<p>Harvard’s</a> masters of the apocalypse - Times Online</p>
<p>Good article. Quite true in my opinion. Obviously, this economic disparity cannot be blamed solely on one group of people, or any single factor; however, the fact is that these MBAs are spread throughout all industries and DO make a large majority of the business decisions across the board. I think most people who attend MBA programs are drawn by the perceived wealth that comes with an MBA. The ONLY reason that 2/3 of MBA students go into banking/consulting is for the money, which is not necessarily the kind of people I want making the decisions. </p>
<p>I can remember a number of years ago when I was younger, I read through most of the top MBA programs mission statements and websites; I was thrilled at the possibility to lead business operations in the way they were described. Ever since then, I have kind of geared my studies and activities in a direction that would eventually lead to a top MBA program. However, it has recently occurred to me that I really share nothing in common with the money hungry people that would share space with me in one of these programs. At this point, I dont really know that an MBA would benefit me all that much professionally, yet for some reason I dont want to give up my goal. I am passionate about business, about leadership, and about bettering the world; but it seems like in practice - what an MBA offers is a chance to network with nearsighted, greedy individuals, fixated on bettering their pocketbooks.</p>
<p>
[quote]
I think most people who attend MBA programs are drawn by the perceived wealth that comes with an MBA
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</p>
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[quote]
but it seems like in practice - what an MBA offers is a chance to network with nearsighted, greedy individuals, fixated on bettering their pocketbooks.
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</p>
<p>Hey, well, what do you expect? That's business. Business exists to make money. These aren't charities here.</p>
<p>Purdue, Yale is waiting for you. Running a non profit is tremendously rewarding. There are many ways to use an MBA.</p>
<p>Purduefrank.</p>
<p>I completely understand your sentiment. I feel the same way. But you have to think about it this way - would you rather leave leading major corporations to the hands of "money hungry" people or would you rather have your say in making socially responsible decision. It's all the more reason to go for a MBA. </p>
<p>I think the key is to know which school fit your do-gooder sentiment. Harvard is infamous for arrogant cut-throat community, well as Stanford/Haas is known for hippie-ish do-gooder student body. </p>
<p>I would suggest researching MBA schools based on Aspen Institute's Guide to Socially Responsible MBA Programs.
The</a> Aspen Institute Guide to Socially Responsible MBA Programs</p>
<p>And hmom5 is right, Yale is a great school for non-profit management. I wish I had did better research before I started applying for MBA.</p>
<p>“Hey, well, what do you expect? That's business. Business exists to make money. These aren't charities here.”</p>
<p>That’s what I do expect now… </p>
<p>“But you have to think about it this way - would you rather leave leading major corporations to the hands of "money hungry" people or would you rather have your say in making socially responsible decision.”</p>
<p>That’s what has kept me moving in that direction still - but I don’t think I’ll be applying to HBS… It's also pretty funny to me that my thoughts on that article lead to the conclusion that I'm a do-gooder - bc I'm not that type. I really think it's just common sense, and I think there's a better way to lead.</p>
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Purdue, Yale is waiting for you. Running a non profit is tremendously rewarding. There are many ways to use an MBA.
[/quote]
</p>
<p>
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And hmom5 is right, Yale is a great school for non-profit management. I wish I had did better research before I started applying for MBA.
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</p>
<p>Even at Yale, few students actually pursue jobs in nonprofit management despite the school's vaunted reputation in that sector. In 2007, only 7% of Yale's MBA graduates took nonprofit jobs, compared to the whopping 53% who went to financial services - a higher percentage than even the finance powerhouses of Wharton or HBS. </p>
<p>Sakky- Do you really think that the only reason someone could be interested in business is to make money? </p>
<p>I realize that the vast majority of those who work on wall street or in management share this sentiment, one reason I'm not sure I want to pursue an MBA, but it's pretty sad to think that that is the ONLY reason. There are plenty of other valid benefits.</p>
<p>Well said, well said.</p>
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Sakky- Do you really think that the only reason someone could be interested in business is to make money?
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</p>
<p>What I am saying is that the only reason for any business to exist at all is to make money. A business that doesn't make money will shut down - or be forced to shut down via bankruptcy and liquidation - and that's exactly the way it ought to be.</p>
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one reason I'm not sure I want to pursue an MBA, but it's pretty sad to think that that is the ONLY reason. There are plenty of other valid benefits.
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<p>And I too question why you want to obtain an MBA, for it sounds like the atmosphere is not really for you. A master's in public policy or the like seems to be more to your tastes. Like I said, the purpose of a business is to make money. This is not a game here. You don't just have a business just for the sake of having a business. You have it to make money.</p>
<p>Obviously a business has to make money, I don’t think that was the point I or anybody else was trying to make.</p>
<p>However, besides the fact that a business must make money, it is also well within business practice to address moral issues that often contradict the pursuit of profit. My point was, and is, that I think the goal of profitability need not sacrifice ethics. It is apparent that the author of that article, and a student of HBS, believed that most of his/her classmates were so fixated on money that they were willing to let their moral standards flounder, taking the economy with them in the process. My comment that the only reason 2/3 of MBAs go into banking/consulting was aimed at those MBA students whose only reason for banking/consulting is the number of zeros on their paycheck. As I’ve said before, I don’t hate bankers/consultants - but I do find it extremely hard to believe that the work is SO interesting in comparison to other professions, that it attracts people in mass for that reason alone. Therefore, what you end up with is a large percentage of people running our corporations(especially banks) that are primarily motivated by money - again, not the people I would like to see making the decisions that affect everyone else.</p>
<p>“This is not a game here.”
Nobody is suggesting this is a game. The fact is that the current status quo is broken, fundamentally. There are many more reasons to run a business other than making money. The money will come if it is a good idea with the proper strategy and backing. Most, if not all good ideas originate from a passion or a need, the result is money - not the cause. The people making the largest contributions to society, and to business, didn’t set out to make a fortune - they were inspired and the money followed. Business serves to provide for a need, both the need of the business owner’s income, and the need for the service they provide - but the sole purpose is not the money, for if it were, there would be no business to begin with.</p>
<p>
[quote]
However, besides the fact that a business must make money, it is also well within business practice to address moral issues that often contradict the pursuit of profit. My point was, and is, that I think the goal of profitability need not sacrifice ethics. It is apparent that the author of that article, and a student of HBS, believed that most of his/her classmates were so fixated on money that they were willing to let their moral standards flounder, taking the economy with them in the process
[/quote]
</p>
<p>With the exception of cases like Madoff and other cases of clear fraud or double-dealing, that category of people didn't actually behave unethically. Bankers and financiers were simply behaving according to the incentives placed before them. They emphasized short-term profits that risked the rest of the economy, because that's what the bank shareholders wanted. Up until just recently, that strategy worked perfectly, as investors enjoyed immense returns on their investment. </p>
<p>Besides, think of it this way. What if you were a bank CEO during the boom times and you decided that you weren't going to invest in subprime-mortgage-backed securities. You weren't going to lever the firm's balance sheet to nosebleed levels. You weren't going to provide the illusion of balance sheet protection through use of off-balance-sheet vehicles to warehouse CDO's. You weren't going to make bets on the market direction through credit derivatives. You weren't going to do any of that - and then as a consequence, your profits were lower than your competitors during the boom times. We all know what would have happened - the shareholders would have then fired you and replaced you with somebody else who would have done all those things. Let's be honest. Shareholders just want their stock price to appreciate. They don't care how it happens. They just want it to happen. </p>
<p>I actually don't think that businessmen were any less ethical during the last few years than they have ever been. Business is inherently an amoral (as opposed to im*moral, or evil) activity. The *real problem is faulty government policy, notably the inappropriately easy monetary policy earlier this decade. When interest rates are set too low, you will inevitably have a credit bubble, and by extension, an asset bubble.</p>
<p>The housing bubble, and the consequent securities bubble and bust, should not have been any surprise to anybody, as the media had been running stories detailing all of them for years. Paul Krugman wrote a piece entitled "Fear Itself" for the NY Times detailing the dangers of a housing bubble - in 2001. But of course, nobody did anything about it because everybody was enjoying the ride. It was easy money - up until the time that it wasn't. </p>
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Therefore, what you end up with is a large percentage of people running our corporations(especially banks) that are primarily motivated by money - again, not the people I would like to see making the decisions that affect everyone else.
[/quote]
</p>
<p>See above. The banks hired people who emphasized short-term trading and profits because that is what the shareholders demanded. If people don't like the business models of those banks, then don't invest in them. {Furthermore, shareholders of bailed-out banks deserve to lose their entire investment.}</p>
<p>
[quote]
Nobody is suggesting this is a game. The fact is that the current status quo is broken, fundamentally. There are many more reasons to run a business other than making money. The money will come if it is a good idea with the proper strategy and backing. Most, if not all good ideas originate from a passion or a need, the result is money - not the cause. The people making the largest contributions to society, and to business, didn’t set out to make a fortune - they were inspired and the money followed. Business serves to provide for a need, both the need of the business owner’s income, and the need for the service they provide - but the sole purpose is not the money, for if it were, there would be no business to begin with.
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</p>
<p>I'm afraid I have to diametrically disagree. The sole purpose is the money. After all, the very definition of a good business idea is precisely one that makes money. There are plenty of ideas out there, most of which don't make money and are therefore poor business ideas. You can passionately build an ingenious technology, but if you can't translate that into a process that generates profit, then there is no business. </p>
<p>Let me give you an example. I was talking to a grad student who is building DNA computation machines, basically parallel computers that can take advantage of the myriad and flexible states of DNA to mine a computational search space larger than any that any that are feasible with today's technology. But there's no business. At least not yet. Building an actual computer that could equate the computational ability of a cheap $500 desktop today using DNA computing would easily cost millions, possibly billions of dollars. Hence, nobody would ever buy it. Nevertheless, it's a cool idea. The guy is passionate about it. He'll surely be able to generate a stream of academic papers and probably place at a tenure-track academic position at a Department of Computer Science or Engineering at a top school. But there's no business to be had here, at least not right now. He himself admits that it will probably take at least 10 years for the technology to even have a chance of becoming a viable business, and so right now he is pursuing it for purely academic reasons.</p>
<p>The vast majority of ideas in the world, even the ones of which you might be passionate about, do not make money and are therefore not viable businesses. Business needs are inherently mediated by money. I have a "need" for a DNA computer if it was cheap, but not if it's going to cost me millions of dollars. Granted, you could build me a DNA computer and then sell it to me for dirt-cheap, but if it costs you a million dollars to manufacture it, then that's not a business. At best, that's a charity. At the end of the day, the terms 'good ideas' and 'right strategy' are simply tautological redefinitions of profit generation. A business strategy that does not generate profits is - by simple definition - a bad strategy.</p>
<p>I've said it before and I'll say it again - this is not a game here. Businesses are out to make money. Businesses therefore hire people because they are supposed to help them make more money. Do businesses hire you just because they think it's fun for to have you hanging around the office? You're there to help the company make money.</p>
<p>Besides, think of it this way. What if you were a bank CEO during the boom times and you decided that you weren't going to invest in subprime-mortgage-backed securities. You weren't going to lever the firm's balance sheet to nosebleed levels. You weren't going to provide the illusion of balance sheet protection through use of off-balance-sheet vehicles to warehouse CDO's. You weren't going to make bets on the market direction through credit derivatives. You weren't going to do any of that - and then as a consequence, your profits were lower than your competitors during the boom times. We all know what would have happened - the shareholders would have then fired you and replaced you with somebody else who would have done all those things. Let's be honest. Shareholders just want their stock price to appreciate. They don't care how it happens. They just want it to happen.</p>
<ul>
<li>I agree, the incentives are completely and utterly skewed. I have said it before, change the incentives and youll change the kind of people attracted to the business as well as the actions of those already there.</li>
</ul>
<p>The banks hired people who emphasized short-term trading and profits because that is what the shareholders demanded. If people don't like the business models of those banks, then don't invest in them. {Furthermore, shareholders of bailed-out banks deserve to lose their entire investment.}</p>
<ul>
<li>Sure, that was true for the last few years. However, I can promise you that there will be a lot of people that will want nothing to do with any of the high risk strategy that banks had adopted (at least in the near future). My thoughts, take advantage of those few years and wipeout the nearsighted incentives that drive the industry. </li>
</ul>
<p>I'm afraid I have to diametrically disagree. The sole purpose is the money. After all, the very definition of a good business idea is precisely one that makes money. There are plenty of ideas out there, most of which don't make money and are therefore poor business ideas. You can passionately build an ingenious technology, but if you can't translate that into a process that generates profit, then there is no business.</p>
<ul>
<li>I do believe that we will have to agree to disagree on this. </li>
</ul>
<p>I am NOT arguing that a business can exist without making money! I am arguing that there are many reasons to run a business besides the money. </p>
<p>Let me give you an example. I recently read an article here in my schools newspaper about a girl who decided to invent a new kind of ladder. She did this because her mom lived at home alone and was afraid that she would not be able to get out of her second story house if there was ever a fire. She researched all kinds of different designs and eventually went with an adjustable length ladder that can attach to any size window ceil, allowing for easy storage and deployment. She won a state business plan competition and received funds to start producing them. Obviously, in order to be a viable business in the future, she will need to make money - however, she started with the idea to serve a need. My argument is and will always be that a good business is one that serves its customers first and foremost, not one that only serves itself. It is not completely different from what your saying; but yet it is different. If I set out on a quest to make money, I serve only myself and my interests - nobody in their right mind would pay me to do this. However, if I set out to serve you and others well in some fashion, then many people will be willing to pay me for that service or product. </p>
<p>I have a "need" for a DNA computer if it was cheap, but not if it's going to cost me millions of dollars.</p>
<p>That is not true. There is a need for a DNA computer at a million dollars; but it is simply unaffordable at that price. As your friend stated, someday there will be viable businesses serving that need, making money in the process. Perhaps right now is not the right time to serve that need, but in all likelihood the need will persist until it is met. Your friends efforts did not go to waste, one day a clever businessman/woman will figure out how to use that technology in a profitable way, thus serving the need of many and profiting for him/herself. </p>
<p>As businessmen/women, our job is to responsibly meet the need of our clients while also maintaining a viable business strategy. It is a juggling act, and an art. When we begin to feel that the only reason business exists is to serve us monetarily, we have lost sight of humanity on a large scale. There are plenty people running viable businesses in the world who understand that. The businesses that dont are the ones who are going bankrupt.</p>
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I agree, the incentives are completely and utterly skewed. I have said it before, change the incentives and you’ll change the kind of people attracted to the business as well as the actions of those already there.
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</p>
<p>And what that means is that it isn't really the fault of the individual people involved. Again, I don't know that bankers were any more unethical in the 2000's than they were previously. What changed were the outside incentives. </p>
<p>
[quote]
Sure, that was true for the last few years. However, I can promise you that there will be a lot of people that will want nothing to do with any of the high risk strategy that banks had adopted (at least in the near future). My thoughts, take advantage of those few years and wipeout the nearsighted incentives that drive the industry.
[/quote]
</p>
<p>Which is entirely consonant with what I said before: those who disagree with the banks' business models should not invest in them, and if nobody invests in them, then the banks will inevitably have to change the way they do business or go bankrupt, and rightfully so. </p>
<p>By all means, change the incentives in order to reduce the systemic risk. But again, that has nothing to do with ethics per se. Systemic reform is different from moral reform. People - both ethical and unethical - are going to behave according to the incentives placed before them. Let's remember that until just recently, all parties were benefitting from the housing/securitization boom: bankers through giant pay packets, individual homeowners through skyrocketing real estate values, stockholders through strong stock performances, and everybody else via a strong economy and low unemployment. Nobody seemed to want reform - whether incentive-based or moral - at the time. </p>
<p>
[quote]
Obviously, in order to be a viable business in the future, she will need to make money - however, she started with the idea to serve a need. My argument is and will always be that a good business is one that serves its customers first and foremost, not one that only serves itself. It is not completely different from what your saying; but yet it is different. If I set out on a quest to make money, I serve only myself and my interests - nobody in their right mind would pay me to do this. However, if I set out to serve you and others well in some fashion, then many people will be willing to pay me for that service or product.
[/quote]
</p>
<p>Uh, no. As I explained before, customer needs are inherently moderated by price. To extend your story, nobody just "needs" a new ladder. What they "need" is a new ladder at a reasonable price. If that girl's new ladder costs a million dollars, then nobody really needs it. They'll just buy a regular ladder, or do without one entirely. It is only when the product in question is priced at a level at which I am willing to pay does the product then become viable.</p>
<p>That also means that the product itself has to cost less to make than what the company can charge on the market, which means that businesses must behave as price transforming processes. If the ladder's raw materials and labor cost a million dollars, then the business is unviable. </p>
<p>Look, everybody has "needs". But from a business standpoint, that's irrelevant. What is relevant is whether you can serve those needs at the right price. I have a "need" for a sportscar for $1000. But if I have to pay $100k, then I don't have that "need" anymore. I have a "need" for an Apple Iphone at $2, but not for $200, which is what the price is now. And if Apple can't manufacture an Iphone for less than $2 - and I know that they cannot - then they cannot meet my need. Businesses therefore exist only to the extent that they conform to price signals, not just through meeting people's absolute 'needs'. </p>
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[quote]
That is not true. There is a “need” for a DNA computer at a million dollars; but it is simply unaffordable at that price.
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</p>
<p>You just contradicted yourself. The price inherently determines the 'need' (or lack thereof, in the case of the $1mil price). </p>
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As your friend stated, someday there will be viable businesses serving that need, making money in the process. Perhaps right now is not the right time to serve that need, but in all likelihood the need will persist until it is met.
[/quote]
</p>
<p>Right now is not the right time precisely because the price would be too high. That is why nobody is selling a DNA computer right now. If you go to the mall, can you find somebody selling one? Of course not. All DNA computers are prototypes in research labs, and will probably remain so for at least 10 years. Again, the "need" for a DNA computer is inherently dictated by price, and businesses know that. </p>
<p>What we are talking about is nothing more than basic economics. Demand does not exist in a vacuum. Rather, demand is determined by price. With the possible minor exception of luxury goods, higher prices translate into lower demand and above a certain price level, the demand for a product is effectively zero. Companies also have to reach a certain scale in order to profitably supply whatever customer base, if any, exists. When supply and demand curves never intersect - as is the case with most new technologies - then there is no profitable business to be had, because there is no price level at which both the customers are willing to buy and the companies are able to sell. Hence, price signals - not some abstract conception of "need" - determine whether a business is viable. </p>
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Your friend’s efforts did not go to waste, one day a clever businessman/woman will figure out how to use that technology in a profitable way, thus serving the need of many and profiting for him/herself.
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</p>
<p>Nobody is saying that my friend's efforts are going to waste. Like I said, I am sure that he will enjoy a successful academic career. </p>
<p>But that's not a business career. Right now, nobody is actually selling a DNA computer, not even the largest computer firms in the world. Is that because they're all dumb? No, it's because everybody realizes that there is no business opportunity right now. Maybe in the future, the technology will mature such that the price of building a DNA computer will drop to a level at which customers are willing to pay. But that is simply a restatement of what I've said above: prices determine business viability. </p>
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[quote]
As businessmen/women, our job is to responsibly meet the need of our clients while also maintaining a viable business strategy.
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</p>
<p>A viable business strategy is a means to sell a product for a higher price than what it costs to create. Nothing more, nothing less. If you can't do that, then, by definition, you don't have a viable business strategy. </p>
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[quote]
When we begin to feel that the only reason business exists is to serve us monetarily, we have lost sight of humanity on a large scale. There are plenty people running viable businesses in the world who understand that
[/quote]
</p>
<p>No, the reason for business to exist is to serve us monetarily. Again, these are not charities we're talking about here. Businesses are profit maximizing agents. </p>
<p>Besides, I don't particularly view businesses in the dark manner that you do. After all, the only way that any business can exist at all is to have customers. Customers always have the choice to not buy anything from the business at all. Nobody is forcing anybody to buy anything. Hence, the fact that a company even exists at all - even a supposedly 'obscenely profitable' company - must mean that they are serving some customers' needs at a price they are willing to pay. </p>
<p>What that means is that humanity always benefits as a side product of aggregate business activity, and that side product usually represents the vast majority of the total price of the transaction. No company enjoys 100% profit margins, and anything less than 100% represents economic benefits that accrue to the rest of society. Economic studies have indicated that the average profit margin of all firms is generally around 10%, which means that a whopping 90% of the value of all economic transactions benefits the rest of the market. </p>
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[quote]
The businesses that don’t are the ones who are going bankrupt.
[/quote]
</p>
<p>The businesses that go bankrupt are the ones who don't recognize that they need to sell a product for a price that is higher than what they need to pay to produce that product in the first place. That is why nobody is selling DNA computers right now, and anybody who foolishly tries will immediately go bankrupt. The input prices are simply too high. Again, sure, in 10 years, perhaps the input prices will decline to the point at which a DNA computer does become a viable business idea. But that's exactly what I have been saying: business viability is inherently predicated on price signals: the price at which customers are willing to pay, and the price at which inputs can be purchased.</p>
<p>You are arguing what a business must do in order to exist, I am arguing WHY a business exists in the first place…</p>
<p>“What we are talking about is nothing more than basic economics. Demand does not exist in a vacuum. Rather, demand is determined by price.”</p>
<p>You are speaking about the quantity of something demanded - not the inherent aggregate demand. Changes in prices ONLY change the quantity demanded of a good. I’m sure you’re well aware of this basic economic principle, but nonetheless, an example would be that fuel prices are often determined by demand itself - not the price determining the demand. Changes in preferences, new technologies, population growth, and other variables inevitably affect demand, which will then change the price. </p>
<p>“You just contradicted yourself. The price inherently determines the 'need' (or lack thereof, in the case of the $1mil price).”</p>
<p>I did not contradict myself, I maintain that the need exists even at 1mil - we are arguing the age old argument, “which came first, the chicken or the egg?” I say that the need exists always, it is only a matter of meeting that need with an acceptable price. </p>
<p>“No, the reason for business to exist is to serve us monetarily. Again, these are not charities we're talking about here. Businesses are profit maximizing agents.”</p>
<p>Again, I argue that business exists to provide for a need. I am not talking about a charity, I am talking about a profitable firm - it exists to provide a good or service to its customer. Without the good or service there is no business. Without profitability there is no business. You can chase the profit, I will strive to provide for my client’s needs - we will see what the best strategy is in the long run.</p>
<p>“Besides, I don't particularly view businesses in the dark manner that you do.”</p>
<p>I do not have a dark view of business, I have a dark view of many of those who partake in the lifelong pursuit of power and wealth at any cost. </p>
<p>“What is relevant is whether you can serve those needs at the right price.”</p>
<p>Precisely. I have the feeling that there is a communication gap between us here. All I am saying is that at the birth of a business, there is someone trying to provide for a need. I completely and utterly understand that this cannot happen unless they can do it profitably - so I’m not sure where the confusion is. </p>
<p>“And what that means is that it isn't really the fault of the individual people involved.”</p>
<p>By saying that, you effectively nullify any responsibility from anybody. Someone knew what they were doing, I would argue that many of the everyday employees had at least some nagging feeling that something wasn’t right. Just because the incentives for something are there doesn’t mean that as a freethinking human you have MUST comply. Yes, almost everybody benefited, however, only a few were in positions that would enable them to understand what was really happening. </p>
<p>Let me take this back to my original post - I agree with the author’s article. Many MBA students end up in positions of high responsibility, and they should respect that they effectively hold the livelihoods of many individuals in their care. It is a shame that many of the people who are attracted to an MBA, are so because of the money. In my opinion, and in the opinion of the author - this leaves many unknowing individuals at the mercy of greedy individuals. If money is your primary motivator, than I personally feel that I would rather NOT have you handling my affairs - yet many times I am not given many other options.</p>
<p>
[quote]
I would suggest researching MBA schools based on Aspen Institute's Guide to Socially Responsible MBA Programs.
The Aspen Institute Guide to Socially Responsible MBA Programs
[/quote]
</p>
<p>Don't waste your time with the Aspen guide, and most definitely do not pay ~$40 for it! Net Impact's Business as Unusual guide is free online and provides similar information.</p>
<p>The shortsightedness of our firms and CEOs is endemic to the nature of the Berle-Means corporate structure. How do we fix it?</p>
<p>
[quote]
The shortsightedness of our firms and CEOs is endemic to the nature of the Berle-Means corporate structure. How do we fix it?
[/quote]
</p>
<p>You don't.</p>
<p>
[quote]
You are arguing what a business must do in order to exist, I am arguing WHY a business exists in the first place
[/quote]
</p>
<p>No, I am also arguing why a business exists in the first place - which is to make money. As I said before, you don't have a business just for the sake of having a business. Businesses aren't hobbies. Businesses exist to make money. </p>
<p>
[quote]
You are speaking about the quantity of something demanded - not the inherent aggregate demand. Changes in prices ONLY change the quantity demanded of a good. Im sure youre well aware of this basic economic principle, b
[/quote]
</p>
<p>Uh, no, there is no such thing as inherent aggregate demand that is separate from the concept of price, as there is nothing "inherent" about it. Aggregate demand is also determined by price. If potato chips cost less, then not only will I demand more of them, but more importantly, some people who had previously demanded none (at the higher price) will now demand some. Hence, the aggregate summation of all of our demands increase. On the other hand, if potato chips cost a million dollars, then nobody will want any, and the aggregate summation of all of our (zero) demand values is still zero. There is nothing "inherent" about the demand. I'm sure you're aware of that basic principle. </p>
<p>
[quote]
ut nonetheless, an example would be that fuel prices are often determined by demand itself - not the price determining the demand.
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<p>Your fuel example illustrates exactly what I'm talking about. If fuel cost a million dollars a gallon, then nobody would buy it for the simple reason that nobody could afford it. Everybody would bike to work. Or jog. Those who have long commutes would be forced to quit their jobs, for why would you keep a job that costs you more to commute to than what it pays? And surely somebody would invent a car that runs on an alternative fuel that costs less than gasoline, which is not that hard to do if gas costs a million bucks a gallon. That's a pretty low bar. </p>
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Changes in preferences, new technologies, population growth, and other variables inevitably affect demand, which will then change the price.
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<p>These changes will shift the demand curve. But that has nothing to do with the simple fact that demand is always affected by price. </p>
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I did not contradict myself, I maintain that the need exists even at 1mil - we are arguing the age old argument, which came first, the chicken or the egg? I say that the need exists always, it is only a matter of meeting that need with an acceptable price.
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<p>No, the need doesn't "always" exist. You said it yourself - you have to meet that need with an acceptable price. Put another way, if the price is not acceptable, then there is no demand. Nobody "needs" a million dollar potato chip. There is a "need" for a very cheap potato chip. The price inherently determines the demand. </p>
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Again, I argue that business exists to provide for a need. I am not talking about a charity, I am talking about a profitable firm - it exists to provide a good or service to its customer. Without the good or service there is no business. Without profitability there is no business. You can chase the profit, I will strive to provide for my clients needs - we will see what the best strategy is in the long run.
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<p>There is always an 'easy' way to provide for your client's needs - simply charge less for all of your products than what it costs to make them, maybe even giving away your products for free. Your customers will surely be rabidly happy. But you will also go bankrupt in a pinch. </p>
<p>In other words, business longevity is not primarily determined by providing for your client's needs. Your clients always want everything for as cheap of a price as possible. Heck, they would actually like to get paid for taking your products. That's a "need", right? But that's obviously a "need" that you do not dare to fulfill, at least not for long. </p>
<p>The best strategy is, tautologically, whatever produces the most long-term profit. Now, that may mean serving some of your customer's needs. But certainly not all of them, especially not the need for negative-margin costs. </p>
<p>Keep in mind that the impetus of this entire thread regarded bankers who have put the global economy in jeopardy by originating mortgages and structuring them into asset-backed securities that have now proved to be 'toxic'. But those banks were serving customer needs. After all, everybody wanted a mortgage at a lower interest rate than what their credit rating ought to dictate. People with no jobs, no income, and no assets still wanted mortgages (the so-called 'NINJA' loans), nor did they want to make a large down payment, and preferably no down at all. Heck, some people actually wanted to not only pay zero down, but to even borrow money on top, meaning that the entire mortgage package would actually be higher than the value of the house itself. People wanted to make low initial 'teaser' payments before the rates reset - hence option ARMS - and to have the flexibility to choose to make monthly payments that sometimes not only did not cover the notional principal, but also sometimes didn't even cover the monthly interest - the so-called 'negative amortization' mortgages, under the assumption that they were probably just going to retire the mortgage by flipping the house in a few years anyway, so they didn't need to worry about ballooning back-end payments. </p>
<p>Those were all customer 'needs', according to your definition. Nobody was being forced to take these exotic mortgages. Banks were simply catering to what the customers wanted. We now realize that maybe it's not such a great idea to give a customer with no job, no assets, and a notorious credit rating a $500k mortgage at 4% interest with no money down and cut-rate monthly payments for the first few years, even though that customer wants it. It is precisely because the banks were serving customer needs that the world's economy is in freefall. </p>
<p>Surely the world's bankers have learned that the vast majority of customer needs should not be served. Just like banks should not give out cut-rate mortgages even though everybody wants one, Ferrari similarly probably should not sell me a $1000 car even though I want one. Right now, banks around the world are reducing credit lines and loan books and tightening interest rates and loan conditions. That's not what customers want. In fact, that's precisely what customers don't want. But banks need to do that because they have to shrink their balance sheets and rebuild their capital reserves by earning their way out of trouble. </p>
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Precisely. I have the feeling that there is a communication gap between us here. All I am saying is that at the birth of a business, there is someone trying to provide for a need. I completely and utterly understand that this cannot happen unless they can do it profitably - so Im not sure where the confusion is.
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<p>The confusion is that you seem to believe in a concept of 'inherent need', which does not exist except perhaps in the highly circumscribed categories of true life necessities such as food, water, and air. Other than that, nobody inherently really 'needs' anything. Needs are dictated by price. Nobody needs a mortgage at a 400% interest rate. Get it down to 4%, and lots of people 'need' it, in fact, so much so that you place the entire world's financial system in jeopardy. </p>
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By saying that, you effectively nullify any responsibility from anybody. Someone knew what they were doing, I would argue that many of the everyday employees had at least some nagging feeling that something wasnt right. Just because the incentives for something are there doesnt mean that as a freethinking human you have MUST comply. Yes, almost everybody benefited, however, only a few were in positions that would enable them to understand what was really happening.
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<p>Like I said, press reports as far back as 2001 discussed the dangers of the housing bubble. But nobody cared, because the bubble kept expanding. So even if you thought that something was amiss, the empirical evidence that you saw in front of you every day was that everybody was getting richer and richer. Home ownership rates reached record highs every year. The stock market kept expanding. Bankers were generating giant bonuses. Many ordinary Americans were becoming fabulously wealthy beyond their wildest dreams by flipping houses - in fact, there was a TV show on A&E called "Flip This House". Everybody was benefitting. </p>
<p>So what exactly were people supposed to do? You can't stop a rising tide. Think of it this way. Let's say that in 2002 you were a bank manager who felt that you shouldn't be originating so many shoddy mortgages because you were convinced that the housing market has become a bubble that would inevitably burst. So you don't. The problem is that all of your competitors were doing it, and so you look bad by comparison. In fact, you may look so bad relative to your competitors that you may have gotten fired. And for the next several years after you got fired, housing prices continued to rise, and so during all that time, you were looking like a fool. Yeah, sure in 2007-2008, you were finally proved right. But that didn't help you during the interim period. In fact, during that time, you were not only mocked, but you may have been run out of the industry entirely. </p>
<p>Keynes once said that "Markets can stay irrational longer than you can stay solvent." In other words, just because people think they may be in a bubble doesn't mean that they can really do anything about it. Those Cassandras who bet against the housing bubble in the early 2000's completely lost their shirts, pants, underwear, and every other stitch of clothing they had. Sure, at the end, they were finally proved right, but that doesn't help them, as they wound up in the poorhouse regardless. </p>
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Let me take this back to my original post - I agree with the authors article. Many MBA students end up in positions of high responsibility, and they should respect that they effectively hold the livelihoods of many individuals in their care. It is a shame that many of the people who are attracted to an MBA, are so because of the money. In my opinion, and in the opinion of the author - this leaves many unknowing individuals at the mercy of greedy individuals. If money is your primary motivator, than I personally feel that I would rather NOT have you handling my affairs - yet many times I am not given many other options.
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<p>The problem that I have with Broughton is that he doesn't actually offer any viable solutions. Sure, we can all agree that present system is deeply flawed. But what's the alternative? State-run businesses don't exactly have a glittering record for fostering economic growth and innovation.</p>
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Again, I argue that business exists to provide for a need.
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<p>Untrue. Businesses around the globe have dedicated departments running at full speed dreaming up unnecessary products / services to push on an unsuspecting consumer market hoping to "generate" demand.</p>
<p>For instance, was there a burning need for iPhone "apps" before the iPhone even existed, or was that "need" / generated by a black turtleneck sporting genius in Cupertino, CA?</p>
<p>Want some more? Just turn on your cable at 3 in the morning and marvel at the myriad of useless products being peddled via infomercials. No one needs a toaster specifically to toast hot dog buns. Unless, of course, you have enough money to eat that hot dog with a million dollar potato chip.</p>