Andrew Hoffman is a professor at the University of Michigan’s Ross School of Business. He has been writing and teaching about business and environmental issues for almost 30 years, having published 18 books and over 100 articles. His work has been covered by the New York Times, Scientific American, Time, The Wall Street Journal, The Atlantic, and NPR.
What’s the big idea?
We need to rethink business education. If we keep producing business graduates who care only about making their wallets fatter and exploiting a broken system, then we’re doomed. It’s urgent that we reshape how we teach business in higher education so that we create a different kind of business leader. We can alter business for the better and fix the market by changing the graduates we produce that go on to run those businesses.
Below, Andrew shares five key insights from his new book, Business School and the Noble Purpose of the Market: Correcting the Systemic Failures of Shareholder Capitalism. Listen to the audio version—read by Andrew himself—in the Next Big Idea App.
1. Shareholder capitalism is broken.
Today’s version of capitalism is shareholder capitalism. It doesn’t work anymore for the purposes for which it was designed. I’m not saying we need to throw it out, but we must amend it. We need to fix it.
There are many key concerns in the market, but two stand out in particular: climate change and income inequality. The market, as presently structured, is unable to address them. If we don’t change course, we will not solve them.
While some people conveniently call these problems “externalities” or “unintended consequences,” they’re actually products of the system. In its current design, the market creates these problems, and the consequences could be catastrophic. We already see the cost of climate change and rising home insurance rates nationwide. We watched in horror as the Los Angeles fires raged, and they have now led to insurance issues. The total cost of climate change could reach as high as $22 trillion by 2100 if we do not do something soon.
It’s best to think of climate change not as an environmental issue, but as a system’s breakdown. To fix a system’s breakdown, you must fix the system that caused it. That system is today’s variant of capitalism.
2. Shareholder capitalism is failing business education.
Today’s business schools were designed for a world that no longer exists: a world fixated on 50-year-old notions of shareholder primacy and a “greed is good” mentality. Outdated ideas and models about the world and society have been ossified into the standard curriculum.
We need to change how we teach business. Simply adding an elective on climate change or income inequality while the curriculum remains focused on models that worsen these problems won’t work. We must change the entire pedagogy, the entire curriculum.
3. It’s time to rethink capitalism, business, and the market.
Surveys show that young people, Gen Z, and Millennials are becoming increasingly disenfranchised with capitalism. It’s not hard to understand why, considering the debt load they carry and the difficulty they have in getting financially on their feet. They worked hard to get their degrees, and now they’re struggling. But when I ask my business school students, “What is capitalism?” they either don’t know or take it as given.
We need to help students understand that capitalism is a set of human-made institutions. If it doesn’t work, we need to amend it to serve the needs of present-day humans. We need to teach students how to be stewards of capitalism so that they recognize their role in making sure that the domain in which they practice their craft works properly. Shareholder capitalism is starting to groan, creak, and collapse under its own weight.
“Students are blown away when they learn about Nordic capitalism, which offers a massive social safety net.”
Unfortunately, all business students and almost all business faculty today are only familiar with one type of capitalism: today’s shareholder capitalism, which arose in the 1970s and 1980s. They don’t understand the capitalism that came before, in the 1940s, 50s, and 60s. Back then, it was managerial capitalism. Business education must help graduates find their voice to become part of a conversation about which capitalism will replace shareholder capitalism. We can teach people that there are multiple variants of capitalism around the world. I do this in one of my classes. Students are blown away when they learn about Nordic capitalism, which offers a massive social safety net.
American capitalism—shareholder capitalism—is just one variant. It’s very different from Nordic capitalism. It’s very different from Chinese capitalism. It’s important to understand what makes capitalism work. What is its essence? How do we keep that and improve it? What is the purpose of firms? I could walk up to any American and ask them to finish this sentence: The purpose of corporations is to—? And their answer will be “make money for the shareholder.” Economically, that is true. Economists have clung to the idea that companies are there to make money for shareholders, but legally. this stands on shaky ground. If you want to sue a corporate executive because they didn’t make shareholders more money, you will have to go through the Good Business Rule, which says that they acted in good faith with loyalty and due care.
The American Law Institute says the company can be designed for any purpose. Even Sam Alito, a conservative Supreme Court justice in the Hobby Lobby decision, said the same thing. Companies can be designed to do other things besides making money for shareholders. If a company fixates on shareholder value, it forces them to fixate on short-term thinking. Look at what Boeing is going through right now. They used to be a company that made the finest quality airplanes in the world, but after their merger with McDonnell Douglas, they started focusing on quarterly returns instead of their craft.
What if we go back to what Peter Drucker said in the mid-1900s? That the purpose of the corporation is to identify and serve a market. How much money it makes is a measure of how well it does so. That changes the order of things and makes for much healthier companies.
4. The relationship between business and government.
The question of government’s relationship to the market today has boiled down to simplistic dualities: conservative versus liberal, socialism versus capitalism, more versus less. We need to start thinking about what the right level of government in the market is.
That’s particularly true today as we see our country moving more and more into the land of industrial policy. In the Biden administration, we had the Inflation Reduction Act and CHIPS, which are very much the government trying to steer the market in a certain direction. Already in the Trump administration, we have a heavy reliance on tariffs, which is also a form of industrial policy as it is an attempt to protect domestic industries.
“Too many of my students think that all lobbying is corrupt.”
We can also start thinking about the role of business in policymaking. Too many of my students think that all lobbying is corrupt, when in fact, business has a strong role to play in making good policy. Few business schools have a course on lobbying, and fewer still have a course on constructive lobbying, meaning lobbying for public good rather than individual gamesmanship.
5. The need for a new kind of business school.
We need to fundamentally rethink business school and what it teaches. We must stop teaching outdated models and ideas, such as that the firm’s purpose is to make money for shareholders. We must think about government less as an intrusion on the free market and more as an arbiter of it properly functioning. We must stop promoting the unrealistic idea that unlimited economic growth is possible. We must stop teaching that the environment is an unlimited source of materials and an unlimited sink for waste. We must stop teaching that efficiency is always good.
I have a colleague who says that we worship at the altar of efficiency if it lowers costs. For example, we have auto plants here in Michigan and it may be efficient to move them to another country, but what about the people left behind? Why don’t we factor that into equations as well? Classic business school teaches that people are inherently selfish.
We teach that technology can solve all our problems. Just make a new product or widget, and we’ll get rich, solve the climate crisis, and live happily ever after. It is not that simple. We must be much more imaginative to change our society beyond techno-solutions. Once we remove and replace outmoded ideas, we need to refill the curriculum with more attention to the whole student.
“We must be much more imaginative to change our society beyond techno-solutions.”
Research has shown that people who apply to business school typically score higher on the traits of narcissism, psychopathy, and Machiavellianism. Research also shows that a business school education amplifies these traits. Graduates tend to be more selfish and self-monitoring than when they enrolled. I see that every spring when graduation time is coming near, and people are looking at salary offers. They measure their worth by how much money they make as compared to everybody else.
It’s an awful way to imprint students, but there is also evidence that today’s students are starting to ask questions. They’re starting to push back on the curriculum and challenge the idea that business school is merely there to help them make more money, irrespective of who they are as a person. The challenge for business school is trying to take that mentality, cultivate it, and guide students to consider management as a calling. We need to move people away from the idea of their career as simply a pursuit for private personal gain and toward the vocation that is based on a higher professional and moral purpose. Then we can have an economy that serves everybody.
It’s a challenge to bring the entire student to the education process and teach not just the heads, but their hearts. To teach not just the how of business, but also why they are doing this. This involves cultivating the virtues of wisdom, character, and purpose.
The market is the most powerful institution on Earth. Business is the most powerful entity within it. Business creates the buildings that we live and work in, the food we eat, the clothes we wear, the forms of mobility we enjoy, and the healthcare system that keeps us alive. All these things come from the market. The market has done wonderful things but it is starting to stutter. To adjust it, there’s an urgent need to nurture a new breed of business leaders who view business not only as a means for profitability, but also as a vehicle to serve society.
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