The Rubber Room
"Russians Even Drunker Than Suspected"

Excellent reply to the management-theorist critics of economics

A significant literature has recently emerged in management journals criticizing economics. For some pointers to examples, see "The New Bashing of Economics: The Case of Management Theory". (The fine Organizations and Markets blog has several other discussions about this. See also "Jeffrey Pfeffer in the Lion's Den" and "Do Economists Believe in 'Atomistic Individualism'?" Plug "Pfeffer" into the blog's search box at the top right of the page and you'll see more.)

One focus of the criticism is principal-agent theory. The criticism runs loosely as follows: academic economists believe that agents, in addition to trying to increase their principals' welfare, have their own utility functions to maximize. So economists teach that agents are initially tempted to shirk. Economists teach this theory to MBAs, who then become managers, who then distrust employees they see as tempted to shirk. Employees soon recognize that their managers view them with suspicion, so they begin to view their managers with hostility. The American workplace soon becomes a dysfunctional hotbed of anger, hostility, and suspicion.

And it's all because of economists' misguided and unhelpful but unfortunately believed models of humanity.

If you don't believe that as I didn't, you may want to read "Social Reality, the Boundaries of Self-Fulfilling Prophecy, and Economics" (Organization Science, May-June 2009; working paper version here) by Teppo Felin and Nicolai J. Foss. It makes the important point, buttressed by ample detail, that economic theory influences decision-makers in the long run when it is right (or at least better than alternative theories).

. . . other's expectations and beliefs about individual behavior predict that behavior not because of self-fulfilling prophecy effects, but rather, because beliefs and expectations about others' behavior are relatively accurate--that is, they are rooted in actual characteristics of human nature rather than arbitrary or false beliefs about it.

Simple. But important.

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