Does the study of economics have a harmful effect?
A survey of Globes readers fails to affirm the tough business image of MBA graduates. However, students of economics still favor the company's interests when faced with a dilemma of maximizing profits or identifying with the suffering of workers who lose their jobs
Ariel Rubinstein

The reader may find it strange for an economics professor to raise questions about the value of an undergraduate education in economics. But I admit that I came to conduct the Globes survey with a great deal of skepticism regarding the significance of the study of economics at university. The results of the survey do not provide unequivocal proof one way or the other. Still, I think these results are sufficiently interesting to present them to the readers.

Globes subscribers received an e-mail message several weeks ago asking them to respond via the Internet to four questions. (I'll only address the first two of these four questions here.) By granting permission to conduct this survey, Globes joined a number of distinguished international newspapers (Berliner Zeitung, Financial Times, Die Zeit) in inviting their readers to participate in a survey aimed at checking their views on economic situations, including situations taken from game theory.

The response by subscribers was well beyond our expectations: within a few hours we had received thousands of replies. 4,612 Globes readers responded to at least one of the questions, with 92 percent of these respondents completing the entire questionnaire. This is an enormous number compared to the usual response rate to surveys in these fields. The amount of time the readers devoted to responding to the questionnaire indicates the seriousness they attributed to it. (About 80 percent of the respondents spent over a minute and a half on the main question before entering their reply. About half of the readers took over two and a half minutes to register their reply.)

Readers were asked to cite their gender and educational background. This enabled us to compare various groups of respondents: those with just a BA in economics (18.4 percent), MBA graduates (21.4 percent) and those with neither of these academic qualifications (60.2 percent). And here's something to note about the Israeli business world: only 21 percent of the respondents were women.

Maximize profits or minimize layoffs?

The main question posed to the readers was:

Imagine you are the vice-president of the IJLK company that provides pest removal services. The company employs a permanent administrative staff and 196 temporary workers who are sent on pest removal assignments. The company is five years old and is owned by three well-established families.

The work is not highly skilled. Each worker received just one week of training before being sent out on assignment. All of the workers have been employed by the company for three to five years. The company pays the workers more than the minimum wage. Including overtime, the workers earn 4,000 to 5,000 shekels per month. The company provides all of the social benefits required by law.

The company has made handsome profits, but these profits have recently begun to decline due to the ongoing recession. (The company is still making a profit.).

You are participating in a management meeting in which it will be decided whether to lay off some of the workers. The finance and economics department at IJLK prepared an annual profit forecast as detailed in the following table

The respondents were asked to answer:

"I recommend continuing to employ ____ of the 196 workers."

The question was intended to present the respondent with a dilemma, forcing him to weigh his adherence to the principle of maximizing profits against his identification with the plight of the dismissed workers in an economic environment of recession and unemployment.

According to the data presented in the question, it is not necessary to lay off workers. The company has been making profits and continues to operate in the black. But the company has the potential to increase its profits by a multiple of five if it fires nearly half of its workers. There are also two middle options: continue to employ 170 workers (laying off only 26) and increase profits by a multiple of 2.5, or continue to employ 144 workers and come close to maximizing profits, while saving the jobs of 44 workers

The responses of Globes readers

An analysis was made of the 4,158 readers who chose to continue to employ 100 or more workers. (We assumed that those who chose to employ less than 100 workers probably confused "number of workers employed" with "number of workers laid off." Including them in the analysis, attributing the most reasonable interpretation of their answers, would not have made a significant impact on the results.)

The initial finding was that the overwhelming majority of respondents - 72 percent - were not solely interested in maximizing profits, despite their real involvement in the business world and the fact that some of them are actual decision makers. Only 28 percent choose to maximize the company's profits without taking into consideration the number of layoffs this would entail. 17 percent of the respondents even gave absolute preference to the workers instead of maximizing company profits. To the extent that the readers' responses correspond to what they would decide in real life (and I believe they do), this is bad news for anyone who regards the classic model of economic theory taught in economics courses as a reasonable approximation of reality.

But the focus of interest here is in comparing readers according to their training in economics. It turns out that the responses of economics graduates are clearly different from those of readers who lack a formal educational background in economics. On average, those with a degree in economics decide to lay off 20 percent more workers than those who lack this academic background in economics. Some 36 percent of these economics graduates chose to maximize profits, compared to only 25 percent of those who are neither economics graduates nor MBAs

Globes readers and students

Several months ago, I conducted a similar survey among students in five different departments at Tel Aviv University and at the economics department at Hebrew University. The results showed clear differences between the students from the various departments: the economists tended to maximize profits, the mathematicians and philosophers exhibited "non-economic" patterns of behavior, and the law and management students were in the middle. From "left" to "right," the departments lined up the following order: philosophy, math, law, management, and economics.

Where do the Globes readers fit in on this scale? Despite the fact that 40 per cent of them have economics degrees, they line up slightly to the "left" of the law students. The percentage of Globes readers who chose to maximize profits is similar to the proportion of management and law students who made this same choice. But there is a higher percentage of Globes readers who chose not to lay off workers. The average number of workers who would lose their jobs according to the responses of Globes readers is also to the "left" of the law students, and to the "right" of the mathematicians.

The responses of men versus women correspond to the stereotype: women are "softer," laying off an average of 45 workers compared to 50 by male respondents. Only 24 percent of the female respondents opted to maximize profits, while 29 percent of men made this choice.

Surprise: Managers aren't so tough…

The findings do not support the tough business image of MBA graduates. It turns out that they are actually "softer" than the economics students. The discrepancy between the economists and MBAs can be attributed to the different types of instruction in the two courses of study. The study of economics is more formal and the students are swamped with assignments to "find the maximum" (or "compare the derivative to zero."???) In business studies, there is greater use of real-life cases that preserve the human significance of the economic action.

This assumption is reinforced by the survey I conducted among university students. Some of the students in the survey were given the profit forecasts in the form of an equation instead of a table. When the table was replaced by the equation, 75 percent of the sample group (including students from math, economics and business departments) responded that they would employ 100 workers (the function's maximum point). Does the study of economics through equations remove the economic discussion from reality or blind the heart?

Globes readers on real managers

After responding to question 1, the Globes subscribers were asked: "In your view, what would be the decision of a real company vice-president?"

The responses to this question showed a weaker correlation to economic training and no gender differential. It seems that many of the respondents feel that "I'm okay, but the real manager is not."

Half of the respondents believe that the real manager would maximize profits and another 25 percent feel that he would "nearly maximize profits." Some 42 percent of the respondents think that the real manager would lay off more workers than they would. Only 10 percent believe that the real manager would show more compassion toward the workers than they would.

The image of the manager among the student sample was very similar to that of Globes readers. And, by the way, there was less dissonance among the students and graduates of economics.

So what?

There are no correct answers in economics. The fact that it is customary to think that the correct "economic answer" in such a situation is for the company to employ only 100 workers reflects a sad sociological fact about economics. Too many economists regard the models they teach as the "Holy Grail" - but that is a topic for another article.

Ultimately, the reader's own set of values determine how he will interpret the survey results. Those who believe that it is the manager's primary duty to maximize the company's profits should praise the economic training that helps inculcate this principle. But those who believe that maximizing profits in such situations reflects "enslavement" to this principle must question the way economics is taught at the universities. Perhaps the study of economics distances the students from the real dilemmas of life? Perhaps "economics in scientific costume" reduces human beings to an equation? And perhaps it would be better for a talented young student who is interested in economic and social questions to pursue an undergraduate degree in a more demanding and less doctrinaire discipline than economics - for example, philosophy, mathematics, art or biology. And only later, when equipped with broader knowledge, he would embark on a graduate degree in economics - a degree that tends to raise more questions than provide answers.

I feel good, at least, about the fact that most of the subscribers of the country's business newspaper do not think that the welfare of workers should be ignored while pursuing the goal of maximizing corporate profits.

I would not have been able to conduct this research without the help of Eli Zvuluny who built the Web site for the survey. Michael Ornstein helped greatly in analyzing the data. And thank you to Ronit Porian for the cooperation and encouragement in carrying out the survey among Globes readers.