The deep meaning of the SEC’s lawsuit against Goldman Sachs for fraud is that it marks the end of the “financialization” of the US economy and the return to the “socialization” of finance. This is a very good thing and educators at both business and design strategy schools need to note the huge change.
For the past three decades, the Chicago school of economics has propagated the theory of efficient, rational markets that divorced financial and economic activity from their social and political context. Wall Street recruits out of Ivy League schools went through year-long training rituals that taught them the belief that markets were always efficient, rational and correct; markets were the most important guide to society; and that they, as individuals, were the Best and the Brightest who deserved all the rewards that markets could bring.
What the Chicago school and Wall Street forgot was the very real social and political context of markets. Average people accept markets only when they believe them to be fair, transparent and open so anyone, not just the Best and the Brightest. Benefits from markets should accrue to anyone who participates. For Wall Street, the social context is even more specific—people believe banks and financial markets exist to promote economic growth and national wealth for everyone, not just insiders, not just a few.
The Great Recession, the Tea Party political movement, surging inequality and the revelation to middle class Americans that they have suffered through not one but two Lost Decades of income, have killed financialization as a working economic paradigm.
The SEC is accusing Goldman Sachs of breaking both rules of social context:
1- rigging the market by selling a synthetic financial instrument designed secretly to fail and fall in price by a big hedge fund manager so he could profit by shorting the market;
2- creating a financial instrument that had no actual connection to the real economy and no economic value except to profit one secret Goldman investor at the expense of other Goldman investors.
If you listen intently to the conversations now going on in business, in economics and in government, you hear the word “social” a lot. Not the ideological “socialism” that Tea Party and Republican ideologues throw around but “social” as in “society.” The term “social business” is becoming popular because it includes both the social media platform and the social context of economic activity, including markets. The terms “behavioral economics” and “social economics” are rising in frequency because they replace the theory of market rationality and efficiency with the reality of human social interaction.
George Soros calls this social context for markets and economy “reflexivity” and he’s just started an Institute for New Economic Thinking in London to research it.
Business Schools, in crisis today, need to shift from EMT--Efficient Market Theory--to SBT--Social Business Theory. This is one reason why B-Schools are increasingly turning to Design Thinking, with its core focus on human-centered innovation, to reformulate their curricula.
The top design schools, for their part, need to understand the huge shift in economic and business thinking taking place post-recession and seize the moment to move outside their comfort zones. Max Weber belongs to everyone.
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