Keynesian Model and Firms

There were lots of discussions on the recession and its effects. There were lots of discussions on how this recession ends (or rather has to be ended?). Governments all over the world were pumping money to the frozen market in a hope to get it revived. Banks were not lending after the sub-prime experience (we have a saying in our native language which literally translates to " the cat learnt its lessons of not playing with the fire after burning its ass".. funny). Somewhere from the middle of the crisis, some economists were discussing about possible application of Keynesian model of economics to the current recession. After all, I was curious about Keynesian model of economics? Searching (rather "googling") through internet, I learnt about Keynesian model. In simple layman's language it is defined as follows. When the economy is in recession, jobs are lost and unemployment jumps. This will have knock effect which creates a vicious circle resulting in slowing down of economic activities. In such a scenario, Keynes advocates that it is possible to revive the economy with the government's intervention because only government has the resources to keep the economy going by implementing new projects such as construction of roads, rail networks etc which provide jobs to thousands. This will create positive knock on effects resulting in more jobs, more spending and ultimately reviving the economy.

This seems to be very simple. As I was thinking about this, as usual, effect of MBA appeared in my mind. Why not companies with enough cash balances go for the application of Keynesian model? I argue that, by doing so, companies could gain competitive advantage. Here are the reasons for my thinking. In the slowing economy, the spending by the organizations diminishes. So too for the demand for products and services. As a result organizations slow down on R&D activities which results in the loss of human resource. Organizations also know that it takes much more effort, time and money to hire them again when the economy recovers. My thinking is that instead of companies slowing their investments and firing the employees, they should start looking into the future opportunities coming on the way when the economy recovers. If the company invests its money in bettering the products and services during the recession would gain the competitive advantage of beating the competitors when the economy recovers. THey even could get best talents in the market for cheaper rates. Because the competitors would have spent less on their R&D and would have fired their employees to shield themselves from the recession.

It seems to be a good strategy for the firms with huge cash balances because these companies can utilize their excess cash to gain the competitive advantage.

So, what do you think? Do you think there is some substance in my arguments?

-Deepak

Are MBAs responsible for financial crisis?

Slowly the crisis started to appear in the MBA life. I was just wondering whether crisis is taking a revenge on MBAs. The number of failures in the financial sector is increasing. It has already taken a number of institutions under its blanket. The knock on effect is felt in other industries too. Ironically by this time, I had started reading the book by Mintzberg titled "Managers, not MBAs". Slowly the belief started to shift. The question "who is behind this crisis"? was pricking me. Sooner, I began to search for the answers. My quest for finding the answer landed me in "the list of failed banks" . 48 banks since 2nd Feb 2007 till 21st March 2009 in US, 69 since 2000 and 17 since January 2009. I was interested to know who their CEOs and their educational qualifications. I started researching on this hardly available data. First major bank failure in 2008 was Lehman Brothers, the failure which shocked the already battered economy across the world. My interest was on the CEO of Lehman's at the time of failure. Incidentally the CEO, Richard Fuld was an MBA from NY university. Merill Lynch was acquired by BoA under distressed conditions. Stanley O'Neal, an MBA from Harvard Business School was running Merril at that time. John Thain, another former CEO of Merril Lynch was ousted by BoA after he was found to have been involved in the losses of the brokerage firm which BoA bought. Troubled Citibank is currently headed by Vikram Pandit, an MBA from Harvard Business School. On November 23, 2008, in addition to initial aid of $25 billion, a further $25 billion was invested by US government in the Citi bank together with guarantees for risky assets amounting to $306 billion. Kennedy Thomson of Wachovia was forced into retirement after mounting losses and subsequent sale to Wells Fargo. He was an MBA from Wake Forest University.

There is a need to relook into the education system as a whole. Does business school teach the required skills to handle the extra ordinary situations? Does business schools teach to be just over ambitious? Mintzberg in his "Managers Not MBAs" writes, people will be arrogant when they have confidence but lack competence. The way these mutli national big banks went after the subprime mortgages suggest their leader's arrogance in reading between the lines. Recently Warren Buffett lambasted the business schools for failing to produce the responsible MBAs. Commenting on Failed CEOs, Mintzberg says "Inexperienced students who seek "practical" applications in the class room seem to become disconnected managers who seek easy answers on the job". A food for thought....

Question: Do you think a drastic change is required in the management education system? If so, what are your suggestions?