Kaplan is a professor at the University of Chicago’s Booth School of Business. Like another Harvard PhD, Jay Light (#34), Kaplan thinks the average person should be thankful for the productive, world improving business insights business schools have recently produced. For example, here is Prof. Kaplan defending business schools after the financial crisis,
“You look at the business world and the global economy since 1980, and it’s stunning. Productivity growth around the world has been terrific. You know, where did all this come from? There’s a huge success story of the tools of the markets and economics that are taught at business schools.”
As is the case with most PhDs in economics holding court, it isn’t too difficult to find the enormous fallacies in Kaplan’s apologia for business schools. A review of the global economy over the past two decades reveals the single biggest reason for improved living standards in the world was not Ivy League educated MBAs. Instead it was the collapse of communism, the most destructive economic dogma in world history. Releasing hundreds of millions of people from the twin yokes of central planning and an omnipotent police state were bound to have a beneficial economic aspect. Apparently, we owe this welcome development to business schools and not the American military, our western allies and the heroic people in Eastern Europe who fought at great personal danger for their freedom. Who knew?
Closer to home, the last few decades have seen the United States stumble from one economic crisis to the next – the inflation of the 70’s producing the deep recession of the early 80’s and the tech bubble of the 1990s prompting a policy of low interest rates that led to the housing bubble in the 2000s. Additionally, while economic aggregates like “total” household wealth and “gross” profits reach all-time highs, the average household struggles to get by like never before. How meaningful is it to even discuss “average household wealth” when the average cost of a private college education is now approaching $250,000 and obviously well beyond the abilities of even very well-off American families to afford. The averages and aggregates that business school professors like Steve Kaplan celebrate as progress, are the result of an increased concentration of wealth among the super-rich. These averages assume a normal distribution of wealth among Americans and ignore the obvious fact that wealth distribution is “skewed” and concentrated among the super-rich like never before. When “median” figures are used, it becomes clear the vast majority of people in the U.S. are falling behind, much less keeping up.
According to Credit Suisse in their global wealth research report, the average net worth of an American adult in 2010 was approximately $300,000; placing the United States fourth globally behind only Switzerland, Australia and Norway. However, when you measure median wealth – which is a much better description of how most people in the United States live - the figure for wealth per adult plummets to $44,900. This median figure places the United States nineteenth in the world, behind most western economies. The implication of these numbers is clear for all to see. Wealth is being concentrated like never before and the average American’s standard of living is in what appears to be terminal decline. This concentration of wealth is the defining characteristic of the modern US economy which Professor Kaplan asks us to celebrate. According to Professor Kaplan, the enormous concentration of wealth, much of it in the financial class – which is exactly the opposite result that capitalism based on the division of labor would achieve - is worth celebrating as a triumph of business schools.
The economic accomplishments that Prof. Kaplan celebrates are illusory. These perceived accomplishments are the result of business professors failing to understand the difference between average and median values, as well as inflation obscuring the fact that increased paper value of assets like stocks and real estate does not produce an increased standard of living. The failure of “modern” economists like Prof. Kaplan to distinguish between higher asset prices and a truly wealthier society lies at the core of many of today’s economic maladies and provides an academic imprimatur for the plutocracy of today that has supplanted the republic of the past.
See Austan Goolsbee (#25) for the insights of another PhD in economics and another University of Chicago faculty member. See Jay Light (#34) for the perspective of another elite graduate school of business faculty member.