A couple posts ago I wrote about some of the ridiculous advertisements I’ve seen for the luxury apartment complexes in our town. Not all advertising is bad, I argued, and even some advertising that went beyond simply conveying factual information to the consumer had a purpose in society. Namely, it could allow a company to “signal” something about its product efficiently to the market. The problem is that sometimes advertisements try to signal something that isn’t quite true true (the right beer gets you babes, for instance), and the market doesn’t seem to correct this flaw as theory would predict. Worse yet, sometimes the thing that’s being signaled is actually detrimental to society in the aggregate.

A recent article published in the New York Times a few weeks back about issues of class at Harvard Business School opened my eyes to another way that the economic concept of “signaling” can go very, very wrong.
In the article, HBS students lament the divisions within the student body along the lines of class. The author explains that while a good number of HBS students are from wealthy backgrounds, many others feel uncomfortable under the pressure to spend hundreds of dollars or more on club and activity fees for the purpose of “networking”, to keep up with a culture of ostentatious displays of wealth, or amid the dominance of elite social cliques made up of the wealthiest students.

As someone who went to business school, there was a great deal in the article that took me back, and not in a good way. The MBA program I attended, also in the Boston area, was a bit different from that of HBS. Most notably, it was nerdier and more technical, with more of an emphasis on hard skills, reasons I chose it for grad school. On the few occasions that I ventured over to HBS to meet friends or attend an event, the physical surroundings alone made me feel I had left the coach cabin of an airplane and ventured into the forbidden territory of first class. The ambiance made the place feel less like an educational institution and more like Harvard’s off campus country club, located in relative isolation across the river from the other university buildings.

That’s not to say that HBS is fundamentally different from other business schools, but it is to say that it’s basically business school on steroids. Even at my school, I remember noticing the swanky leather chairs in the lobby, which stood in stark contrast to the antiseptic feel of the university’s other departments. Social events were lavish, regularly catered with upscale food and almost always featuring an open bar (I quickly realized my tuition went largely to subsidizing the alcohol consumption of other students). My fellow students regularly spent their winter and spring breaks at exotic and expensive vacation spots.

That shiny gloss of our program was reflected in the academics as well, which always seemed secondary even though the workload was known to be one of the heaviest among the top programs. I remember distinctly my conversation with one of the school administrators, in a meeting I scrambled to set up after getting a “C” in Accounting my first year. I had consistently gotten in the 40s or 50s in my Accounting exams (I really tried, but was just awful at it), and had gotten the lowest grade that the scale allowed. Would I have to repeat the course? Could I re-take the final and still get credit for the semester’s worth of work? The administrator told me to relax. Everyone got credit and “passed”; it took a special level of negligence beyond simply bombing every exam to fail a course there. I moved on.

Now, what does this have to do with “signaling”? All of the personal anecdotes above refer to the fact that the major value proposition to the top MBA programs is that they allow the student to enter an elite circle, get stamped with a special seal of quality, and then turn around and signal this to employers. There is no secret why my school couldn’t care less about my abominable lack of talent for accounting; the point of the school is to allow for the student to signal effectively, and the basic component of that is simply getting in, not actually doing the work. I’m convinced that the reason why my program is known for such rigorous academics compared to other schools is that it is consciously trying to signal something extra, namely that the students are serious about the material and can handle more work and a more intellectually challenging atmosphere.

Now, there is nothing wrong with signaling, per se. It happens everywhere. As I wrote last time, the usefulness of it as an economic tool or concept is that when there are high quality and low quality products in a marketplace, the high quality product can send a signal that only it could credibly send. For the low quality product, it’s just too costly and difficult to send the same signal (hard to keep up the facade when you’re repeatedly getting called out, let’s put it that way). So there arises something called a separating equilibrium, and consumers recognize the difference between good and bad quality products, to the benefit of the former.

So, when we think of why people go to business schools, think signaling: students want to send a signal that they’re good quality, and getting in to a top school establishes the separating equilibrium between “high quality” students and the others.

But here’s the problem. Schools don’t just participate in signaling by making it hard for students to get in. They also purposefully make it expensive to afford two full years of tuition, and even more difficult to afford to participate in all the extra, pay-to-play activities. The first separating equilibrium is between the students who get in and the students who don’t. But the second is between the students who not only shell out the money for tuition, but spend lavishly on the clubs, memberships, and parties once they’re in. Theoretically, even a student who doesn’t have all that money saved up will just borrow the cash if they believe they’ll make it up when they graduate. That’s the point: Students who aren’t good enough don’t have the confidence that all that ridiculous spending will pay off, so they don’t borrow the money.

That’s why, if you ask me, the top business schools are often the most flashy and expensive. They start by having the best professors and students, and make sure this reality is crystal clear to the market by going to seemingly ridiculous, peacock-like extremes.

Here’s where the whole thing all goes sour, and starts to hurt people. First, it’s not so simple to assume that the “good” students will borrow in order to show off their crazy spending and that the others will not. First, even if you’re “good” and believe you can easily pay off the debt after graduation, you may not want to take the risk. In that sense, the people who freely borrow and spend might simply be the ones with more tolerance for risk, not more talent. Second is the issue of availability of financing. The reality is that borrowing can be expensive in and of itself or, in some cases, not an even option. (My last year of school, during the height of the financial crisis, a major bank backed out of the student loan business and left many of us scrambling to fill the gap.)

But the other problem with this business school signaling thing is that it can be socially destructive, a big theme that comes through from the article.

Such is the dilemma for HBS, or any other top business school for that matter. These schools want to distinguish themselves and to prove to the marketplace that they’re truly in another class. But there are tremendous cultural costs from doing this via all the glitz and glamour, namely that this culture filters down to the students themselves and damages other important things about the school such as a sense of social cohesion and egalitarianism. In other words, when the school is blatantly trying its best to market itself as elite and exclusive, it’s inevitable that certain students — the ones with the means and disposition to do so — will take that on as a feature of their own behavior.

This is a type of conundrum — things that may appear to be economically efficient, but which promote disunity or bear some other social cost — that the Baha’i teachings try and address from a spiritual angle, but will nonetheless require a lot of thinking as we mature as a human race. The solution can in part be one of policy, but like a lot of these issues I think the bulk of the solution is the simple improvement of our characters.

The Baha’i Writings are ceaseless in reminding us of our equality. “Since We have created you all from the same dust,” they beckon, “it is incumbent upon you to be even as one soul, to walk with the same feet, eat with the same mouth and dwell in the same land, that from your inmost being, by your deeds and actions, the signs of oneness and the essence of detachment may be made manifest.” How on earth could anyone internalize these words and still carelessly take part in behavior that would be construed as snobby, exclusive, or elitist? How much easier would it be for a student body to resist the tendency to split along social or economic lines? Perhaps MBA programs need nothing more than a bolstered culture of humility, moderation, and self effacement. Those may sound like things that don’t belong in business school, but I think the evidence — as well as many HBS students — may be telling us otherwise.