by Gary North
For a thousand years, China was administered by Mandarins. These bureaucrats swore loyalty to the emperor. Then they were granted enormous control over the entire society. From the days of the Pharaohs until the twentieth century, the Mandarin class was the world's most powerful bureaucracy.
To enter the ranks of the Mandarin class, a young man had to pass a rigorous written examination. The examination covered Chinese classical poetry. What did a knowledge of Chinese poetry have to do with ruling a vast empire? Directly, very little. Indirectly, a great deal.
A student needed five things to pass the exam: (1) advanced literacy; (2) enough leisure to study for the exam; (3) a very high IQ; (4) a teacher; (5) the ability to endure intense boredom for many years under a nearly absolute master.
The teacher was a man who had failed to pass the exam.
Had he passed, he would not have become a teacher.
This system, or something very close to it, has very nearly conquered America. At the gates, one man now stands as the representative agent of the resistance: Donald Trump.
The recent failure of a team of formally educated hot shots on "The Apprentice" to defeat the street-wise team points to a major problem in this country, but also its solution.
The problem: Our political representatives have accepted the self-serving opinion of institutionally self-certified academics in non-profit institutions, namely, that this special-interest group has the moral right to determine who gets certified academically and who doesn't. Legislators have granted them this legal right by way of college-accrediting agencies, which then determine what constitutes a legal degree-granting institution.
The solution: The free market. What saves us from complete control by these mostly tax-funded, Ph.D.-holding bureaucrats and their certified disciples is the right of consumers to spend their money almost any way they please. Consumers, in paying for what they want, irrespective of the educational background of producers, keep the flow of funds flowing to street-smart entrepreneurs.
In every field, the Mandarin class has attempted to control access to power. In some fields, they have been highly successful: medicine, law, education, and the professions in general. The word "profession" no longer means "profession of faith." It means "certified by state-licensed bureaucrats."
The Mandarins have been least successful in areas of the economy that are the most dependent on mass marketing. But they have done their best to impose the functional equivalent of Chinese poetry on American business: the MBA degree.
Maybe you aren't thinking of earning an MBA degree. This report will still be useful to you. After reading it, you may come to the conclusion that the American educational system is nutty. The higher up we look, the nuttier it gets. I hope so, anyway.
Earning a masters in business administration degree is a very expensive project. It is extremely high risk. You may not graduate. If you do graduate, the degree probably will not earn extra money for you.
Why not? Because there are too many people with MBA's, and tens of thousands of others are on the way. Supply and demand are working against the market value of the MBA. First, there is an MBA glut, meaning "excess supply at existing high prices." Second, the information imparted by these programs is not useful in generating consumer-satisfying output, which is the basis of higher wages. This is the other side of the glut: decreasing demand from the buyers of final output: consumers.
Large corporations hire hundreds of MBA's, yet these corporations refuse to abandon customer-alienating practices. Like dinosaurs caught in the tar pits, they seem helpless in the face of competition from Chinese industries staffed by the sons and daughters of peasants. They seem blind to the implications of price competition of the Internet. They seek protection from the government rather than seeking the support of their customers.
It is well-known that small businesses generate more new jobs than large businesses do. There are not many MBA's running small and medium-sized businesses.
Don't these bright MBA-holding experts understand that the basis of profitability is customer satisfaction? No, they don't. They got where they are by performing in a controlled environment that was designed by bureaucrats who personally have never met a payroll, who have sent their entire lives writing term papers that nobody besides other bureaucrats read.
THOSE WHO CAN'T, TEACH
Consider the faculty of a business school. It is accredited by an organization made up of PhD-holding non-businessmen, or, more likely, anti-businessmen. The decision to accredit or not accredit is backed up by the Federal government and the states, which have granted a monopoly to the regional accrediting agencies to license institutions of higher education.
These accrediting agencies are unknown to the public. They operate in near-secrecy, yet they control entry into a $270 billion a year industry: American higher education.
They have established a rule that to be a graduate degree-granting institution, most of the faculty members must possess Ph.D. degrees. To earn a Ph.D. takes several years writing term papers, passing exams, and paying tuition and expenses. I speak from personal experience.
So, when a business school goes looking for someone to join the faculty, it does not look to business. It does not approach retired businessmen who oversaw the creation of billions of dollars of value for consumers. Businessmen were too busy creating value to have had time to earn a Ph.D. They are not eligible.
Side note on law schools: The most prestigious journal for American law is the "Harvard Law Review." To get published there is to make your mark. You become a somebody. The Harvard Law Review is edited by third-year law students at the Harvard Law School. Not only are they not lawyers who have passed the bar, they have yet to graduate. A bunch of twenty-somethings determine the criteria for shaping legal opinion for the nation, and then impose these criteria. These kids announce to America's legal theorists:
"Shape up or ship out." The theorists shape up.
Nutty, you say? Of course it's nutty. It's higher education in America. This is not the free market at work. This is a state-created monopoly at work — the largest, most influential monopoly on earth.
This has all been done behind the scenes. I am aware of no book on the history of the accreditation agencies, with their links back to Rockefeller's General Education Board (1903), itself deliberately shrouded in anonymity by its creator.
So, when you go off to a business school to become a certified expert in business, you place yourself at the mercy of a group of bureaucratic monopolists who have never run a business. (A partial exception is the faculty at the University of Dallas, which has produced thousands of MBA's. Business school faculty members must have a Ph.D. and also have real-world management experience.)
If they could run a business, they would be out there making piles of money. But they cannot run a business, so they get paid to certify aspiring businessmen as having what it takes. What it takes to do what? Write term papers.
Then why attend a business school? One word: Rolodex. You will meet members of the class above you, your own class, and the class behind you. You will be given an opportunity to "network" with them. This is the opinion of a old friend of mine, a graduate of the Harvard Business School, whose start-up company made it to the New York Stock Exchange . . . and then died.
Problem: If you are not attending one of a handful of very expensive business schools, your network's connections won't be worth much. You will be like a line of drunks, arm in arm, helping to hold up each other. These top schools are Harvard, Wharton (the first one), Stanford, and Chicago.
PROF. PFEFFER BLOWS THE WHISTLE
Jeffrey Pfeffer teaches in Stanford's business school. In 2002, he released the conclusions of his study of the economic payoff of earning an MBA at any of the also-ran business schools. Here is a summary of what he found.
In articles published in Business 2.0, National Post, the Chicago Sun-Times, and the Chronicle of Higher Education, Stanford Business School Professor Jeffrey Pfeffer stated that you may be just as successful in your career if you do a two or three week boot camp on business basics instead of a two-year MBA.
Professor Pfeffer analyzed 40 years of research on the economic value of an MBA degree. He concluded that it does not guarantee a successful career or a higher salary. His research was published in the Fall 2002 issue of the Academy of Management Learning and Education.
How many aspiring business school applicants are aware of this? Not many. The business schools' faculties have no incentive to spread the word. Their livelihood depends on widespread ignorance about this study. After all, they are ill-equipped to compete in the world of business.
He also said, "Little of what is taught to students in business school prepares them for the corporate workplace. You have to question what goes on in the two years it takes to get an MBA, if someone can virtually be equivalent in two or three weeks. What that suggests to me is that if you take a smart person, and give them a relatively short course, a mini-MBA, if you will, they basically do as well as the MBAs."
On what evidence does his startling conclusion rest? On evidence supplied by the free market. He is a wise scholar. He let profit-seeking organizations gather the evidence. Then he studied it.
Dr. Pfeffer said he has long been skeptical of the value of an MBA. He became convinced after a group of consulting firms and investment banks did their own research comparing the performance of business school graduates to those trained in two- or three-week programs teaching new employee's business basics. The internal studies found the non-MBAs did no worse, and in some cases better, than their peers with a business degree. The studies also found more education did not result in higher salaries. For example, a study of consultants at McKinsey & Company who had been on the job for one, three and seven years found that at all three points, employees without an MBA were as successful as those with one.
I first read about this in an online article published by the Chicago Sun-Times (July 5, 2002). I saved it as a "Favorite," and the marvelous free desktop search engine distributed by Copernic let me find it. (I had misfiled it.) Today, that article is available only from the website of a distance-learning college.
Prof. Pfeffer of Stanford recently said, "Obviously, if you get admitted to Harvard or Stanford or another elite school, the very fact of your admission is going to increase your worth in the job market. Employers who hire brand-name MBA graduates do so on the basis of the quality of the student body at the school, not whether the students have acquired specific skills or knowledge with their degrees."
The implication of this statement is that you can capture for yourself much of the value of an MBA degree from an elite school by simply applying to that school and getting accepted. Disclosing on your resume that you were accepted at Harvard or another elite business school can help you prove your case that you are just as capable as someone who graduated from that school.
Best-selling author and Stanford MBA Seth Godin suggested this strategy in his article in Business 2.0.
Now here's a money-saving strategy for anyone smart enough to get accepted!
An elite school will accept less than 25% of those who apply. For example Harvard and Wharton accept only about 10% of those who apply to their MBA programs. The idea of course, is to apply to MBA programs that have a very good reputation or ranking and are very selective about who they accept.
SURROGATES FOR ILLEGAL TESTING
Businesses want to hire the best and the brightest. Why? Because, in the long run, brainpower produces results.
Because of the Federal government, it is illegal to test for brains directly. Why? Because this has been found to eliminate too many applicants from members of certain protected racial minorities. The Equal Employment Opportunities Commission will file a lawsuit against companies that screen by tests, unless it can be shown that the test was inherently related to a specific job.
However, if a company screens by a business school degree, then it's OK to restrict hiring for jobs in general. The testing is done by an agency that has been accredited by a government-created monopoly.
So, large companies hire MBA-holders from the best schools, which admit the brightest students. They are not hiring the information that was imparted by the MBA program. They are hiring three things: (1) IQ, (2) Rolodex; (3) the ability to endure intense boredom and survive. They are hiring Mandarins.
The question is: Will these Mandarins be able to compete in a world that does not swear loyalty to the emperor, but must bow and scrape to the consumer? Is the ability to conform to the rigors of an MBA curriculum the same as the ability to forecast accurately future consumer demand, and then devise a cost-effective way to meet that demand?
Bill Gates and Michael Dell, both college drop-outs, don't think so. They are not Mandarins. They stand at the gates alongside Trump. Plus . . . they have better barbers.
There is a disconnect in the heart of American business management: the business management school. This was Prof. Pfeffer's conclusion in his original article. The business schools imitated the arts and science departments.
In implicitly or explicitly rejecting the so-called trade-school model, business schools gained respectability and approval on their campuses by conforming to the norms and behaviors of arts and sciences departments.
If there is a kiss of death for entrepreneurship, it is the outlook of the liberal arts departments of an American university. This has lowered the market value of an MBA from all but the most prestigious schools.
For the most part, there is scant evidence that the MBA credential, particularly from non-elite schools, or the grades earned in business courses — a measure of the mastery of the material — are related to either salary or the attainment of higher level positions in organizations. These data, at a minimum, suggest that the training or education component of business education is only loosely coupled to the world of managing organizations.
My conclusion: It is better to get on-the-job training in a mid-sized business noted for its entrepreneurship than it is to earn an MBA. It is better to come under the influence of a manager who has prospered in a growing company than a professor of business administration.
February 26, 2005
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