consultants as key advantages. \u201cKeep our client information confidential<\/a>\u201d is one of its credos, proudly displayed on its website.<\/p>\n Where did Gupta, Kumar and others get the idea that this kind of behavior might be OK? Most business schools do offer ethics classes. Yet these classes are generally divided into two categories. Some simply illustrate ethical dilemmas without taking a position on how people are expected to act. It is as if students were presented with the pros and cons of racial segregation, leaving them to decide which side they wanted to take.<\/p>\n Others hide behind the concept of corporate social responsibility, suggesting that social obligations rest on firms, not on individuals. I say \u201chide\u201d because a firm is nothing but an organized group of individuals. So before we talk about corporate social responsibility, we need to talk about individual social responsibility. If we do not recognize the latter, we cannot talk about the former.<\/p>\n Economics and Greed <\/strong><\/p>\n Oddly, most economists see their subject as divorced from morality. They liken themselves to physicists, who teach how atoms do behave, not how they should behave. But physicists do not teach to atoms, and atoms do not have free will. If they did, physicists would and should be concerned about how the atoms being instructed could change their behavior and affect the universe. Experimental evidence suggests that the teaching of economics does have an effect on students\u2019 behavior<\/a>: It makes them more selfish and less concerned about the common good. This is not intentional. Most teachers are not aware of what they are doing.<\/p>\n My colleague Gary Becker<\/a> pioneered the economic study of crime<\/a>. Employing a basic utilitarian approach, he compared the benefits of a crime with the expected cost of punishment (that is, the cost of punishment times the probability of receiving that punishment). While very insightful, Becker\u2019s model, which had no intention of telling people how they should behave, had some unintended consequences. A former student of Becker\u2019s told me that he found many of his classmates to be remarkably amoral, a fact he took as a sign that they interpreted Becker\u2019s descriptive model of crime as prescriptive. They perceived any failure to commit a high-benefit crime with a low expected cost as a failure to act rationally, almost a proof of stupidity. The student\u2019s experience is consistent with the experimental findings I mentioned above.<\/p>\n In other words, if teachers pretend to be agnostic, they subtly encourage amoral behavior without taking any responsibility. True, economists are not moral philosophers, and we have no particular competence to determine what is ethical and what is not. We are, though, able to identify behavior that makes people better off. When a theater catches fire, the individual incentive is to rush to the exit as fast as possible. Yet if everyone in the audience rushed at once, the crowd near the door would allow fewer people to escape — indeed, many could die. Not surprisingly, there are social norms against this behavior. People who violate those norms are judged rude, egotistical, ill-behaved, or in certain cases even criminally negligent.<\/p>\n