Sunday, May 1, 2011

The Scam-Economy

Here's a link to a N.Y. Times article on a Law School scam.  It is run by second and third and fourth-rate law schools.  They offer a "merit" scholarship, to cover the cost of tuition, but with the condition that a certain GPA is maintained.  If the student fails to achieve the grade, the scholarship ends, and the student must pay to complete school.  Of course, students are graded on a strict curve, which ensures that a fair number of merit scholarship recipients must lose out.
The students recognize that it is a kind of "bait and switch" game.

Nobody knows exactly how many law school students nationwide lose scholarships each year — no oversight body tallies that figure — but what’s clear is that American law schools have quietly gone on a giveaway binge in the last decade. In 2009, the most recent year for which the American Bar Association has data, 38,000 of 145,000 law school students — more than one in four — were on merit scholarships. The total tab for all schools in all three years: more than $500 million.
It’s a huge sum, particularly when you realize that merit scholarships were exceptionally rare at law schools a mere generation ago. But given that many students lose their grants after the first year, the question is this: What exactly are law schools buying with all of that money?
The article emphasizes that the merit scholarship money is used as a competitive weapon among schools attempting to climb in their U.S. News and World Report rankings, rankings which rely heavily on the statistical character of incoming students.
I classify it as an example of the rise of the scam-economy, because it is an example of deliberately exposing people, who can not bear much financial risk, to increased financial risk.

Thursday, April 28, 2011

Bill Black, the Nemesis of  control frauds in banking, takes on the Lewis Powell memo, which now stands symbolically as the blueprint for pro-corporate movement conservatism.  His analysis suggests that Powell's viewpoint was one of social and economic class partisanship, masquerading as an economic analysis.  To highlight the departures from economic analysis, Black takes a detour in his narrative, to consider the classic Akerlof paper, which helped win its author a share in a Nobel Memorial Prize.
The Market for “Lemons”: Quality Uncertainty and the Market Mechanism. Akerlof, George A., The Quarterly Journal of Economics, Vol. 84, No. 3. (Aug., 1970), pp. 488-500.
Bill Black:
Economists have a Pavlovian response to any mention of Akerlof’s seminal article on lemon’s markets – “asymmetric information.” The committee that awards the prize in economics in honor of Nobel cited Akerlof and his co-awardees’ work in developing the economic implications of asymmetric information. Economists have tended to ignore, however, the context of Akerlof’s famous article. The specific examples of the sale of goods that Akerlof discusses are frauds. More particularly, each is an anti-customer control fraud – a fraud instigated by the person(s) controlling a seemingly legitimate entity where the primary intended victims were the customers. Akerlof did not discuss the variants of anti-customer control fraud that maim or kill – he focused solely on examples of economic injury due to fraudulent misrepresentations by the seller of the quality or quantity of the goods sold. More precisely, two of Akerlof’s examples – the fraudulent sale of defective cars and rice deliberately intermixed with stones – do maim and kill some customers, but Akerlof did not discuss this aspect. (Biting down on a stone can easily shatter a tooth. That causes excruciating pain, but it also exposes an Indian peasant – the fraud victims Akerlof was discussing – to a greatly increased risk of dental infection, which causes an increased risk of severe cardiac illness.) Akerlof had appropriately large ambitions in his article. He sought to provide a “structure … for determining the economic costs of dishonesty” (p. 488). Goods that maim and kill the customer impose the primary economic costs of dishonesty.
Akerlof explained [how unprosecuted fraud undermines market mechanisms] in his 1970 article:
Gresham’s law has made a modified reappearance. For most cars traded will be the “lemons,” and good cars may not be traded at all. The “bad” cars tend to drive out the good (p. 489).
[D]ishonest dealings tend to drive honest dealings out of the market. There may be potential buyers of good quality products and there may be potential sellers of such products in the appropriate price range; however, the presence of people who wish to pawn bad wares as good wares tends to drive out the legitimate business. The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence (p. 495).
When cheaters prosper, market mechanisms become perverse and can drive the honest from the marketplace. The market becomes dominated by cheats because they obtain a competitive advantage. The most common reason that firms can cheat with impunity is that their CEOs are cronies of powerful politicians. The defining characteristics of crony capitalism are that the cronies receive subsidies, favors, and immunity from normal rules and laws. The cronies dominate the big corporations and provide reciprocal benefits to controlling politicians. Managerial incompetence and wealth flourishes under crony capitalism. Merit and efficiency suffer, income inequality surges, and class and who one knows become the primary determinants of economic and political success and power. The elites become pervasively corrupt. 
 I wanted to quote at length here, because Black highlights a peculiar lacunae in the customs and language of Economics: the allergy to, and disinterest in fraud.  The use of opaque jargon, "asymmetric information problems" to obscure the nature of the beast is an imperative cultural norm of economics.  And, it is not just the professional need for a distinguishing jargon, which drives it; it is linked, always, to the need to see the economy as "natural" and naturally tending, without government intervention, to optimal results.

Consideration of the phenomena of market economy certainly doesn't suggest to an unclouded mind that achieving optimal results is effortless or even usual.  I would say that there's nothing inherent in good economic theory to suggest that actual economies will be "naturally" efficient.  Something else is driving the economists to an unwarranted faith in certain precepts.

Black suggests that Powell, a lawyer and moderate conservative, was blinded in his point-of-view by his commitment to class solidarity.  With regard to academic economists, I think the roots of the poisonous weeds grow primarily from other seeds; though class may sow some seeds, there are others, more shameful to an intellectual.

Wednesday, April 27, 2011

no coherent picture whatsoever, Redux

I find I regret the turn my analysis of Steve Landsburg's apology for the idle rich took, in the previous post.

I'm struggling to find a voice and a point-of-view, here, and, though, I am an ideological partisan, I do not particularly wish that point-of-view to simply echo the creed of those with whom I am aligned.  This blog is about what is wrong with economics, and what is wrong with economics is not that there is a Left and a Right, but that the Left and the Right disagree, unproductively.
The disagreement is more fundamental, more foundational than either side ordinarily acknowledges.  It is one thing to disagree, where agreement is possible; it is quite another to debate completely incommensurable frameworks.
Whether Steve Lansburg realizes it, or not, he is reasoning within a framework of meaning, while his liberal  interlocuters are reasoning within a framework of functional relationships.  It has become a mark of conservative economics, to reason from meaning.  And, that's crap.
And, it is also crap to reason about functional relations, and not address the need for meaning, even if the functional relationships are where the "science" is.

Monday, April 25, 2011

no coherent picture whatsoever

Discussions like this really disturb me; they indicate that there are a lot of people with Ph.D.s in economics who can throw around a lot of jargon, but when push comes to shove, have no coherent picture whatsoever of how the pieces fit together.
Welcome to my world, Paul.
Do economists, generally, have any clue as to how "the pieces fit together"?  If they do, they disguise it pretty effectively behind that jargon.  More on that in future posts, no doubt.  To the matter at hand . . .

Wednesday, March 30, 2011

The Maestro Speaks!

Alan Greenspan:
 "Today’s competitive markets, whether we seek to recognise it or not, are driven by an international version of Adam Smith’s 'invisible hand' that is unredeemably opaque. With notably rare exceptions (2008, for example), the global 'invisible hand' has created relatively stable exchange rates, interest rates, prices, and wage rates."
unredeemably opaque?  notably rare exceptions?

Monday, March 21, 2011

What Atrios Said

Atrios, recovering economist, says, ". . . the ignorant bullies took over the profession . . ."

Monday, February 7, 2011

The Moral of the Story

Man is a story-telling animal, and what matters most to humans, is the meaning of the story.

If you wonder why someone tells a particular story, it will generally be because that person is invested in the particular meaning that the story conveys. "The dog ate my homework," is valuable to the teller, for casting the teller of the tale, as blameless victim.

Economists tell tales, and, sometimes, they tell us why their favorite story is their favorite story.

Saturday, January 29, 2011

Marginal Tax Rates & Effort

Reducing the marginal rate of income tax from 70% to as low as 15% for capital gains was going to release creativity and effort.  Consider this quoted from Bloomberg News (no link available). 

Wall Street firms’ soaring pay pushed traders to disregard risk and limited regulators’ ability to lure top talent to police banks, according to a panel probing the origins of the financial crisis. . . .
Stock-option bonuses motivated financial firms to use leverage to boost returns, and traders were given “aggressive incentives” to dissuade them from defecting, the Financial Crisis Inquiry Commission wrote in a 545-page book outlining its findings. Regulators had difficulty recruiting financial professionals, who could earn more working in the private sector, said the panel . . .
Pay at financial firms started to outpace other industries in 1980, when investment banks began converting from partnerships into publicly owned companies “trading with shareholders’ money,” the FCIC said. Total compensation at U.S. banks and securities firms had climbed to $137 billion by 2007.
. . .
Stock options and other incentives tied to a company’s performance encouraged risk-taking because gains for the employees were much greater than the workers’ potential losses, the FCIC said.
“These pay structures had the unintended consequence of creating incentives to increase both risk and leverage, which could lead to larger jumps in a company’s stock price,” the FCIC said in its report.
Should economic analysis have suggested the possibility of such perverse results?

I think, yes. 

Sunday, January 2, 2011

Narrative and Logic, Meaning and Function

People love stories, and always want to know "what it means" -- it is in human nature to organize our experience and understanding in stories  -- stories, which compound judgment, cause and effect, intent and effort, into meaningful, sequential drama, drama that satisfies our emotional needs.

Scientific analysis, on the other hand, of the functioning of a system?  Interesting in its way, but not compelling in the manner of a dramatic narrative, though analysis has enormous practical implications, in the relation of science to technology, for engineering the means to actually do things, to control the processes of production.

This poses a problem for Economics, and for politics and society, in general.  What is the relation of meaningful story to functional analysis?

The problem of meaning and function -- or meaning v. function -- is an intellectual one for the science of economics, and also, a problem of epistemology: how does one "know" something, or discover something, about the world, about social reality, about how the world functions?

The problem of meaning and function is also a practical problem, because stories are a means to organize and motivate people, drama is a functional part of the social systems of political economy.

One might naively imagine that the critical question is,  Is the Story True?

Saturday, January 1, 2011

Economical Ethics

Some things are just too easy. 

News that the American Economics Association is going to take up the possibility of adopting an ethics code.

The impetus is a documentary film, in which embarrassing interviews are shown with Glenn Hubbard and Frederic Mishkin.

David Rucio, at Real Economics Review, notes that Economics, unlike other academic professions, has no ethics code.

Believing that Economics is a deeply corrupt enterprise, I'm not the pious sort, who think an ethics code is likely to do much good, by itself.  It is heartening that at least some professional economists were disturbed to see the whorishness of some of their most esteemed colleagues on the silver screen, but I think developing an ethics code is likely to be a kind of distraction, a way to re-channel substantive concern about the damage done to the economy into a pious and self-serving concern about the damage done to the Profession.

So, here's my take, my teeny-tiny effort to get folks not to look away.

The scandal is not that some economists get paid.
The scandal is not that some economists get paid quite a lot of money.
The scandal is not that economists who get paid a lot of money like to obscure their association with certain institutions that pay them.

The core of the scandal is that (many) economists know very little about the economy and get paid a lot of money to make unfounded claims about the economy, anyway, as a means of impeding public understanding and responsible state action.

A large part of the profession our society assigns the task of understanding political economy has evolved a "body of knowledge" that consists largely of null results and excuses for ignorance.

One can be absolutely certain that the American Economic Association will focus on the purely ceremonial aspects, like ritual disclosure, and ignore the purveying of ignorance, lies and poisonous ideas.

(h/t to the Sandwichman for being the tipping point that got me to feel I ought to create a post on this, as futile as feels.  Like all blogging isn't futile.)