Comments on: Enron of the Eggheads?

By: Tracy

Tracy — Wed, 04 Aug 2004 13:08:09 +0000

Matt, the FAIR summary does not give me sufficient detail to be sure that the Harvard group should and could definitely be tried for fraud and therefore it is disgraceful that they are not (finding proof is always a problem under our justice system). It looks like at least one person is under investigation for criminal acts, so possibly criminal charges may be laid. And it still sounds to me like Daniel was arguing that HIID should be jailed for their policy advice rather than fraudulently stealing aid money, e.g. that innocent frauds perpetrated by people acting in good faith are in general far more damaging than culpable frauds perpetrated by people who know what they are doing I agree that bad policy advice can cause heaps of damage, but I don’t think the courts can or should deal with it.

By: Matt

Matt — Tue, 03 Aug 2004 00:27:38 +0000

Tracy, The charges against the Harvard boys were not the result of “giving bad advice” but rather for massive fraud. This is beyond the rather gross use of USAID (i.e.- tax) money to finance high-flying lifestyles for themselves in Mosow. (On this, see Maly.) Now, it’s true that more people were hurt by their “bad advice”, but it’s only the criminal behavior they are being tried for.

By: dsquared

dsquared — Mon, 02 Aug 2004 22:52:41 +0000

That’s what the New York Times thought, in a rather sad little correction to the article they wrote about it …

By: christopher ball

christopher ball — Mon, 02 Aug 2004 22:39:35 +0000

This does put his “Does Competition Destroy Ethical Behavior?” American Economic Review Papers and Proceedings, May, 2004. in a whole new light.

By: Kimmitt

Kimmitt — Mon, 02 Aug 2004 21:46:38 +0000

If we start jailing policy advisors for policy that turns out to be bad there is going to be a massive shortage of policy advisors. You say this like it’s a bad thing.

By: Tracy

Tracy — Mon, 02 Aug 2004 20:34:28 +0000

If we start jailing policy advisors for policy that turns out to be bad there is going to be a massive shortage of policy advisors. Given the inability to carry out controlled experiments in order to test what actually causes economic growth (or any other policy objective you’re aiming at), actual policy advice is always going to be heavily buggy. Especially since the people the policy is being carried out on are generally at least as smart as the policy advisors, and thus are going to respond in ways that the policy advisors don’t expect. Then there is all the fun of figuring out what the counter-factual would be, and how much blame should be attributed to who (e.g. the forthcoming pensions crisis – are the people who were opposed to population growth to blame, or the people who put in place a pension scheme that’s basically a giant Ponzi scheme? Is there a way of putting in a pension scheme that wouldn’t face the coming crunch?) It would be a very brave court system that would tackle those issues. And the courts can do a pretty bad job of policy-making themselves. To take an example well removed from privitisation in Russia, an Australian court judge ruled that people who had sold a business were not then liable for its taxes, an innocous decision itself, thus setting up a big hole in the tax system by which people sold businesses to criminals, who then didn’t pay any taxes and sterotypically sunk the books in Sydney Harbour. And if you describing people as having “committed a serious crime” does not count as serious criticism, I am interested in what you think does. Is anything less than hordes of people chanting outside your bedroom window mild disapproval? I am all for seriously, or sarcastically, or satirically critising people who give policy advice that turns out to be bad. However, if you’re going to suggest that people be jailed, are you willing to take up a role advising poor countries on how to create economic growth? How have you tested your theories on what Russia should have done after the collapse of communism?

By: roger

roger — Mon, 02 Aug 2004 16:35:28 +0000

The search for one cause for the collapse of the Russian economy in the 90s is probably a vain quest. The real quest, I think, should be for a series of causes (the decay of the industrial infrastructure under Brezhnev, the rise of a criminal underground that intersected with the bureaucracy of the state, etc) that amplified the bad effects of the radical free market ideology that motivated Yeltsin’s advisors in the nineties. There are obvious symptoms of this—for instance, the way the selling off of state owned industries was handled (which has had effects that are still destabilizing—see Peter Maas’s fascinating article in the NYT Mag this Sunday about Vagit Alekperov)—which fed back into the corruption of the system—viz, the essentially coup like manner in which Yeltsin allied himself to the mafia to win the 96 elections. The injection of the Americans produced the typical best and brightest side show: American advisors in such situations (think of the privatizations urged on Argentina and Mexico) come with a pre-determined theory about the way the system should work, paying more attention to the metric they know (with its self-validating definition of efficiency) than the metrics they don’t know (the matrix of production relations that operate to keep villages going, for instance) and consequently pay no attention as their grand plan amplifies problems until they reach catastrophic proportions. This is a story of an organizational mindset as much as one about macro-economic policy. On another level, this is exactly what happened in Iraq last year. Bremer was a poster boy for the arrogant American advisor mindset, who was unfortunately given uncurbed decision-making power.

By: alkali

alkali — Mon, 02 Aug 2004 15:52:58 +0000

The opinion, for those who care to read it, is available at this link.

By: Giles

Giles — Mon, 02 Aug 2004 10:25:55 +0000

Actually I think the outrage ahs to be reserved for Scheleifer – he in effect got the US government to subsidse his setting up of a business to sell shares while advising the Russian government of terms under which they issued them. So in one transaction he attempted to rip off both the US taxpayer and the Russian peasant. That he didn’t make a lot of money out of what looks like a slam dunk is not a mitigating factor but simply proof of the old adage that you there are economists and millionaires but no billionaire economists. This story shows why.

By: Matt

Matt — Mon, 02 Aug 2004 06:41:48 +0000

Damned inability to put in a link! Maly’s web page is: http://www.matthew-maly.ru

By: Matt

Matt — Mon, 02 Aug 2004 06:37:20 +0000

For anyone interested in these topics I can’t recommend Matthew Maly’s writings too strongly, espeically Understanding Russia and How to Make Russia a Normal Country. He’d second Bull’s point about law essentially not exisiting, I’d think. Maly’s books are avaliable at his web page: < http://www.matthew-maly.ru>

By: rd

rd — Mon, 02 Aug 2004 05:34:01 +0000

I’d have to read up on the extent of capital account liberalization, but whatever the case, bull’s post reinforces what I think is the real story for both Ukraine, Russia, and almost all the post-Soviet republics: the hollowing out of state authority and the cannibalization of economic enterprises by local bureaucracies whose members, freed of any central discipline, turned en masse to personal enrichment. That’s what makes all talk of bad policy choices almost beside the point. There was no state anymore ready or willing to carry out any coherent policy, be it liberalization or continued state managment. If you’ve got a New Republic subscription, I highly recommend historian Stephen Kotkin’s “Trashcanistan”: http://www.tnr.com/doc.mhtml?i=20020415&s=kotkin041502

By: Zizka

Zizka — Mon, 02 Aug 2004 05:12:06 +0000

Two Nobel prize felonies came out of the Long Term Capital Management collapse, Myron Scholes and Robert Merton. http://www.econstats.com/scandal.htm Merton’s father of the same name wrote a very amusing book called “On the Shoulders of Giants”, which I wholeheartedly recommend. The leder Merton did a considerable amount of work on the sociology of crime, which makes googling the son trickier.

By: bull

bull — Mon, 02 Aug 2004 02:37:38 +0000

“my suspicion is that it was capital account convertibility rather than privatisation per se which did the real damage” Having lived and worked in Ukraine for many years, I can assure you that it didn’t matter one iota what the law said about capital account convertibility (whatever the hell that means) or capital outflows, or anything else for that matter: if the people with money wanted to send their money elsewhere, they could. Ukraine was (and still is, from what I can gather) the ultimate lawless society. In analyzing Ukraine, don’t focus too terribly hard on what the law states, or else you’ll miss what’s actually happening. I suspect, without any actual experience, that the same is true in Russia.

By: Carlos

Carlos — Mon, 02 Aug 2004 02:15:08 +0000

Okay. My own intuitions have been shaped by Blanchard’s toy disorganization model, which suggests a deeper and longer drop in output the greater the degree of central planning beforehand. It does explain the faster patterns of recovery for the peripheral economies in the Soviet sphere compared to the Soviet core pretty well. And I like it a hell of a lot more than the pseudo-cultural reasons that are often trotted out by Kaplan-Huntington types to explain economic differences in the region. But your idea intrigues me, though I don’t think it can explain all the drops in the transition economies.