More than twenty years ago, the sociologist Robert Nisbet described the emergence of a particular character type that was beginning to dominate basic American political, economic and social institutions. Building on Samuel Johnson’s description of an unconstrained individual, who, like a parasite, “hung loose upon society”, Nisbet called this new character type the “loose individual.” The loose individual isn’t bound by norms, like fairness or equity, that have arisen as the moral distillations of generations of social experience. He eschews allegiances to social institutions like nations, firms or even occupations, and lacks a sense of “moral responsibility”, often “playing fast and loose with the other individuals in relationships of trust and responsibility.” Outside of their intimates, their relations with others are anchored only in self-interest.¹

Since Nisbet wrote, many other observers across the political spectrum have noticed the same character type—from Zygmunt Bauman’s concept of “liquid modernity” to George Soros’s distinction between relational and merely transactional economic engagements.² Today, economic collapse and an almost decade-long cascade of sordid revelations stretching from Enron to AIG make it clear that rather too many loose individuals have been admitted to the inner sanctums of American capitalism. Once associated with confidence games and local numbers rackets, the loose individual, king of the “flip it” mentality whether on Wall Street or in executive suites and boardrooms across the land, has radically reconfigured the financial, governance and technical apparatus of the American economy.

Many factors have no doubt helped create and empower the loose individual—not least a lack of government regulatory restraint that encouraged imprudent risk taking, poorly designed compensation systems that motivated short-term thinking and behavior, and weak corporate governance and oversight that undermined internal control systems. One of the most important but least remarked sources of the loose individual, however, is a particular type of institution that has trained large numbers of our most elite business leaders: university-based business schools.

In the aftermath of our economic train wreck, many are beginning to question anew what business schools have been teaching their students in recent decades. A few of these questions have arisen from within business schools themselves. Joel Podolny, the former dean of the Yale School of Management, wrote in the June 2009 issue of the Harvard Business Review, “So deep and widespread are the problems afflicting management education that people have come to believe that business schools are harmful to society, fostering self-interested, unethical and even illegal behavior by their graduates.” Indeed, these beliefs may be justified. To understand why, however, requires some historical reflection on one crucial question: Why do universities even have business schools?

To those unfamiliar with the contemporary American business school,...