By William K. Black. This article was first published on New Economic Perspectives.
In my most recent column I focused on three brief passages from George Akerlof and Paul Romer’s 1993 article (“Looting: The Economic Underworld of Bankruptcy for Profit”) that had they been listened to would have prevented the fraud epidemics that drove our recent financial crises.
Here is one of those three passages. Notice how unequivocal they were in their statements about causality.
“Neither the public nor economists foresaw that [savings and loan deregulation was] bound to produce looting. Nor, unaware of the concept, could they have known how serious it would be. Thus the regulators in the field who understood what was happening from the beginning found lukewarm support, at best, for their cause. Now we know better. If we learn from experience, history need not repeat itself” (1993: 60).
The deregulation Akerlof and Romer condemned is most associated with George Stigler. Almost nobody understands economics – particularly economists. The important, difficult economic issues, such as regulation, typically require multi-disciplinary understanding. “Modern” neoclassical economics (an oxymoron for an archaic field) has foundered in this regard because of its arrogance. George Stigler epitomized this practice. He famously called economics “the Imperial Science” (an oxymoron coined by a regular moron who did not enough sense of history to understand why “imperialism” is so destructive). Stigler claimed that the phrase “social science” was the oxymoron and that economics was the only discipline studying social actions worthy of the word “science.” Stigler asserted that economics was a social science because it had an organizing theory of human conduct – rational, overwhelmingly selfish behavior. When he responded to questions about why economics was the only social science with an (ersatz) Nobel Prize, Stigler is reputed to have said that all the other fields had a collective Nobel Prize – the one awarded for “fiction.”
Stigler loved Gary Becker’s imperialistic forays into fields like criminology where he famously began his book by saying there was no reason to read the criminology literature because one merely needed to know that there was a demand function for crime and that if one increased the price there would be less crime. Becker’s proposed policy was to send far more people to prison, for significantly longer sentences, for committing blue collar crimes while sending fewer rich people to prison for committing white-collar crimes (relying on fines instead). Becker’s (effectively) pro-fraud policies intersect with Stigler’s anti-regulatory policies (which remove or neutralize the “regulatory cops on the beat”) to create a far more criminogenic environment for elite white-collar crimes.
It was society that paid the price for Stigler’s and Becker’s arrogance – they were, respectively, awarded the Nobel Prize in Economics in 1982 and 1992 by the Swedish Central Bank. Stigler’s simplistic, generalized picture of “regulation,” which he arrogantly referred to as “the economic theory of regulation” fed the disastrous, dogmatic assault on regulation that created our modern criminogenic environments that produce our recurrent, intensifying financial crises.
The prime act of S&L deregulation that was “bound to produce looting” was the Garn-St Germain Act of 1982. Richard Pratt, an academic expert in finance and the S&L industry who President Reagan appointed as the Nation’s top S&L regulator authored the bill that became the Garn St Germain Act of 1982. The Swedish Central Bank made Stigler a Nobel Laureate in 1982 – at the very moment his dogmas became policies that were “bound to produce looting.”
Stigler’s Prize represents two of the pathologies unique to the Nobel Prize in Economics. First, it is given to people for work that is wrong. Second, the year the prize is awarded often represents the year in which the Prize-winner’s terrible economic dogmas produce catastrophic harm.
Becker’s 1992 prize also illustrates these pathologies. His award came just as what would become the administration of Bill Clinton and Al Gore was about to adopt “reinventing government” which was premised on Becker’s and Stigler’s antipathy to, respectively, prosecuting and regulating financial elites. Akerlof and Romer were revising drafts of their “looting” article as Becker accepted his prize.
The Nobel Peace Prize is also an embarrassment in a fair number of cases. That prize, however, has no pretense to science or objectivity
George Akerlof was made a Nobel Laureate in Economics in 2001. That award illustrates the third pathology unique to the Nobel Prize in economics. The prize goes to economists who take opposite positions about economic reality. When two economists contradict each other about a fact they can both be wrong, but they cannot both be right.
Our research in white-collar criminology and as effective financial regulators confirms that Akerlof was right in his famous 1970 article about anti-purchaser control frauds (“lemons”) and explaining the “Gresham’s” dynamic that can produce endemic fraud (because bad ethics drives good ethics from the markets and professions). Similarly, our research demonstrates that Akerlof and Romer were correct about the role of the three “de’s” (deregulation, desupervision, and de facto decriminalization) in producing the criminogenic environments that drive our epidemics of accounting control fraud. Akerlof is the opposite of arrogant and he and Paul Romer were committed to drawing on our expertise with regulation, criminology (provided by Henry Pontell, Kitty Calavita, and Robert Tillman), and fraud schemes to develop a multi-disciplinary understanding of “looting” that was grounded in reality. Reality-based economics works; faith-based theoclassical economics is disastrous.