Lessons from history: Why the business education systems are so important in determining the dynamism of an industrial economy, the cases of Germany and the US

le 10 novembre 2015 par

Robert Locke, a long time contributor and author at the Boostzone Institute, namely with his book « Management from Hell », presented recently a very important paper comparing the historical development of management education in the US and in Germany.

We generally do not present academic paper on our blog but we are happy to be able to present this one today in a slightly abridged version (the original document can be downloaded at http://hermes.hsu-hh.de/~vhb-ideengeschichte ) because some of the major elements of this document, although lessons from history, are major inputs, in my view, on how to think about management, innovation, education and training, for the uncertain and complex future we are facing.

The sentences in bold letters are highlighted by us, not by the author.

In particular this paper shows how the lack of foresight, of contact with the field and of understanding of the Japanese manufacturing revolution by management education institutions in the US (and all Europe but Germany) disadvantaged the development of industry in Europe (but Germany), how most management education institutions missed completely the innovation and entrepreneurship challenges raised by the Silicon Valley, how the financial education bias in management education taken in the last two decades have led to another complete misunderstanding of what the real world is about and, quasi directly, into major and socially dangerous income discrepancies in our societies. 

The German model, with significant elements like a priority to technical education, to practical training, the importance of co-determination, the illegality of stock options as a mean of compensating senior executives until 1999, the closeness to field banking systems, etc. is brought to a new light and helps to understand major differences between the German economic model and most other ones in the Western world.

This paper not only very seriously questions the model of MBAs but also shows us how education choices and financing choices can be determinant in the long term view of a corporate/ country competitiveness. 

One quote before you start reading: “The competence acquired from a business school MBA education did not prompt start-up entrepreneurialism or produce venture capital innovative IT firms”.




Robert R. Locke

I was asked to compare American and German Management Education, (“Management Bildung im US Amerikanisch-deutschen Vergleich), which, in order to connect the topic more carefully with my scholarly experience, I present as ”Reflections on the Response of German Business Economics (BWL), which took root in German higher education before World War II, and US MBA business school education to three major incidents in recent economic process:

  1. The Japanese challenge in manufacturing in the 1980s and 1990s,
  2. The start-up habitat of Phenomenal Silicon Valley at the turn of the 21st century, and
  3. The financialization of the economy, which has occurred with growing intensity since the 1990s.”

Before confronting the three major incidents, I begin with a few comments about BWL and US business school education that clarify the difference in their response to them.

German Business Economic (named BWL further in this article). Two introductory points on the relationship between economy and business in education

First, as this Workshop emphasizes, although there were those who stressed that the new discipline focus on commercial science (Johann Schär in Berlin) or on the firm as a money mill, a Geldfabrik (Wilhelm Rieger in Nürnberg), the first generation of pioneering professors of business economics (BWL) in the newly created Institutes or Faculties of Commercial Science (Handlelshochschulen), established between 1898 and 1920, sought successfully to extend the scope of business economics from commerce into industry (Schmalenbach in Cologne and Nicklisch in Berlin are examples). This meant not only that professors of business economics took an interest in industrial firms, but that the engineers running industrial firms embraced the work done by professors of business economics, especially in management accounting. German university level engineering schools (technische Hochschulen) introduced business economics into their curricula and hired professors of business economics to teach it. In 1924, one of them, Professor Willy Prion, developed the special degree of Economics-Engineer (Wirtschafts-Ingenieur), combining engineering and commercial studies, in the Technische Hochschule Charlottenburg (Berlin), which subsequently spread to other university level engineering schools. Dipl. Wirt.-Ing. Degree holders from engineering schools were and are especially prized as agents in consultancies working with industrial firms.

Second, after WWII German universities reestablished prewar business economics, often calling professor back to their old chairs, or appointing as professors people who had done their work under them before the war. This meant that prewar management accounting studies remained a focus of study for some time in German business economics (BWL), before new American influenced studies in marketing, finance, human resource management , and operations research (OR) made headway in the curriculum of faculties of German business economics.

US business schools models

With the exception of the Harvard Business School (1907), which ushered in MBAs early in its program, business education in the numerous business schools founded in the late nineteenth and early twentieth century amounted to undergraduate studies based on business practices. The era of the MBA, which brought about a rapid expansion in MBA degrees began in 1960; at the same time it brought about a complete transformation of the graduate business school curriculum, during the two decades after 1960.

The inspiration for this radical change in MBA curriculum came to a large extent from neoclassical economics, expressed within the epistemology of a Newtonian mechanics tied together within a mathematical framework devised by Léon Walras in the 19th century that pretended to turn economics into a prescriptive science. This effort failed, however, primarily because of the insufficiency of Walras’ mathematics – to be renewed after the war through a strong belief, after their exposure to them in defense work, among neoclassical economists, in the prescriptive efficacy for economics of the methods scientists and mathematicians used to solve operations research problems during World War II and the ensuing Cold. War.

MBA programs, unlike German business economics, had an advantage when upgrading the mathematical and scientific skills of their students because the former were graduate programs that could recruit students with bachelor degrees in mathematics, physics or some other science, or in engineering, who could easily imbibe the methodologies of the New Paradigm. Business Schools could also recruit faculty with the requisite knowledge, as in the example of Russell Ackoff, who moved from Cleveland’s Case Institute of Technology to set up a new operations research program in the Wharton School of Finance.

Rakesh Khurana’s history of US business schools (From Higher Aims to Hired Hands: The Social Transformation of American Business Schools and the Unfulfilled Promise of Management as a Profession. Princeton, NJ: PUP.2007) does a splendid job describing the work the Carnegie Foundation and (especially) the Ford Foundation did in the introduction of mathematical models and science methodologies into the curriculum of elite business schools, but his work falls short because it lacked a critical dimension. The management science developed in mainline MBA education almost from its inception was in fact a contested historical project that became more contested through time. The critical assessment emerged in the late 1970s in the work of OR academics themselves like Ackoff and has gained strength since the 1990s in the critique of the Post-Autistic dissident economists through their blog and journal (The Real World Economics Review, all issues available free on-line) and in the journals and books sponsored by the recently created (2011) World Economics Association. Despite the withering criticism of the epistemological foundations of neoclassical economics and management as science and the strong critique of their prescriptive prowess, the orthodox establishment of neoclassical economists maintains its grip within the discipline politically with the flimsy logic that the critics have not developed a new scientific paradigm to replace that introduced into business school education in the 1960s.


I Reflection on the Japanese challenge in manufacturing

US business schools in their MBA education did not play much of a role in responding to the Japanese challenge, which took the form of imitating the Total Quality Management (TQM) process postwar Japanese firms developed in organization-wide efforts to install and make permanent a climate in which an organization continuously improves its ability to deliver high-quality products and services to customers. Only 1-2% of US business schools had truly been affected, as of early 1991, by the Total Quality Management revolution that had been creating radical change in many US and worldwide businesses. American business school research and teaching contributed almost nothing to the most significant development in the business world in the last half of the 20th century’ American manufacturing, of course, did not ignore the Japanese challenge, but the impulse came primarily from manufactures themselves, production engineers, and from regionally or nationally organized associations like the Deming Societies and the Association of Manufacturing Excellence organized in 1985.

Moreover, the problem that elite business school MBA institutions had, with regard to Japanese manufacturing, went much deeper than ignoring the challenge. Under the regime of director-primacy management, which had become ensconced in big firms by the late 20th century, top management concentrated on financial results, not artifacts firms made.

H.T. Johnson, observed in his comparative study of US Big Three automakers with Toyota’s Georgetown, Kentucky plant, that the American firms operated through “management by results,” which he portrayed under 7 rubrics:

  1. the individual is responsible,
  2. control results
  3. follow finance-driven rules
  4. manipulate output to control costs
  5. increase speed of work
  6. specialize and decouple processes
  7. the individual is the cause – blame

compared to the Toyota Kata at Georgetown that operated under “management by means,” a system wherein:

  1. relationships are reality, and management
  2. nurtures relationships,
  3. masters life-oriented practices,
  4. provides output as needed on time,
  5. changes how work is done,
  6. enhances continuous flow, and
  7. when troubleshooting, considers mutual interaction as the cause of a problem – not individuals

(H. T Johnson and Anders Bröms, Profits Beyond Measure: Extraordinary Results Through Attention to Work and People. New York: Free Press, 2000, pp. 186–87)

Management by results served the needs of top managers and firm outsiders (stockholders, capital markets, and institutional investors) who based decision-making on financial results, but it frustrated management by means, which required attention to work process and people. Johnson claimed the new paradigm introduced into US business school MBA teaching, 1960-1975, especially the financial accounting methods, directly gainsayed attempts to introduce Japanese “management by means,” into US manufacturing. He wrote:

“[US] managers believed they could make decisions without knowing the company’s products, technologies, or customers. They had only to understand the intricacies of financial reporting … [B]y the 1970s managers came primarily from the ranks of accountants and controllers, rather than from the ranks of engineers, designers, and marketers. [This new managerial class] moved frequently among companies without regard to the industry or markets they served… A synergistic relationship developed between the management accounting taught in MBA programs and the practices emanating from corporate controllers’ offices, imparting to management accounting a life of its own and shaping the way managers ran businesses. (Johnson and Bröms, 2000, p. 57)

At first the abstract information compiled and transmitted by these computer systems merely supplemented the perspectives of managers who were already familiar with concrete details of the operations they managed, no matter how complicated and confused those operations became. Such individuals, prevalent in top management ranks before 1970, had a clear sense of the difference between ‘the map’ created by abstract computer calculations and ‘the territory’ that people inhabited in the workplace. Increasingly after 1970, however, managers lacking in shop floor experience or in engineering training, often trained in graduate business schools, came to dominate American and European manufacturing establishments. In their hands the ‘map was the territory.’ In other words, they considered reality to be the abstract quantitative models, the management accounting reports, and the computer scheduling algorithms.”

Hope and Hope reported that “97% of 402 US firms [they] surveyed used a formal budgeting program focusing time on measured variables considered critical to management control.” Eliasson noted in 1997 that “The bulk of subjects on the teaching agenda of business schools, like investment calculations and financial economics, rest on the assumption of a formal knowledge model.” Management by Result has been highly criticized by those interested in following Japanese manufacturing procedures. Johnson himself migrated from being a professor of management accounting at the University of Washington business school to become a professorship of sustainable management in the business school of Portland State University, Oregon.

German Business Economics

German business economists were not deeply involved in facing up to the Japanese challenge in manufacturing, which, since Germany was a major industrial exporter, was just as important an issue to its manufacturers as to American. To the extent that responding to the manufacturing challenge required technical knowledge of productions processes, business economists with their accounting traditions were ill-prepared to meet it; nor were those who learned operation research methods after the war of much help because of a paucity of numbers. Membership in Operations Research Societies 1974/76 was 7,848 in the US, 2,896 in the UK, and 701 in W Germany, which suggests that the density of scientific mathematical modeling knowledge in German faculties of business economics was not very great.

Within BWL, however, its long-time association with engineering education produced the important exception. Before going to Germany to look more deeply at the German response to the Japanese manufacturing challenge, I asked Robert W. Hall, founding member of the Association of Manufacturing Excellence, about Germans to contact. In his response, he described Horst Wildemann as the “repository of nearly all the coming of manufacturing excellence practice to Germany, a part of it almost from the beginning.” (Ltr. 25 June 1994).

In 1994, Wildemann was professor of business economics, with emphasis on logistics, in the Munich Technical University, teaching courses primarily to engineering students on work-process innovation. He headed a substantial group of over 100 research-consultants (30% with degrees in business economics, Dipl-Kaufleute, 50% with Wirts-Ing. degrees, 20% with engineering degrees, Dipl-Ing.), which included 35 graduate assistants. Their work was heavily oriented to mathematical modeling and computer simulations.

By1994 Wildemann’s team had already introduced Japanese inspired production processes in 200 European (mostly German) firms over a period of 11 years, including Daimler-Benz, Grundig, Philips, and Volkswagen. At Volkswagen his group had just (1994) spent three years teaching small-group quality control management techniques in five day courses to over 2,500 managers. Thirty to fifty percent of German industry had already by that year successfully implemented Total Quality Management, including Just in Time, Kaizen, and/or other Japanese work-process techniques. German business economics through its Wirtschafts-Ingenieur engineering education tradition made a significant contribution, Wildemann’s teamwork shows, to a successful German response.

There is a second factor that made BWL’s response different from that of American business schools. Whereas in US business financial accounting served the interests of corporate governance in the form of director-primacy, reform of German manufacturing had to be carried through in firms subject to co-determination management. Wildemann reported that in the four years at Volkwagen his group worked closely with works councils and IG Metall shop stewards. The works councilors fully appreciated the need to improve work processes, but also understood the impact that the changes would have on jobs numbers in the workplace and on the need to reduce work time and pay. His group taught the new techniques to the shop stewards at the same time that they taught them to management. The union (IG Metall) not only promoted the implementation of Just-In-Time and other work processes but often led management instead of following it in their adoption. Co-determination management facilitated the consultant’s efforts to meet the Japanese manufacturing challenge.


II Reflections on start-ups in Phenomenal Silicon Valley

The start-up habitat that drew the world’s attention to Silicon Valley in the 1990s had no more to do with the new paradigm implemented in business school curricula in the 1960s-70s than it had to do with the response to the challenge of Japanese manufacturing. If science was crucial to the high tech start up, it was not management science but the scientific ideas that physicists, biologists, and computer engineers fed into the cluster of competence that produced start-up firm innovation. Habitat studies like those of Annalee Saxenian (1994) and Lee, Miller, Gong-Hancock, and Rowan (2000) clearly show that the competence acquired from a business school MBA education did not prompt start-up entrepreneurialism or produce venture capital innovative IT firms.

The fact that US business schools created centers of entrepreneurial study, then, can be explained by their institutional flexibility, which made them capable of establishing special institutes within them, sponsored by successful entrepreneurs, that business school academics, instilled with the scientific values of the New Paradigm, often opposed on the grounds that entrepreneurship was not a valid scientific subject for a university professorship.

BWL Entrepreneurial Deficiencies

The principal obstacle to the participation of German professors of business economics in entrepreneurial studies arose from the limitations that the requirements of an academic career imposed on their exposure to praxis. Since it takes a student seven years (Dipl.-Kauf., doctorate, and Habilitationsschrift)], to qualify for a university chair, it is impossible for the prospective professor to complete his education before age thirty. As a young professor he had to devote efforts to academic science in order to advance his discipline (and his career) – there is not much time to work in business.

Only one of the professors appointed to an entrepreneurial chair when they were set up in Germany had been an entrepreneur, and people objected to him because he was not properly qualified academically (the chair was not established in a BWL faculty). (By contrast in the US 90% of the professors of entrepreneurship in business schools had created or owned a firm) Katja Schöne, who interviewed German appointees to chairs in entrepreneurship, most of whom had degrees in BWL, noted a lack of enthusiasm for the subject: “To questions about who founded their professorships and why, they sometimes replied that ‘the motivation was not a rational one (Schefcyck); it was ‘a fashionable subject at the time’ (Hering); or that it was done out of ‘hysteria’ (Bayer). Hysteria? Yes, because the flourishing American start-up culture in the late 1990s made people think that something had to be done. So they started founding chairs. It was as if this had little to do with the desires of the chair holders or the seriousness of the subject,” about whose scientific stature the chair holders themselves expressed doubts.

BWL’s lack of response to the implementation of a start-up entrepreneurship culture in academia is confirmed when comparing the institutions where entrepreneurship studies were developed with those where entrepreneurial networking actually took place. It is not surprising that the institutions most highly placed in Klandt and Knaup’s 2002 rankings of the new chairs in entrepreneurship (H. Klandt and U Knaup. Gründungsprofessoren 2002: Eine Studie zum Stand der Institutionalisierung der Grüdungsforschung und-lehre an deutschsprachigan Hochschulen, Entrepreneurship Research, Foerderkreis Gruendungs-Forschung. Cologne and Dortmund. 2003) were not the same as the ranking of institutions according to the intensity of their start-up networking, presented in J. Schmude and S. Uebelbacker’s 2001 study (Vom Studenten zum Unternehmer: Welche Hochschule bietet die besten Chancen? Lehrstuhle für Wirtschaftsgeographie, Regensburg University).

In the former most of the chairs, held by degree holders in economics or business economics, were located in BWL faculties. In the latter, eleven of the top thirteen institutions ranked for entrepreneurial networking were in university level engineering universities, where the scientific and technical ideas necessary to high-tech start-ups are rife.


III. Reflections on BWL and US business school involvement in the financialization of the global economy

Financialization is the transition from management capitalism to finance capitalism. More specifically, it is the change from viewing a business as a vehicle for earning returns on investment based on the value created by productive enterprise, to viewing a business as assets to be bought and sold for maximizing profits through financial strategies. In banking, new products (e.g. credit cards, derivatives, stock option pay, subprime mortgages ), new services (e.g., mergers and acquisitions and IPO counseling), new financial agencies (e.g. hedge funds, private equity firms, financial institutions, i.e., Goldman Sachs, institutional investors, i.e., huge pensions funds) appeared. Financialization, under director-primacy firm governance, has permitted corporate CEOs to flip assets to maximize payoffs for deal-doers, at the expense of firm employees’ wages and benefits, and to inflate CEO incomes through stock option provisos in pay packets. The scenario is a familiar and often painful one, because it has produced since 1980 an ever widening gap between the incomes of the top 1% and bottom 99% of the US population.

In this transformation the elite US and UK business schools have, in contradistinction to their role in meeting the Japanese manufacturing challenge and the development of a start-up entrepreneurial culture, played an active, even aggressive part. Utilizing the scientific methods of the New Paradigm introduced into business schools in the 1960s, the schools propagated new degree programs in financial economics, and their professors formulated architectures used in financial firms and in market research, which permitted mathematics to be used in all four branches of finance: modeling, optimal investment calculations, option pricing, and risk management.

BWL Response to Financialization.

BWL was not initially involved in the creation of the financialization process because it came late to Germany (payment of corporate executive through stock options was illegal before 1999). When the big German commercial banks decided in the 1990s to adopt the US-UK investment banking model, they found the required expertise through acquisition: Deutsche Bank bought Morgan Grenfell, the British merchant bank in 1989 and Bankers Trust, the US specialist in hedge funds, in 1999; Dresdner Bank acquired UK-based Kleinwort Benson in 1995 and US-based Wasserstein Parella in 2000. Deutsche Bank established its investment branch in London. To satisfy their educational needs, they drew substantially on those educated in elite American and British business schools.

Other aspects of the German economy also dampened the scope and speed of the financialization process. One was the strength of a nonfinancialized public and cooperative banking system, which made 70% of loans to SMEs and recruited personnel through local apprenticeship and sub-university (Fachhochschulen) community-based educational systems. Still another was the German Small and Medium Enterprise (SME) sector of the economy. German Mittelstand firms remain largely unincorporated; they are primarily self-financed out of earning or regionally through traditional bank loans from savings and cooperative banks; nor are they victims of leveraged buyouts by private equity firms. Between 2000 and 2007 only one percent of SME successor arrangements, the lowest in Europe, were takeovers by equity firms. Rather, German SMEs strive for sustainability within a valued community where employees are trained and treated as a company asset, not a cost.

Within large firms, co-detemination also slowed down the gap widening between CEO and employee’s incomes brought on by financialization, for, if German CEO incomes, after stock options were legalized, began to track increases in the rates of American executive compensation, works council negotiated payoffs kept the employee side of the pay differential higher than American. Accordingly, in 2012 CEO-worker pay ratios in Germany were 1:147, compared to US 1:357.

Among the educational retardant factors that effected BWL participation in the financialization process was the German idea of higher education itself. American, French, and British people prize elite institutions more than they do the subjects learned, since the school attended opens the road to the top more than the subject studied. In finance by 2005, among the 180 principals and managing directors in the 20 largest US investment firms, 73 held an MBA from one of the six elite schools (Harvard 51, Chicago 7, Columbia 6, Stanford 5, Dartmouth’s Tuck 3, and Northwestern 1. No such selection process could happen in Germany where students choose subjects to study in excellent regional universities rather than to attend a particular elite management school. When Germans wish to profit from study at an elite institution, in finance they are better off attending a British or American school of fame, because there are no equivalent school rankings among German universities.


Questions and Answers

In the short time allowed for questions after Locke’s presentation, Professor Dieter Sadowski of Trier University asked the pertinent one. “Professor Locke, considering your sharp critique of US MBA education, do you agree with Henry Mintzberg that MBA education ought to be abolished?” (H. Mintzberg, Managers not MBAs: A hard look at the soft practices of managing and management development. San Francisco: Berrett-Koehler Publisher, Inc. 2004)

Locke answered: “Yes, as it currently stands. Not only has the MBA education installed in the new study paradigm in the 1960s failed as a prescriptive science, but the education system it has provided, within the confines of director-primacy firm governance, has not served the public interest, especially in the era of financialization. In the nineteenth century the Morrill Act (1859) set up land grant colleges throughout America to promote the liberal and practical education of the industrial classes in the several pursuits and professions in life. They were, like the technical and commercial institutes being established in Germany, meant to promote the public good through agricultural, commercial and engineering education.

The business school movement in the U.S. and its extension overseas has taken a different route. Already in his 1918 book The Higher Learning in America: A Memorandum on the Conduct of Universities by Business Men, Thorstein Veblen provided a critical perspective on the role of the schools of commerce within the American university and, by consequence, their effect on the society as a whole. He asserted that the college of commerce, if it is to live and thrive, may be counted on to divert a much larger body of funds from legitimate university uses, and to create more of a bias hostile to scholarly and scientific work in the academic body, than the mere numerical showing of its staff would suggest. Furthermore, he wrote about the consequences that a habitual pursuit of business has on the ideals, aims and methods of the scholars and schools devoted to the higher learning. Put simply: Business proficiency is put in the place of learning.

He might have added business proficiency in US MBA education is devoted to the perpetuation of a moneyed elite, for these schools, where tuitions range up to $100,000 a year, are private welfare clubs for the upper classes, supported with lavish endowments from businessmen for the schools’ academic chairs and the schools themselves. Financially hijacking public institutions to promote private greed is not philanthropy for the public good. It is part of financialization and should be appropriately dealt with in the tax codes.

Reform of business school education should include its integration more broadly into American society by requiring trade unions and manufacturing promotional institutions to become part of its purview and incorporating moral education, not of MBA students, as business schools are wont to do when they think about reform, but in the education of faculty and deans who run the system.

In Locke’s opinion German academic business economics should follow a similar course, which it can more easily do than those involved in American MBA education, because of the broader investigative scope of the German tradition: Witness the debate of BWL professors in the 1920s about firm “efficiency” (Wirtschaftlichkeit) that included a definition of the firm as an organic entity, which served the interests of its employees and customers as well as managers and stockholders, and, after the adoption of co-determination laws, the role BWL teaching played, not only in explaining them to managers but to union leaders and work councilors – an educational step essential to giving life to the German idea of the Social Market Economy.


1 réflexion sur « Lessons from history: Why the business education systems are so important in determining the dynamism of an industrial economy, the cases of Germany and the US »
  1. Splendid stuff – and Professor Turcq’s decision to publish this is to be applauded.

    There are lots of different ‘bottom lines’ here. Perhaps the most important is that we have to be able to explain why management education (whatever it is) is the most signal development to shape higher education in the last century. Yet even its most vigorous defenders admit doubt about its practical value.

    Unless we can explain management education’s growth – depite its practical irrelevance – we has not yet grasped it as a phenomenon. Absent this, discussing the future of management education is something between a waste of time and a mere mouthing of orthodox dogma.

    The brutal facts are that management education is a monster in the heart of higher education consuming an ever-greater proportion of our young; and we need to know whether it is the harbinger of social change – total capitalism as an analogy to ‘total war’ perhaps – or an abandonment of the 19th century notions of the aims and purposes of higher education, or something else entirely.

    Practically every serious issue we want to raise today – the immigration crisis, the Precariat, global warming, etc. turns on our commitment to contemporary capitalism, and the business education that sustains it.

Laisser un commentaire

Votre adresse de messagerie ne sera pas publiée. Les champs obligatoires sont indiqués avec *