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What Role for Economicsin Business andManagement Education?Nigel M. Healey aa University of Leicester Management CentrePublished online: 28 Jul 2006.

To cite this article: Nigel M. Healey (1993) What Role for Economicsin Business and Management Education?, Journal of Further and HigherEducation, 17:3, 34-39, DOI: 10.1080/0309877930170304

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What Role for Economics in Businessand Management Education?

Nigel M. HealeyUniversity of Leicester Management Centre

Since the foundation of the world's first 'modern' business school (theWharton School at the University of Pennsylvania in 1881), economics hasenjoyed a central role in business and management education. In Britain, thedevelopment of formal education in this area lags the United States by manydecades, but its recent growth has been spectacular. There are now approx-imately 100 higher education institutions offering MBA degrees,1 while atundergraduate level, business studies has expanded hugely relative to single-honours economics. Economic courses feature as a key element in both MBAand business studies programmes. There are now over thirty textbooks in printwith the title, 'Managerial Economies', as microeconomists seek to repackagetraditional microeconomics for business students. Books entitled 'Macro-economics for Managers' or 'The Business Environment' similarly purportto offer potential and practising managers the 'essence of macroeconomics'.

Despite the continuing centrality of economics in business and managementcourses, it is a salutary fact that business students dislike economics.2 Anec-dotal and questionnaire evidence from MBA students at a range of represen-tative institutions, for example, suggests that they typically find economicscourses abstract, excessively theoretical and mathematical, boring and, mostdamning of all, irrelevant to their needs as potential or practising managers.Such results are confirmed by revealed preferences. At institutions whereeconomics courses are compulsory, MBA students tend to underperformrelative to their performance in other courses;3 where economics courses areoptional, student enrolments are below average as customers vote with theirfeet, choosing alternative courses like marketing and finance.

Under pressure to compete for students, many business schools are respond-ing by seeking to downgrade both the level and amount of economics. AsProfessor John Kay of the London Business School recently noted:

'while business education as a whole has been expanding, the role offormal economics within it has generally been contracting'.4

Nevertheless, given the evident unpopularity of economics, it is perhapssurprising that it continues to play any role in mainstream business andmanagement education at all. After all, students are taught in their marketing

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NIGEL M. HEALEY 35

courses that companies achieve competitive advantage by meeting customerneeds. Yet when business schools ask their customers, who are intelligent,highly motivated and (in the'case of MBA students) paying considerable sumsof money, they are told unequivocally that economics fails to meet their needs.It is hard to avoid the conclusion that, despite what they teach their studentsabout being flexible and responsive to customer needs, business schools inBritain continue in the traditional 'product-push' mould borne of universities'once unchallenged producer power. 'We know what is good for our studentsand that is what we shall provide.'

It is time to open a genuine academic debate on the role of economics inbusiness and management education. Why should business students 'learn'economics? Economists tend to answer that an understanding of economicsis valuable to such students as an 'enabling' skill. They argue, with considerablejustification, that economics underpins most of the recognised functionalbusiness disciplines. Marketing, for example, is primarily the study of con-sumer behaviour and market competition. Management accounting is a muta-tion of microeconomics. Corporate planning is largely the application ofeconomic principles to companies' decision-making. On this basis, the pro-fession argues that a grasp of economic principles is essential for a masteryof these derivative functional subjects.

This argument is fallacious for two reasons. First, these other disciplineshave grown out of economics because they meet the needs of business, whereaseconomics does not. It is equally true that human resource management hasevolved out of social psychology, but that is not a case for teaching socialpsychology to business students. Secondly, economics courses are often regar-ded as difficult and left until later in business degrees or offered as options,negating any putative role as 'foundations' for an overall programme of study.

A more plausible explanation for the widespread teaching of economics inbusiness and management courses is a combination of historical accident and'rent-seeking' behaviour by economists. Management education (and MBAcourses in particular) are a US concept and its import to Britain is relativelyrecent. And as in the United States during the 1940s and '50s, British businessand management schools originated in, and ultimately emerged from, the tradi-tional academic department in most institutions that historically had acquiredmost experience of studying business, namely the economics department. In-deed, that this should be the pattern of evolution for business schools wasthe concluding recommendation of the 1944 McNair Report.5 Unsurprisingly,many business and management programmes began life with a strong em-phasis on economics.

While this stress on economics is being steadily diluted in the face of studenthostility, its rate of displacement is inhibited by rent-seeking behaviour onthe part of economists. In many institutions, the number of business students

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36 WHAT ROLE FOR ECONOMICS?

has dramatically overtaken the number studying pure economics. Economicslecturers typically find themselves spending an increasing proportion of theirteaching hours servicing business-related programmes. This servicing hasgrown to the extent that any reduction in the input of economics to businessand management education would seriously jeopardise the jobs of economicsstaff, inducing economists to vigorously defend the central role of their subject.

Regrettably, there are few signs that the gulf between what business studentsdemand from an economics course — namely, relevance to their needs asmanagers — and what economists are able to deliver is likely to close.Economics as a discipline is becoming relentlessly more mathematical, withthe majority of academic articles now unintelligible to all but the most highlytrained technicians. This trend has, in turn, spawned a growing number ofeconomists who are unpractised in verbal exposition (written or spoken) andwho operate in an abstract, theoretical frame of reference divorced from therealities of the business world. Such economists have almost no common pointsof reference with the business students (and often the business staff) with whomthey must increasingly work, regarding the latter in much the same way thatclassics dons at Oxbridge historically regarded their faculty of engineering.

However, the present parlous state of most economics courses on mostbusiness and management programmes in British higher education does notnecessarily mean that economics should not continue to play a central rolein business and managment education. Certainly, in its present form,economics has little to offer. But, suitably reconstructed to meet the needsof business students, economics could have a promising future within Britain'sgrowing business and management schools.

In reconstructing economics for business users, it is important to escapethe traditional mind-set of 'product-push' and start with customer needs. Whatdo business students need? Or, to reformulate the question, what are businessand management programmes at higher education level supposed to achieve?There are, of course, a number of possible answers to this question, but oneof the most compelling is that such degrees are intended to create 'strategicmanagers'; that is, managers with the capacity to think and act strategically.Business and management courses are explicitly not designed to produce ac-countants, marketers, personnel managers or (even) economists, but generalmanagers who can use the basic tools and techniques of these disciplines toimprove the quality of their strategic decision-making.

The appropriate test of whether a course is relevant to a business degreeis whether it 'adds value'; that is, whether it improves the ability of students ito think and act strategically. It is clear that traditional economics coursesfail this test. An overview of introductory micro- or macroeconomics — whichis the stock in trade of most 'Managerial Economics' or 'Business Environ-ment' courses — is completely unhelpful for improving the quality of strategic

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NIGEL M. HEALEY 37

decision-making. The fundamental problem is both what economics is taughtand the way it is taught.

Other business staff have overcome this problem. Accountants, for exam-ple, do not teach business students the minutiae of double-entry book-keeping.Rather those that follow 'best practice' go straight to the finished productof the accountants' work — e.g., a set of company annual accounts — andteach their students how to analyse such published accounts and to under-stand the limitations of the data. Similarly, economists should not attemptto teach business students the details of national income accounting or themechanics of differentiating a utility function to derive a demand functionthat is homogenous of degree one in income and prices and exhausts income.Rather, students should be enabled to use basic economic tools and techniquesto inform and improve their strategic decision-making.

Any positive move away from traditional, introductory economics coursestowards a new approach of 'strategic economic analysis' should have two keydimensions. First, the material taught should focus on the needs of its con-sumers, namely potential and practising managers. Figure 1 shows the threelevels of strategic analysis at which managers have to plan. 'The Organisa-tion' focuses on the company itself, its strengths and weaknesses in terms ofits functional areas — finance, marketing, operations management, humanresource management, etc. — and the way in which they interact.

'The Operating Environment' focuses on the market and industry in wichthe company competes. It is at this level that microeconomics can make amajor contribution to better strategic thinking. Compared to Porter's famous,but essentially superficial, 'five forces' analysis (i.e. of competitors, buyers,suppliers, technology, new products), industrial economics — in particular,the analysis of oligopolistic behaviour — has a wealth of insights to offerstudents about the strategic interdependence between firms. Microeconomics(perhaps retitled 'strategic market and industry analysis') should concentrateon the means by which firms compete and the nature of their interactions(e.g., limit pricing, barriers to entry, etc.). Such courses could usefully dispensewith treatment of perfect competition and (probably) monopoly, which areextreme theoretical constructs distinguished by the fact that, under theseunrealistic conditions, firms do not actually compete at all — whether on price,quality, product differentiation or marketing. Such models are hardly usefulto managers seeking a means to achieving greater competitive advantage.

'The General Business Environment' encompasses those external forceswhich act on the industry and the market. These include political, legal anddemographic trends, but for most companies these forces are dominated bydevelopments in the domestic and international macroeconomy. Again, openeconomy macroeconomics can provide valuable insights into the analysis ofthe external opportunities and threats facing a company — e.g., exchange

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38 WHAT ROLE FOR ECONOMICS?

FIG 1

STRATEGIC ECONOMIC ANALYSIS

rate and interest rate movements, the likely reaction of national governmentsto changes in inflation and unemployment, etc. Modern macroeconomics is,however, highly technical and increasingly model-based. There is little pur-pose in attempting to teach ab initio students basic theory, since it is toosimplified to convey anything useful about the workings of real economies.Rather, the emphasis should be upon understanding the key macroeconomicindicators and learning how to interpret the model-based forecasts of majorforecasting companies like the National Institute, the London Business Schooland Goldman Sachs.

The second fundamental dimension of strategic economic analysis is thatit should be, as far as is possible, case-study based, with the case studies clearlyfocused on individual (preferably real) firms. Case studies which involve

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NIGEL M. HEALEY 39

students interpreting macroeconomic forecasts in an abstract way, for exam-ple, are wholly inadequate. It is critical that students acquire the capacity tointerpret and analyse developments in either the operating or general businessenvironment and translate them into opportunities and threats for a givencompany. They need to be able to appreciate, for example, that a rise in in-terest rates differentially affects companies, depending upon their financialstructure and the consumer or industrial markets in which they sell their out-put; or that a depreciation in the exchange rate affects both import and ex-port prices and that the impact on a company depends upon the nature ofits production process (i.e., the proportion of imported inputs used) and theinternational openness of the markets in which it competes.

Only by reconstructing economics into strategic economic analysis, so thateconomics becomes an integral part of situational analysis and corporate plan-ning, will the steady decline of economics in business degrees be halted. Theobstacles to be overcome are, admittedly, formidable. Amongst staff in otherfunctional business areas, the stock of economists is low. Economists as aprofession in Britain remain generally unsympathetic to the concept of businessand management education, which they compare unfavourably with thetheoretical elegance and rigour of their own subject. There are few, if any,'off-the-peg' case studies (unlike in, say, marketing or finance) whicheconomists can use to illustrate the use of basic micro- and macroeconomictechniques in strategic analysis at the level of individual firms. But unless theprofession makes a concerted effort to address the needs of the rapidly grow-ing numbers of business students, the role of economics in business andmanagement education will continue to diminish — to the long term detri-ment of both economics and tomorrow's managerial class.

Notes and References1. Syrett, M. (1992), 'Fully briefed to operate in master class', The Times, February 5, p.22.2. This impression is based on the author's own experience as an MBA student, an

economics lecturer on business studies and MBA programmes at various institutionsin Britain and the United States and an external examiner on such programmes at otherinstitutions. The evidence includes anecdotal evidence from business students andeconomists working in business and management schools and analysis of studentevaluations.

3. Relative underperformance is sometimes disguised by 'norm-referencing' marks (whatUS academics term 'grading on a curve'), which effectively adjusts 'criteria-referenced'marks so that the average marks are broadly the same across subjects.

4. Kay, J.A. (1991), 'Business and economies', The Economic Journal, Vol. 101, No.404, January, pp.57-63.

5. Report by the Joint Committee of the Universities and the Accountants ProfessionalBodies, 1994.

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