Revolt turns to management

E. Panca Pramudya, Political Economist Alumnus, School of Oriental and African Studies University of London

No one will object to the statement, "Economics is a social science." However the discipline pretends to be more "science" than "social". The serious questioning these days in economics is now turning to the field of management.

Concerns with changing the traditional approach have been raised. On July 7 this newspaper published an article by B. Herry-Priyono, discussing the growing pressure from young economists to reform the way basic assumptions in economics are being taught.

Another article from economic guru Joseph E. Stiglitz (July 16) mentioned the ideological debate in development economics, in which populists -- though not influential technocrats in leading economic institutions -- might be right because their judgments transcend the technocrats' often narrow-minded vision.

The revolt has also spilled over into management theories -- in watching corporate scandals the Enron drama is among those which remain fresh in memory. Fingers have been pointed at business schools, blamed as the intellectual culprits for this colossal moral hazard. An article in the Financial Times by Sumantra Ghoshal -- a professor of strategy and international management at the London Business School -- did a good job of exposing the problem.

Ghoshal's article of July 17 showed that all popular MBA courses are based on three prominent management theories.

The first is the "agency theory", which aligns managers' performance to maximize shareholder value, with a good system that ensures satisfaction in achieving interests and incentives.

The second is "transaction cost economics", which posits the requirement for tightly controlling staff while creating sharp and individual-level performance incentives.

Finally, there is Michael Porter's theory about "competition along the overall components in the value addition process", though this theory is ignorant about whether it hurts society.

Even though these theories have been planted in the brains of managers who have taken such courses for decades, their real impact on behavior is questioned. Corporate shenanigans like those from Enron, Bre-X and Global Crossing clearly show managers' lack of commitment to the maximization of shareholder value.

Ghoshal rightly mentions how management theories are highly optimistic about people and institutions. Such optimism is rooted in treating business as a science in which "individual intentions and choices either do not play a role, or if they do can safely be taken by economic, social and psychological laws".

Here we can refer to the Indonesian crisis. The nation's besieged economy faces a hard road ahead. Many blamed the reckless behavior of global financial creditors and the moral hazards created by their domestic counterparts.

Many of them grew up on management theories at MBA courses in the world's prestigious institutions. In addition, the students of management gurus not only come from the business community, but many of them also come from a background of state administration. Yet in general they failed to give convincing proof of changes in their behavior, especially to maximize value creation.

So where does the optimism on people and institutions come from? Rather than looking at behavioral grounds, the problem would more likely lie in misunderstanding the issue of the "social" in current social sciences.

The performance of managers cannot be determined solely on the grounds of their rational capacity and limited mental model. They are just part of the social relations where production activities operate.

The state, meanwhile, is perceived as a neutral public institution. Yet state administrators are bound up in complex social relations with the capitalists, political entrepreneurs, bureaucracy and citizens. The complex relations may support value maximization that promotes growth -- but such relations can also end up in value reduction such as massive corruption that is parasitic to growth.

Also, global finance has added to the complexity. Global finance can break down a set of rules laid by the state since it offers alternatives for business financing outside the traditional state subsidy -- industrial relations. The power of global capital becomes influential since its size is much bigger than the sum of domestic resources. In many parts of the world the states cannot do much to curb such capital.

Unfortunately our analysis of the involvement of power and social relations is blocked by the supporting disciplines of management. The current trends to treat economics, social sciences and psychology in reduced scientific laws give less room for analysis of social relations. The situation is worsened by a taboo for expanding power analysis between the state and private sectors, either due to trauma of state authoritarianism or to the dogma that interactions other than those of the market are irrelevant.

The challenge is to redirect the discipline of management to recognize economics and other social sciences in their social existence. The change must be created and reinforced through a series of commitments to real action. Understanding power and social relations in their various specific contexts will help management theorists to depart from the current scientific determinism.