The Golden Passport: Harvard Business School, the Limits of Capitalism, and the Moral Failure of the MBA Elite

Introduction

Casey Gerald stood at the podium during Harvard Business School’s 2014 Class Day and gave what one commentator later referred to as the most stirring speech ever by an MBA.¹ Gerald, the student speaker for his graduating class, recalled how he’d come to the world’s best-known business school in Boston, Massachusetts, with the simple goal of getting his MBA and using it the way the New York Times described it in 1978: as a golden passport to the good life. But here he was, on the cusp of graduation, and he’d concluded that the good life could wait. Unlike so many of his peers, Gerald wasn’t taking a job at a private equity firm for $175,000 a year. Instead, he and three classmates were launching a nonprofit startup called MBAs Across America, with the aim of putting energetic and idealistic MBAs such as themselves together with mission-driven businesses across the United States.

His final words were a rousing ratification of HBS’s claim to educate leaders who make a difference in the world. An impassioned Gerald beseeched his classmates, In your hands, as well as mine, lies the hope for a new generation of business leaders in which each of us becomes a pioneer, in which each of us decides to travel unknown roads in search of unsolved challenges, in which each of us commits our time and talent not just to the treasures of today but to the frontier of tomorrow, where new dreams and new hopes and new possibilities are waiting for us to pull them from the darkness. Yes, we have more work to do. . . . Hard work, frightening work, uncertain work, unending work, work that may test us, work that may defeat us . . . but work on which the whole world depends. The time is short and the odds are long, but I believe that we are ready nonetheless. With the love of those who raised us, with the lessons of those who taught us, with the strength of those who stand beside us as we face what lies ahead, I say, let us begin.

The eighteen-minute speech has been viewed more than 200,000 times—certifiably viral, at least as far as business school Class Day videos are concerned. It was also timely, at least as far as HBS was concerned. Long regarded with reverence and skepticism in equal measure, in 2014 the School was in need of a love poem like the one Gerald had just written to it. In the wake of the 2008 financial crisis, it had endured the latest of its periodic raking over the coals in the media, which had specifically accused it of grooming the kinds of behaviors that had brought the global economy to the brink. And suddenly here was Gerald, who had entered HBS with an eye on his own wants but had emerged with an eye on others’ needs. He is a handsome man reeking of leadership qualities, and his face quickly found its way onto both the cover of Fast Company magazine and HBS fundraising posters. He became a poster boy—literally—for the idea that capitalism really can be a force for good.

Products like Casey Gerald (it is a business school, after all) allow Harvard Business School to claim with a straight face that it is developing leaders who will make a difference in the world. It can look its naysayers in the eye and say that it isn’t just about the money. It can trumpet its dedication to diversity, too. Gerald’s ambitions were made even more remarkable—and marketable by HBS—given his personal narrative: an African-American who was raised by his grandmother in the down-at-its-heels Dallas neighborhood of Oak Cliff. (Sure, he had arrived at HBS via Yale, but the point still stands—he isn’t the typical Harvard MBA, at least not the type that exists in the public imagination.) And it can assert that it is delivering on a self-imposed mandate that it has doggedly reiterated over the years, one that was expressed by its dean in the early 1930s as follows: In training a student for [a career] in business, this School has aimed to stress in all its work the responsibility of business to the community as a whole.²

Less publicly, it can also take pride in the fact that Casey Gerald’s speech was convincing. Because that’s another thing that Harvard Business School sells: a form of rhetoric. Watch the speech and you’ll find it hard not to root for Gerald. You might even be ready to believe that the place does impart more than just the secret password to the club of the chosen—things like values and a social conscience. It’s not really up for debate whether HBS grads are highly likely to end up both comically wealthy and immensely powerful. But the example of Casey Gerald can be put forth as living proof that they really do intend to use that power for the good of us all.

And yet.

And yet, talk to Casey Gerald a few years later, and he’ll tell you that if that’s the message you took away from his speech, then you are mistaken. Yes, he says, there are many people at HBS, both students and faculty, who truly put the interests of others ahead of—or at least on par with—their own, but they’re still a distinct minority at the school.

If all you do at HBS for two years is spend two hours on every case and try to answer the discussion questions—taking an off-the-rack approach—it’s not going to change your life, he tells me over a coffee in Brooklyn in early 2015. For a whole semester, for example, the school is basically bought and paid for by the consulting firms. You can’t go to lunch without seeing someone from Bain, Boston Consulting Group, or McKinsey. It’s not a bad thing to work in consulting or finance, but it’s a terrible thing to tell eighteen hundred people who are purportedly the brightest minds of their generation that they only have two careers to choose from. In fact, it’s unconscionably unimaginative.

I ask him whether he’s concerned about accusations of heresy, whether he’s at risk of being run out of the vaunted HBS network—the more than 76,000 living alumni in 167 countries around the world, quite likely the most powerful and active alumni organization that has ever existed. We’re meeting in Brooklyn, after all, because MBAs Across America is working out of the nearby offices of Tough Mudder, which was founded by fellow HBS alumni. Not in the slightest. It’s like what James Baldwin said about America, says Gerald. "He said, ‘I love America more than any other country in this world, and, exactly for this reason, I insist on the right to criticize her perpetually.’ I feel the very same way about Harvard Business School.

What I think HBS does, and does very well, says Gerald, is train people to, in situations of ambiguity, to take imperfect information, uncertain outcomes, and tight deadlines and figure out what to do in the most effective, efficient, and powerful way. But the tragedy of the Business School is that you can use that ability to do two things at once, to build great companies and destroy the planet in the process. Or its people. Robert S. McNamara was an HBS alum. He helped turn around Ford Motor Company, and then went on to wreak destruction in Vietnam. We have to have a conversation about which one we’re doing—and why we should be doing one and not the other. There’s nothing ambiguous about it.

Debates like this, Gerald points out, don’t happen that often at Harvard Business School, even if they do raise, and ought to raise, fundamental questions about what institutions like HBS are actually good for and good at. An example: Should the role of a professional school extend to taking responsibility for its graduates’ spiritual life? On the one hand, their incoming students are adults when they arrive. On the other, if they came in fully made, they wouldn’t need to pay $250,000 for a two-year education. They are, by nature, risk-averse. And they need guidance. In a way, it’s therapy, says Gerald. You don’t bring people into therapy and then tell them to figure it out on their own.

If there’s a case to be made that HBS is failing to adequately address the spiritual component of an education in business, there’s an even more damning one on top of that, which is that the school has failed to sustain engagement with the intellectual challenge that’s been staring it in the face from the very start, which is to foster a meaningful ongoing discussion of the nature of capitalist society and the role of the firm within it. Consider the school’s approach to the concept of social enterprise: It misses the point entirely by treating it as a distinct field of study. That’s absurd. Every business is a social enterprise—there has never been a socially neutral business in the history of the world. And every single business makes a difference—the only question is whether they’re making a positive or a negative one.

There’s no question that the school got off to a promising start, sustained by the vision of a few singular individuals. People like Wallace Donham, the school’s second dean, realized that the intellectual purpose of a business school should be to do what economists had not, which was to develop a viable theory of the firm. Most economists don’t bother with what happens inside actual companies; they simply assume that all managers are rational beings. But we’re not. And that was the opportunity for the likes of HBS, to create an empirically, philosophically, and morally defensible understanding of how we act—and how we should act—when we engage in business. And for a time, they seemed to have landed on one, which was a judgment-based theory of general management developed through the school’s lauded case method. More than any other business school, HBS regarded the judgment of managers as central to the running of a business.

And then they pretty much walked away from it all. Around the time of its seventy-fifth anniversary, in 1984, HBS abdicated any meaningful pursuit of that task, although it had by that point already ceded crucial intellectual ground first to those who sought to turn management into a computational exercise and later to neoliberal economists, who view managers as nothing more than high-priced whores. The moment of peak paradox for HBS came when it hired the economist Michael Jensen in 1985. His ideologically driven hijacking of the study of finance served as a cynical repudiation of everything that had come before him at the school.

How did it happen? The way it always does: The money got too good. The Harvard Business School became (and remains) so intoxicated with its own importance that it blithely assumed away one of the most important questions it could ask, which was whether the capitalist system it was uniquely positioned to help improve was designed properly for the long term. Today, in 2016, with economic inequality at a hundred-year high and meaningful progress on climate change and other social and environmental issues embarrassingly paltry, the answer to that question is obvious. It is not. That a single French economist, Thomas Piketty, has done more in the last decade to focus the world on the first of those issues—inequality—than the entire faculty of the wealthiest business school on the planet is as concise an indictment of the institution as one could ask for.

Equally embarrassing is the scant contribution HBS has made toward resolving a problem that they helped create, and which lies at the heart of America’s inability to effectively address those social and environmental challenges—an unnecessarily antagonistic relationship between business and government that eclipses that of the majority of industrialized countries on the planet. It’s not as if they don’t understand the problem, either. At the very least, their more enlightened alumni do. Consider the case of Carter Bales (’65).

Bales worked at McKinsey & Company for thirty-three years, including two years as the firm’s recruiting officer at HBS. During that time he also served as acting assistant budget director for the City of New York, where he led the development of New York City’s air pollution, solid waste management, and water supply programs. He has served on the boards of a number of environmental organizations, including the North Shore Land Alliance, Grand Canyon Trust, Adirondack Nature Conservancy, Center for Market Innovation at the Natural Resources Defense Council, and advisory council to Resources for the Future. He was vice chairman of the board of governors of the Nature Conservancy and chairman of the board of trustees of the Nature Conservancy of New York, too. So the man has environmental bona fides.

In 2009, Bales cofounded NewWorld Capital Group, an investment firm focused on environmental opportunities, with special focus on clean energy, energy efficiency, water resources and reclamation, waste-to-value, and environmental services. He is among those who reject shareholder capitalism in favor of stakeholder capitalism, with the environment itself one of those stakeholders, as he sees no trade-off in seeking maximum economic returns from investing while also enjoying what he calls free rider societal co-benefits. This is not an academic issue: A recent report sponsored by the United Nations Environment Programme found that if externalized costs are taken into account, none of the world’s largest industries are actually profitable.³ Their shareholders, in other words, are living off the future.

Bales credits HBS with providing him with a durable network of influential contacts, as well as having a profound influence on the way that he thinks. Specifically, he credits the case method for its power in teaching him how to frame problems, how to find side ways and crab walks into problems. Most academics seek insights, but leaders seek outcomes, he says. The case method helps you to understand the relative importance of problems, the interconnectedness of problems, how to characterize a desired outcome, and how to marshal resources to get things done.

What he can’t credit HBS with is giving him any sense of the limits of capitalism, and how a country like the United States can operate within those limits so as to prevent it from driving itself into a profitable gutter. The problem at the heart of the HBS curriculum, he believes, is its historical failure to develop a sympathetic view of the right and proper role of government in the economy. To separate business with a bright line from the policy structure, the regulatory structure, the incentive structure that business lives within, which is frankly dictated by politics, policy, and government, is very incomplete, he says. The Kennedy School has a lot of people who go work for NGOs. But I bet if you look at the top thousand or so federal government employees, none of them will have gone to HBS.

It is that lack of a dialogue, he thinks, that has gotten the nation into the environmental fix that it is in. Businesspeople respond to incentives, he says. They don’t break new paths. Why have we gotten nowhere on climate change in this country? Because corporations have no incentive to change. To speak to their heart is bullshit. Quarterly capitalism is the ruling reality. If you’re going to change business, you are not going to do it by jawboning. The only thing that works is incentives. And the only people that can really engineer incentives are government. And look where we are with that: Currently, state, local, and the federal governments provide billions of dollars of incentives to the hydrocarbon industries that will, in the end, destroy the world. Incentives for renewables? Almost nothing. Here’s a case of government being successfully operated by business. The claim that we live in a free market is a crock. What we have is free subsidies and implicit unstated monopolies and collaborative action in oligopolistic situations. It’s heading us toward a cliff with respect to hydrocarbon energy. In an essay he wrote describing the mandate of NewWorld, Impact Investing: Trading Up, Not Trading Off, Bales concludes: Without changing the behavior of Corporate America, there is little prospect of curing certain environmental problems and many other societal ills.

Can HBS lead the way in that regard? It’s not going to happen until the faculty helps eliminate the ideological divide that the School helped create between business and government. And Bales is not entirely optimistic on that front. Unfortunately, like any aging institution that is losing its mitosis, HBS is conservative by nature, and generally risk-averse. The whole idea of trying to get ahead of change doesn’t really fit their situation. And you know the old conservative maxim: If it isn’t necessary to change, it is necessary not to change. But they’re going to have to at some point.

This is urgent stuff—the questions that young alums like Casey Gerald, older ones like Carter Bales, and an increasingly vocal public have posed—especially given that business does indeed reign supreme in modern society. Government does not function as an effective check on corporate interests anymore—not in the United States, or across the globe. Given that a trans-national capitalist class⁴ has grabbed the reins of power in most developed economies in the world, the only remaining check, one might argue, is our collective morality. Which brings us back to HBS. Does HBS have the capacity to lead that change? Perhaps, but it’s also hard to truly improve a system from the inside. While there are many ways to describe HBS, no one has ever called its people outsiders. And while they produce a lot of corporate leaders, they are usually not of the revolutionary sort. They’re conservative by nature, Company Men at heart, and that constrains their ability to truly lead in times of change.

Certain things about modern corporate society are unseemly and suboptimal, says Gerald, but HBS could play a role in determining the remedy. We need them to, as the only ones who can really untangle these knots are the ones in power. He then proposes another way to look at it: HBS professor Clayton Christensen talks about resources, priorities, and processes. The resources are there. But what about the processes people go through from day one at HBS until they graduate? How are they designed? Intention can have huge effects. As for priorities, we need only look at the people they celebrate and recognize. So what are HBS’s priorities?

As the nation’s most prominent—and largest—business school for the last century, HBS has shaped—and continues to shape—the direction not just of its graduates’ lives, but also those of the organizations they work for and the economy itself. Harvard University occupies a singular place in the public’s imagination, but Harvard Business School—the child reluctantly adopted by the parent early in the last century—eclipsed its parent in terms of its influence on society long ago. Given its position in the business firmament, anything that happens at HBS (changes in curriculum, in student career choices, in the methods of socialization of its students) has butterfly effects not just in the U.S. economy but globally. The direction they’re all pointed in—as well as the priorities they come to possess—has ramifications for every one of us.

Before addressing those questions, however, it seems appropriate to dispense with an easy one, the cost-versus-value of a Harvard MBA. While most people focus on the $60,000-plus tuition, the full cost of attending HBS, that is to say, the opportunity cost, can be $500,000 or more. Is it worth it? Of course it is. The lifetime of enhanced opportunity—both pecuniary and otherwise—that a Harvard MBA provides makes the calculation a no-brainer. A Harvard degree guarantees respect; an HBS degree only starts with respect (at least from certain quarters). Its true value is near-guaranteed entrance into Western capitalism’s most powerful realm—the corner offices and boardrooms of the corporate elite. They say there are no sure things in life, but this actually is one: A Harvard MBA really is a golden passport to the land of wealth and influence.

HBS has proven an enormous success in many respects—it played a major role in distilling, defining, and teaching the fundamentals of business administration; it provides its graduates with unrivaled opportunity; and it is a money machine unto itself. At the same time, it has likewise proven an enormous failure at delivering on the stated goals of its founders. One of them was unattainable from the very start—the misguided pursuit of a science of business—but they sure wasted a lot of time and effort trying. The other might have been attainable, but they failed at doing so: the multiplication of men who will handle their current business problems in socially constructive ways. In other words, HBS has failed to meet the goals it set for itself. Its graduates tend to be very good at whatever they do, but that is rarely the doing of good, Casey Gerald and a handful of other outliers notwithstanding. The fact that the school worked with Gerald’s MBAs Across America to design a course that put MBAs to work in small communities—and which was taught for the first time in September 2015—is a start, but it’s no more than that.

Of course, HBS isn’t the only business school that promotes certain ideas or suffers from certain hypocrisies, but as the largest business school in the United States, and long one of its most influential, it must bear the burden of responsibility that comes along with success. It is worth examining closely because it is so outstandingly, breathtakingly good and bad at what it does. HBS both instigates and reflects the paradoxes of modern-day capitalism. Its own history is characterized by spectacular ambition, awe-inspiring single-mindedness, enormous successes, and profound failures. The Golden Passport charts the rise of one of America’s most influential institutions over the course of a century—highlighting both its positive and negative contributions to society—and then postulates on its future.

Why is it important to do so now? Because modern corporate society is broken. Shareholder capitalism wasn’t the answer; it led to the exploitation of the many for the obscene enrichment of the few. The election of businessman Donald Trump was not an endorsement of business-as-usual, but its opposite: the howl of an electorate deprived of economic opportunity. Business has lost sight of its true function in society, which is to provide a mechanism by which we can work together and with our environment to achieve our common goals. It is not, and never has been, to simply make a profit.

Another reason is that having first presided over the decimation of America’s manufacturing supremacy and then the distortion of the economy by Wall Street, the MBAs of the world are now invading Silicon Valley. And they are bringing their ruthless culture of winning with them. Consider four of the technology world’s standout companies—Amazon, Apple, Facebook, and Google. Which do you think is most overrun with MBAs? Amazon, of course. A wildly successful company, to be sure, but it’s also not much more than the Wal-Mart of the Internet, and it’s the one that treats its employees most poorly. Amazon, in other words, is the one of those four companies that feels the most like yesterday and the least like tomorrow, a company driven more by cost control than quality creation. But it is also a sign of things to come: The horde of MBAs has turned its conformist gaze toward Silicon Valley, the last redoubt of innovation in America. Whether they crush it in their stampede for money and their desire for success only for the sake of it, only time will tell.

That’s not to say that HBS and the rest of the business school universe aren’t doing anything right. Indeed, they are doing many things right. But they have drawn—and have always drawn—the wrong conclusions from that success. And that is what makes them dangerous.

1

The Experimenters: Charles Eliot and Abbott Lawrence Lowell

Harvard Business School deserves recognition for a number of firsts. It was the first business school to require an undergraduate college degree for admission. It was the first to focus on the role of the general administrator rather than on narrow technical specialties. It was the first to utilize the case method as a primary means of instruction. The list goes on. It was the first business school to engage in the systematic collection and analysis of industry data. It was the first to offer midcareer training—now known as Executive Education—with a level of resources and commitment commensurate with undergraduate and graduate efforts. And it was the first business school to build a library of any value.

Charles Eliot and Abbott Lawrence Lowell, successive presidents of the university (1869–1909, 1909–1933), receive credit for the first of those firsts—the decision to establish HBS as a graduate school, not an undergraduate one. When it opened its doors in 1908, it wasn’t the first collegiate business school, not by a long shot—the Wharton School of Finance and Economy at the University of Pennsylvania had been around since 1881, the result of a $100,000 gift from industrialist Joseph Wharton. It wasn’t even the first to conceive of business education as a graduate endeavor—Dartmouth’s Tuck School, founded in 1900, required three years of undergrad, followed by two years of graduate studies.

The idea of a business school wasn’t even a new one at Harvard. Indeed, since being named president in 1869, Eliot had long ignored suggestions to create a professional school of business comparable to Harvard’s medical school (founded in 1782) and its law school (founded in 1817). Eliot wasn’t opposed to educational innovation, by any means. Not only did he reestablish the elective principle at Harvard, but he also put science firmly in the curriculum.¹ But his reasoning when it came to business was simple: Harvard saw its mission as teaching students how to live worthy lives—and in late-nineteenth-century America, a life in business was no such thing. One literature professor expressed the prevailing sentiment: What? Sully the robes of Chaucer and Shakespeare with seekers of gold?²

It was a view in keeping with its time: For America’s late-century social elite, any money made after abolition was money of a lesser sort—new money. In marked contrast with America’s current celebration of overnight fortunes, you were not welcome in the club if you’d actually made your own money. You had to inherit it. The mark of the upper class, as Alexis de Tocqueville observed, was to possess, without exertion, an opulence they [had] not earned.³ Another way of looking at it: It took about three generations for the blood to dry on a fortune’s bills and for people to forget how it had been made.

But the idea that business was not a worthy pursuit no longer held sway among America’s youth. By the end of the 1800s, more than half of all Harvard College graduates were entering careers in business. Indeed, a nationwide clamoring for collegiate business degrees had begun. So, too, had inquiries into just what a business education should be. In 1893, the American Bankers Association published the transcript of an address by Edmund James—the first director of the Wharton School—to an ABA meeting in Saratoga, New York, in 1890, Education of Business Men–I and II. That was followed by another report by the ABA’s Committee on Schools of Finance and Economy in 1891, and another on Europe’s own experiments in such in 1892.

Still, by 1900, there were just two elite universities offering business degrees. But if the nation’s prominent academies were tentative in their early efforts toward the subject, its scrappier entrepreneurs had been on the case for decades. By 1893, more than five hundred business colleges already existed across the United States.⁴ A number of America’s early entrepreneurial success stories attended such colleges, including Henry Ford and John D. Rockefeller. Across the Atlantic, schools of commerce and administration had been around for more than a hundred years, with schools in Portugal, Germany, and France all established in the mid-1700s.⁵

Said James in 1890: One of the most striking facts of modern civilization is the rapidly growing importance of the business, as distinct from the professional classes. This is plain enough even in Europe where it is still kept back by the predominance of the court, the army and the church and where the bar and physic still maintain their high position. It is, however, beyond all doubt true in this country where the great merchant prince, the railroad president, the great manufacturer and banker have succeeded to the place of power once held by the great orator, statesman, lawyer, or clergyman. The professional class is losing ground, the business world gaining it. Whether for weal or woe, the control of government, of society, of education, of the press, yes, even of the church is slipping more and more rapidly into the hands of the business classes, and it is this class which to an ever increasing extent will dominate our political and social life.⁶

James’s point was news to no one. Indeed, as Harvard’s administrators grappled with how to credibly position their new school as the first of its kind, American business was well into a decades-long period of growth and increased cultural prominence. The nation’s rail network grew from 53,000 miles in 1865 to 193,000 miles in 1900. Annual steel production was going through the roof, climbing from 77,000 tons in 1870 to 11.2 million at the turn of the century.⁷ There were 140,000 factories in the country in 1865; by 1900, there were 512,000. And this was a new kind of factory—whereas an old-school New England mill employed just a few hundred people, the Ford Motor Company’s first plant had 15,000 on the payroll.

The population was also transforming to meet the needs of the new economy. Between 1870 and 1900, the U.S. population rose from 40 million to 76 million, while the population of its cities grew from 10 million to 30 million. In the second half of the nineteenth century, San Francisco doubled in size, Milwaukee tripled, and Denver grew twentyfold.⁸ Boston, home to Harvard and already one of America’s most important cities, saw its population surge as well, more than doubling from 250,000 in 1870 to 560,000 by 1900.

The reach of business grew right along with the spread of the people. The mass market of the United States was in the process of relegating the concept of the local economy to the ash heap of history, and almost overnight a new national economy dominated by gigantic megacorporations was doing just as James had observed: threatening the traditional authority structures of the professions (law, medicine, clergy, army) while raising a whole host of unprecedented social problems and organizational challenges. In 1888, President Rutherford B. Hayes wrote in his diary of the challenges ahead. This is a government of the people, by the people, and for the people no longer. It is a government of corporations, by corporations, and for corporations.⁹ That included Harvard, which, having been chartered in 1636, was America’s oldest corporation. The next year, in 1889, the Wall Street Journal was founded.

In the span of a single generation, the United States had been transformed from an agrarian to an industrial society. In 1870, the country accounted for 23 percent of the world’s industrial production. By 1913, it was at 36 percent, more than Great Britain. As historian Alfred Chandler later wrote, the sudden appearance of massive companies of unprecedented complexity called for the creation of a new type of business enterprise . . . operated by teams of salaried managers. In his opus Scale and Scope: The Dynamics of Industrial Capitalism, Chandler documents the three-part evolution of large firms into multinational giants that was taking place as Harvard argued with itself over whether true change was truly afoot. Part one: an investment in production facilities large enough to exploit a new technology’s potential economies of scale or scope. Part two: an investment in a national and international marketing and distribution network so that sales could keep pace with production. Part three: an investment in management.

That’s where HBS came in. Companies suddenly needed managers not just to run the production and distribution mechanisms, but also to monitor and coordinate the two, planning and allocating resources for future production. The larger the firm, the more operating units, and the more managerial oversight required. The era of the professional manager, a character who was neither owner nor labor, but who nevertheless was suddenly sitting on a power base all his own, had begun.¹⁰ (Or at least the era of the respectable manager. Historian James Hoopes points out that the 1850 U.S. census reported 18,859 Americans earning their living as slave overseers, the largest group of salaried managers in the world at the time.)

The convergence of two powerful forces forced Eliot’s hand when it came to the establishment of a business school. The first was one in which Eliot himself played a pivotal role: the evolution of the American university. American culture had always been a little more Roman than Greek, strong in the arts of engineering and less adequate in the world of creation,¹¹ and it was only natural that American universities took as their role model the German university, with its emphasis on science and the scientific approach. But Eliot and others had taken the pulse of American can-do practicality, and added separate professional schools with an emphasis on practical application into the mix. (Eliot had helped conceive of Johns Hopkins University in 1876.)

The second force was the maturing of American industry. The self-made man had been in the limelight in the late nineteenth century. But the increasing complexity and institutionalization of American business enterprises necessitated the education of neither captains of industry nor the functionaries that could be trained in vocational colleges, but of a new, broadly trained, managerial caste that understood the view from the very top, even if they weren’t actually the swashbuckling sorts who would get the thing going in the first place.¹² In short, a business career had become a bureaucratic career, and like all such careers it evinced an inevitable proclivity for titles and degrees.¹³

Some three decades into his presidency, then, Eliot had a problem on his hands. Like it or not, a university is in some sense selling a product, and the nation’s most prestigious one suddenly found itself without an offering in what was both the most popular subject and the most pressing social need of the day: surging demand for managers to oversee those corporations. Harvard has always liked to think itself above it all, but the forces of supply and demand were impossible to ignore. There was a second factor: the status-related needs of the country’s established elite. If the parents of America’s turn-of-the-century youth (in particular, the Boston Brahmins) were having trouble convincing their sons to enter the established professions because the lure of business was simply too strong, one obvious solution was to extend the reach of one of their most important social signifiers—the Harvard degree—into the realm toward which their sons were headed. If they couldn’t drag their children back into the circle, in other words, then they would expand the circle itself.¹⁴

Harvard naturally decided to deemphasize the above, and explained their eventual decision with arguments that ranged from the civic to the religious, the intellectual, and the academic. Indeed, Eliot’s first serious notion of how to respond to the changing times showcased his disdain for private enterprise; he contemplated, rather, the formation of a school of diplomacy and government modeled on the École Libre des Sciences Politiques in Paris. The appropriate ambition for a business-minded Harvard graduate, in other words, was to engage in business in the public sphere, not the private one. The idea was that HBS would be a force for good, consistent with academia’s joint historical aims of developing expertise and a commitment to positive social change. An early candidate for the name of the School: the Graduate School of Public Service and Commerce.¹⁵ Both President Theodore Roosevelt and Senator Henry Cabot Lodge signaled their support of the idea in writing.¹⁶

Eliot voiced this idea to Harvard professor of history Archibald Cary Coolidge in 1898, and the idea bounced around Harvard for nearly a decade before taking more definite shape in 1906—with an added wrinkle. That year, Harvard’s Division of History and Political Science formed a committee to investigate the feasibility of establishing a separate school of public and private business. Members of the faculty had voiced concern about a lack of demand for Eliot’s exclusive focus on diplomacy and public service, and decided to investigate the addition of courses on private business to help support the effort. They were right—demand for an education in private business did and continues to far outstrip demand for an education in the diplomatic arts.

A significant document in the prehistory of the School is a January 1907 letter from government professor A. Lawrence Lowell to Professor Frank W. Taussig. Taussig was a Harvard man through and through: a member of Harvard College’s class of 1879, he later worked as Eliot’s secretary while pursuing a PhD in economics before becoming an assistant professor in 1886. Named a full professor in 1892, he was a force in both his field and in administrative matters of Harvard until his death in 1940, at which point he was known as the grand old man of the university’s economics department.¹⁷ In his letter, Lowell argued that a school aimed at professional training for public service was doomed to failure by lack of demand, whereas a school aimed at professional training for private business had no limits to its potential. The argument fell on sympathetic ears, and by mid-1907, Eliot’s conception of a two-pronged approach to business education had been jettisoned. What hadn’t: the self-congratulatory rationale for training men for public service. Combining the two, Harvard founded a school of private business and cloaked it in the idealism of public service.

When current HBS dean Nitin Nohria was being interviewed by Charlie Rose in January 2015, he said, as if reminding his interviewer of an accepted fact, that business is the greatest force for good in society. That’s the kind of thing they say at HBS these days. But in 1908, the idea that business bestows its gifts not just on the businessman but on everything he touches had not yet become Western capitalist dogma. The tenor of those times required an appeal to loftier ideals. Forget about Harvard’s competitive position and the desires of students. The way Harvard saw it, their efforts were for the good of everyone: Concerned that the rise of industrial America was corrupting its democratic soul, Harvard proposed that business was the answer to the problem, not its cause. It was a brazen appropriation of high ideals for slightly less high purposes, and it wouldn’t be the last instance of such. The School has made a century-long habit of insisting that it is doing one thing when it is quite clear to all involved that it is doing something else.

By the latter half of the first decade of the 1900s, Eliot had also become convinced of the wonderful intellectual odyssey presented by a career in business, and decided that Harvard could arm fledgling businessmen with the right mental framework for their journey. How had he arrived at such a conclusion? By noticing that more than half of recent Harvard College graduates had gone into business. And why had they done so? The explanation of that new phenomenon is that business in its upper walks has become a highly intellectual calling, he told the Harvard Club of Connecticut in February 1908, requiring knowledge of languages, economics, industrial organization, and commercial law, and wide reading concerning the resources and habits of the different nations.¹⁸ Harvard graduates weren’t stooping to careers in business, his thinking went; business was elevating itself into the realm of Harvard graduates.

This line of thinking exposes two fundamentals about how Harvard sees itself. In the first instance, Eliot clearly could not countenance the notion that Harvard graduates were entering business for pecuniary reasons alone. They were Harvard graduates, after all, so their primary motivation had to have been intellectual. In the second, Eliot’s implicit argument—that a thing is not yet a thing until Harvard has deemed it so—is a tradition that continues to this day. To wit: HBS professors consider a survey of Harvard MBAs sufficient research when seeking insight into questions of national importance.¹⁹ But others hadn’t needed to see the writing on Harvard’s ivy-covered walls to come to the same conclusion decades before Eliot finally did. After the Civil War, Robert E. Lee, then president of what became Washington and Lee University, had proposed a business curriculum that included commercial history, law, and technology; mathematics of accounts, exchange, insurance, and interest; English language and correspondence; plus modern languages.²⁰ (He died before it could be implemented.)

But Lee hadn’t used the term calling. And if business were a calling, with all the sacred connotations that entailed, then the education of businessmen could itself be seen as a moral pursuit. And that sentiment had Harvard written all over it. Harvard’s opportunity, as Eliot and others saw it, was to teach not merely how to run a business, but also how a business should be run.¹ (A vocation, perhaps, but one with a moral dimension.)²² Within limits, of course. As former HBS faculty member Michel Anteby points out, [Eliot] saw it almost as a civilizing project. As long as you were white and not Irish, at that time, you could join the elite, but you just didn’t fully know yet what being part of the elite meant. So these . . . elite business schools . . . started off in the US to try to teach these new members of this group to learn the codes of conduct.²³

Lowell’s 1907 letter to Taussig holds a special place in the hearts of HBS historians, because suggestions made therein became decisions, and because Lowell, who became president of the university upon Eliot’s retirement in 1909, was for his entire career a supporter of HBS in the face of hostility from both within and without the university. Importantly, he argued that Harvard must teach [students] business, not political economy—that it should be more of a professional school than an academic one. This was a very American inclination—favoring the practical over the philosophical—and to this day, HBS takes great pride in favoring relevance over rigor when it comes to its teachings. They can thank Lowell for tilting the balance in that direction. That said, the decision also set the fledgling enterprise on a collision course not only with those at Harvard who would look down their noses at a vocational school (even if it were dressed up in Harvard finery) but with many in the university’s Department of Economics as well.

In another letter, to Eliot, Lowell referred to the whole initiative as a great but . . . delicate experiment. Later generations were so taken with the term that they titled the School’s authorized history of the first half century of its existence A Delicate Experiment. But the notion that Harvard was engaged in such a thing in 1907, as if they were alone in a laboratory, doing something no one else had thought of, is simply untrue. There was already a school teaching business at the graduate level—at Tuck. And they’d been experimenting at Wharton for nearly thirty years at that point. Conducting an experiment for the very first time is the stuff of leadership; conducting one that someone else has already done isn’t quite so delicate.

In 1957, HBS dean Stanley Teele acknowledged that the School’s decades-long insistence on stressing that it was the first graduate school of business has seemed strained to many. Indeed it had. But to Teele, the decision had resulted in nothing less than a horrible future narrowly averted. Had the founders decided that to manage business enterprises one need not have a liberal education, he wrote, what followed might well have been a quite different story.²⁴ Or it might not have been. We’ll never know, will we?

In any event, Harvard wasn’t going to place third after Wharton and Tuck, and they saw their opportunity to be first to offer business solely at the graduate level. And thus its eventual name: the Harvard Graduate School of Business Administration. Tuck bestowed a master of commercial science degree. Harvard offered a master of business administration. Despite the public’s wholehearted embrace of science at the time, it was the term MBA that stuck. Harvard Corporation made the decision official with a vote on March 30, 1908. And that was that.

So 1908 marked a significant turning point, for the study of business at Harvard and beyond. Harvard had groomed America’s historical elite and it would henceforth groom the leaders of its future as well—businessmen. As it had done with the founding of its schools of law and medicine, the School made the argument that classroom teaching was superior to apprenticeship, and that commercial practices, and the philosophies that underpinned them, [could be] elevated to the same sort of level as other academic disciplines.²⁵ Just what those practices and philosophies were was a question as yet unanswered, but the feeling was that they could be, and that elevation would follow. This was Harvard, after all. Everything about the place was elevated.

Whatever their stated or unstated goals, the fact of the matter was that HBS was founded, more or less, on a hunch: By joining a nascent effort to attach to management the same trappings that gave the professions their authority—science and the research university—the nation’s most prestigious university was betting that it could help legitimize the emerging managerial class. Per Lowell himself, they hoped to raise the oldest of the arts into the youngest of the professions. Along with other trailblazers, HBS dragged business training out of the vocational realm and into the professional one—and in doing so, helped cement the foundation of managerial authority in America and beyond.

Many years later, Charles Eliot rendered his own judgment on the merits of not just HBS but of Harvard’s professional schools as a whole: To this day there are many Harvard Bachelors of Arts who hold that graduates of Harvard professional schools cannot be considered to be genuine sons of Harvard, and do not yet see that the service Harvard University renders to the country through its graduate professional schools is greater than that it renders through Harvard College proper. More than a century after its founding, the university-based business school has become one of the most influential and successful institutions in America. Harvard might not have been the first, but it quickly became the most dominant, and it has never relinquished that position.

2

A Search for Mission and Method: Edwin Gay

Once the decision was made to establish a business school at Harvard, the next step was to select its inaugural dean. The dean would be responsible for helping to raise funds, establishing a curriculum, and recruiting faculty and students. Not only that, he would also take on the burden of justifying the School’s existence to critics both inside and outside the university. Given the obvious challenges, it wasn’t exactly a job that had the most qualified candidates fighting over it.

The first dean of Harvard Business School wasn’t Eliot’s first choice, but he turned out to be a providential, if unconventional, one nonetheless: Edwin Gay, a wiry and energetic young professor of medieval economic history and acting chairman of Harvard’s economics department. Gay had zero business experience, and couldn’t even count many businessmen among his circle of friends. But he had recently returned from a twelve-year stay in Europe—he’d earned his PhD in economic history in Berlin in 1902—where he had worked under Gustav von Schmoller, the founder of the younger German Historical School of economics who had spent much of his career focused on the development of economic and social policy to address the challenges of industrialization and urbanization. According to biographer Herbert Heaton, Schmoller had convinced Gay of the possibility of bringing economics into close interrelation with psychology, ethics, history, and political science to produce a real science of society . . . that the economic order must be regarded as only one integral part of the entire social life and, as such, was to be evaluated from an ethical point of view.¹

Born in Detroit and raised in Wisconsin, Gay and his siblings spent their pre–high school years in Europe because, as HBS history has it, his father’s financial success had enabled him [to do so].² At the time, anyone who could afford their children a European education was almost obliged to do so. The irony of that education: Edwin Gay leaned on it to help found an institution that later had the world flocking to the United States for its schooling—not the other way around—for the next century and more.

As dean of HBS from 1908 to 1919, Gay laid the groundwork for everything that was to come. Of course, one precedent had already been set—Harvard’s tendency to describe its own involvement in business education (and by extension, business itself) as a more noble pursuit than the naysayers would have it. Gay carried that torch faithfully, defining business as the activity of making things to sell at a profit—decently.³

In those days, this wasn’t anyone else’s definition of business. It was merely the definition of business as Harvard would have it conducted. At the time, American big business didn’t have a reputation for doing much of anything decently, and was the subject of constant muckraking in the press. While no one could deny the advancements in quality of life brought about by the relentless advance of American commerce, many were concerned that the national character was becoming distorted, in which the means to an end—money—was becoming the end in itself. In 1907, Harvard philosopher William James pointedly expressed the sentiment when he bemoaned the moral flabbiness born of the exclusive worship of the bitch-goddess SUCCESS. That—with the squalid cash interpretation put on the word success—is our national disease.⁴

As prominent a personage as Theodore Roosevelt regularly made frequent and biting reference to the self-interestedness of many American businessmen. Even in 1907, during his second term as president, Roosevelt hadn’t reined in the criticism, referring that year to certain malefactors of great wealth.

So the School took as a large part of its mission developing a heightened sense of responsibility among businessmen.⁵ How would it do that? By attempting to elevate managerial occupations into the realm of the established professions. It was an ambitious goal, and one complicated by the fact that it wasn’t the most auspicious time to mount a campaign to raise the estimation of businessmen in the eyes of the general public. The years 1893 to 1897 had proven the deepest and most traumatic period of economic distress in American history.⁶ A decade later, 1907 delivered a severe business crisis. The next year, as Gay scrambled to position the School for a fall 1908 opening, a nationwide recession was flirting with an upgrade to a full-blown depression. And even if Americans have long shown themselves capable of tolerating great disparities in wealth and income, in 1896 social scientist Charles B. Spaur had floated an estimate that couldn’t help but raise an eyebrow or two: by his calculations, 1 percent of the population owned more than half the national wealth, whereas the bottom 44 percent of families owned just 1.2 percent.⁷

There was another issue: The legitimacy of the established professions was built upon stronger foundations than seemed to be available for business. At the time, few questioned the rationale for graduate instruction in medicine or law—both required a mastery of specific technical knowledge. But it was more than that: Professions also demanded adherence to codes of conduct such as the Hippocratic Oath and an ideal of service. No such things existed in the world of business, and there were serious questions as to whether they ever would. There was also the question of social standing. If the sight of a doctor elicited an immediate show of respect, the businessman of the time was more likely to elicit a snort of contempt. Just ask Dorothy Parker. But even Harvard is vulnerable to the wish’s predilection to be father to the thought, and it saw professionalism where it did not yet exist, confident that it could fill in the blanks.

There was also the question of whether businessmen were even desirous of professional elevation. They weren’t exactly holding rallies on Harvard Yard for the right to mingle with more refined sorts. Andrew Carnegie had famously said that he didn’t know a single successful businessman who’d been a college graduate. The historian Frederick Lewis Allen summarized the mainstream reaction of businessmen themselves to the opportunity Harvard and others had seen fit to extend to them: Business, a profession! What an innocent notion! Business was a rough-and-tumble battle between men whose first concern was to look out for number one, and the very idea of professors being able to prepare men for it was nonsense. As a matter of fact, many a tough-fibered tycoon of those days was dubious even about employing college graduates, whom he regarded as toplofty, impractical fellows who had to unlearn a lot before they were fit for the business arena.⁸

The idea that college graduates should run businesses wasn’t just new; it ran counter to the way things had always been done. In the United Kingdom, for example, you either had to apprentice or be a member of the family. And usually not the most impressive member of the family at that. If Mr. Cadbury had two sons, it was the one who couldn’t get into Cambridge who got to stay home and run the business, not the other way around.

The notion of HBS certainly had supporters within Harvard’s hallowed halls, but it does seem likely that detractors outnumbered them. Even Eliot’s recent epiphany that business success required intellectual mastery wasn’t enough to convince those critics of the merits of the idea. Melvin Copeland, a longtime professor of marketing at HBS, recalled years later that by many professors and by numerous Harvard alumni, it was deemed to be degrading for the University to offer instruction in the venal subject of Business Management.⁹

All that said, the idea did have a lot of things going for it in early 1908, not the least of which was the emergence of a Progressive coalition united in the belief that society could improve itself through intentional and systematic reform. Moreover, as HBS’s second dean, Wallace Donham, later observed, the traditional professions were falling down on the job of providing moral authority at a time of rapid and dislocating social change. The clergy had stubbornly stuck to dogma in the face of scientific advancement, and had lost credibility in the eyes of a science-happy public. Lawyers, who had once been unbiased counselors, were becoming nothing more than servants of business.¹⁰

So the founders of HBS took the argument to another level: The well-being of society itself demanded that business be taken more seriously by the Ivory Tower. As the trustee of society’s material resources, the businessman had greater responsibilities than to his own bottom line. And as a trustee of society’s educational system, Harvard had responsibilities to teach that to him. The study of business, they argued, could produce graduates capable of solving the human problems that had arisen because of the rise of modern business itself. It was, in a sense, the first (if slightly contorted) example of the periodically recurring argument that businessmen could not only self-govern but might be the best hope for governing the rest of us as well.

It wasn’t as if the roster of professions was carved in stone, either. Oliver Wendell Holmes Sr. might have been one of Harvard’s favorite sons, but if he’d been born a half-century earlier, when the only doctors were Irish, there wouldn’t have been a Harvard Medical School for him to attend or at which to lecture. Accounting had just recently pushed its way into the inner circle, and the laboratory-trained engineers of the Massachusetts Institute of Technology had only been invited in when Bostonians worried that engineering’s march was getting a few too many steps ahead of them. There was always room for another cadre for the children of the privileged to join, provided it convinced the right signatories of the virtues of its application.

With the mission in hand, then, the method needed to be addressed. In other words, what would HBS teach, and how would it teach it? In the school’s August 1908 program of instruction, they answered the first part of the what. The first year of the two-year graduate program would have three required courses—Accounting, Commercial Law, and Economic Resources—and one elective. The remaining courses included Industrial Organization, Banking and Finance, Transportation (basically, railroading), Insurance, and Public Business. But the second part of the what—what it would all add up to—was a question as yet unanswered in the minds of many, including Edwin Gay himself. He sought shelter under the broad intellectual awning of science. And he wasn’t the first to do so. Led by West Point, engineers began to model businesses as rationally designed ‘engines’ that transformed scarce inputs into marketable outputs in a competitive economy,¹¹ writes business school and management education historian J.-C. Spender. (A very important point: The notion of the firm as a machine, as opposed to an organism, is close to original sin in the story of how the American economy has come to find itself in the predicament it is in today. But we will return to it later.)

Said Gay in 1909: I am constantly being told by business men that we cannot teach ‘business.’ I heartily agree with them; we do not try to teach business in the sense in which business men ordinarily understand their routine methods, or in the sense in which you speak of teaching young men to be ‘moneymakers,’ or ‘to get the better of their competitors.’ We believe that there is science in business, and it is that task of studying and developing that science in which we are primarily interested. (This belief in science was so profound that a number of early graduate business degrees were designated masters’ in science. Some still are.)

Gay married the spirits of scientific inquiry and professionalism, with an eye on what might be called pragmatic humanism. This was the stated reason for why HBS required an undergraduate degree for admission—the intention was to produce a sort of ethical business engineer, based on the point of view that the administration of business was a serious matter and for its proper conduct required the services of men with breadth of view and an inclination for learning. And the decision to include banking, finance, and insurance in the early curriculum was based at least in part on the reasoning that those occupations might be the most amenable to professionalization. (The original curriculum also included requirements in French, German, and Spanish, based on the supposition that students would require foreign languages in their business and personal dealings. American triumphalism later deemed such knowledge no longer important.)

The pragmatism was going to come, at least in part, by utilizing not just professors but also practitioners—experienced businessmen—in the classroom, something that HBS continues to the present day. In 1908, for example, F. A. Delano, the president of Wabash Railroad, lectured on the topic of Railroading as a Profession, while F. B. Sears of Boston’s National Shawmut Bank taught a course titled The Credit Department of a Bank. Other early outside lecturers included Thomas Lamont, vice president of Bankers Trust Company