Journalists’ Failures versus Historians’ Failures

7 02 2013

The quality of US economics journalism has been severely criticized in the blogosphere in the last few days. Brad DeLong has called for the better press corps, using a recent piece by Tom Friedman (of The World Is Flat fame) to illustrate his point. Friedman wrote:  “India has a weak central government but a really strong civil society…. China has a muscular central government but a weak civil society…. Egypt… has a weak government and a very weak civil society…. But there is one thing all three have in common: gigantic youth bulges under the age of 30, increasingly connected by technology but very unevenly educated.”

Friedman’s piece is unintentionally hilarious. As DeLong pointed out, China’s age pyramid is quite different from those of the other two societies, thanks to the famous One Child policy.

China Age Pyramid

Virtually every educated person on this planet knows about the One Child policy. A few days ago I was teaching the students in my history of globalisation class about fertility rates, Malthus, and the Demographic Transition. At least half of these first-year university students in England already knew about the One Child policy.  Friedman, who travels to Asia frequently, appears to have forgotten about it.

Then there are the important issues that the media doesn’t talk about. As readers of this blog will know, I’m interested in the ratings agencies that evaluate the safety of various types of bonds, including sovereign debt. Some pretty spectacular problems with the ratings agencies were revealed by the 2008 GFC, when securities previously rated as excellent were revealed to be worthless. It is pretty clear in retrospect that the ratings agencies, which have a privileged position under US law, had an obvious conflict of interest (i.e., a good reason to give a falsely positive rating). That’s because the ratings agencies are typically paid by the person giving the rating rather than the consumer of the data. (There are some ratings agencies that don’t take money from the entity being rated and instead rely on subscriptions).

The Franken Amendment to the 2010 Dodd-Frank law would have eliminated this conflict of interest by requiring a firm issuing a security to contact the Securities and Exchange Commission (SEC), which would then choose a rating agency to do the work of evaluating it.  However, a member of Congress succeeded in delaying the implementation of the Franken Amendment until December 2012 so that it could be “studied”. It is now 2013 and the study of the Franken Amendment is somehow, mysterious, not yet finished.  As the Center of Economic and Policy Research pointed out, neither the New York Times nor the Washington Post have investigated why the measure has been delayed.  These are the two well-funded, left-leaning newspapers with a heritage of serious investigative journalism [think Watergate] that one would expect to shine some light on this issue.

Clearly the press corps isn’t doing its job. Neither, however, are academic historians.

Here’s why I would condemn the historical profession and, in particular, specialists in late 20th century US history, for their failure to investigate. The ratings agencies owe much of their power to the fact they are designated as Nationally Recognized Statistical Rating Organizations or NRSROs. Since 1975, the US government (the SEC actually) produces a list of approved NRSROs that has become a global standard: if they want access to US capital markets, a security issuer needs to go through a NRSRO. They are gatekeepers. A few months ago Sam Bowman wrote an interesting blog post in which he argued that the NRSROs were “quasi-governmental” agencies rather than genuine private companies. He is right that they owe their privileges to state favour, but they are privately-owner commercial enterprises. That’s why they need to be watched so carefully– they operate in the profitable twilight zone between free enterprise and state monopoly.

The whole category of the NRSRO was created by the SEC in 1975.  The decision-making process at the SEC is murky, of course, but it is striking that no academic historian has studied the political history of the making of this category and its preservation. Why was this category created in 1975? What were the names of the specific individuals who were pushing for it? Was its creation opposed by members of Congress? What was the attitude of the CRAs, borrowers, lender, and other stakeholders to this innovation?

Today, it is routine to hear politicians in Greece, Italy, and elsewhere denounce the ratings agencies. Economists have spilled a lot of ink on the subject as well.  Given the sheer importance of NRSROs such as S&P, Moody’s, and Fitch you might have thought historians would investigate this topic, perhaps by doing a bit of oral history, using open archival materials, and maybe putting in a few FOI requests. However, I know of no secondary literature on the creation of this category in 1975. No articles. No books.

The non-existence of this literature represents a massive failure on the part of the historical profession. On Monday, the Justice Department launched a $5 billion lawsuit against S&P for its role in the mortgage meltdown. Hopefully the headlines about the lawsuit will encourage some academic historian to publish something on the momentous events of 1975.





The Adam Smith Institute, Business Ethics, and the Ayn Rand Lecture

23 06 2012

Gordon Gecko’s mantra was “Greed is Good.” In the 1980s and 1990s, there was a tendency, especially among people on the right of the political spectrum, to celebrate the pursuit of money as the driving force behind social progress. I suppose that was the culture of the Reagan-Thatcher era. Since the Enron scandal in 2002, there has been a growing realization that capitalism without ethics is a bad idea.  The GFC in 2008 and the evidence of corporate dishonesty and that has accumulated. For instance, it was revealed that a manager at Bear Stearns described, in a 2005 email, some of the securities the firm was trying to sell to investors as a “sack of shit” (i.e., a product they knew was massively overpriced).

The revelations of recent years have intensified the demands for businesses to be more ethical.  Yes, there have also been demands for tougher laws, better auditors, etc. But many observers think that laws mandating ethical behaviour are not enough: shifting behaviour will involve changing norms and institutional cultures as well. That’s why there has been so much attention given to the question of how business schools train future executives in ethics. When he was appointed Dean of the Harvard Business School, Nitin Nohria announced that business ethics were going to be a mandatory part of the curriculum. Nothia believes that future executives must be taught that the quest for profits must be counterbalanced by the other considerations, such as the interests of other stakeholders and society in general. The message is– go ahead, make a healthy profit, but not at any cost.

Of course, business people don’t stop learning about ethics the moment they graduate from their MBA programme. They continue learning about ethics on the job. If they go to Goldman Sachs, a company that is, or at least was, famous for its strong ethical culture, they will learn a different set of values than if they land their first job at some Enron-style company where most of the apples in the barrel are already rotten. [In his famous resignation letter of March 2012, Greg Smith claimed that the traditional culture of integrity at Goldman Sachs had been undermined during his twelve years at the company].

Businesspeople also pick up messages about business ethics through life-long learning events, such evening lectures in the financial district. For those who are religious, the sermons they hear at church or synagogue may influence their behaviour on the job.   Studying the messages about ethics that businesspeople absorb on and off the job is clearly a really important task for academics. Within my own discipline, business history, there is growing interest in the history of corporate social responsibility and corporate ethics.  There is a growing body of social-scientific research showing how culture and ideology influence present-day managerial decisions. For instance,  we know that investment managers in the US who are registered Democrats are more likely to avoid investing their clients’ money in tobacco companies than their Republican counterparts. See here. Managers don’t park their personal values at the door when they arrive at work in the morning.

This brings me to my next point. The Adam Smith Institute, a think-tank in London, is named after a distinguished economist and moral philosopher. Although Smith wrote in the eighteenth century, his ideas are still very relevant today. Personally, if I were in charge of ethics education at a business school, I would make the students read and debate passages from both Smith’s Wealth of Nations and his Theory of Moral Sentiments. One of the messages of the Wealth of Nations is that greed (i.e., the pursuit of self-interest by individuals) can, in certain circumstances, be good for society as a whole. In Smith’s other classic work, the focus was on charity, benevolence, altruism, and the duties of a citizen.

Reading the two books together would be a good way of getting students to debate how individuals and corporations go about achieving the right balance between selfishness and altruism. I don’t think that anybody expects the managers of for-profit companies to behave like Mother Teresa. We certainly don’t expect households to give 100% of their incomes to charity. At the same time, executives should be taught to limit the pursuit of short-term self-interest at the expense of shareholders, workers, and other stakeholders. Similarly, a private individual who went through life without ever giving a penny to charity would be pretty hard to respect.

Precisely what the right balance between greed and altruism is a question I certainly don’t have the answer to. However, I believe that thinking about the two great works of Adam Smith is a great way of getting people to think about these fundamental issues. It makes you a better person. Adam Smith has been criticized for being an inconsistent thinker, someone who said that greed was legitimate in some circumstances and not others. Smith favoured the free market in most cases, but he also supported a certain number of government regulations in the economy. Nineteenth century German philosophers were particularly exercised by the apparent contradictions between Smith the author of The Wealth of Nations and Smith the author of the Theory of Moral Sentiments. They spilled buckets of ink trying to reconcile the ideas in these two books.  Personally, I think that this alleged inconsistency is one of Smith’s great virtues. Smith represents the great Anglo-American tradition of “muddling through,” of pragmatically judging each issue on a case by case basis rather than trying to impose some deductive continental European ideology that has a snap answer for everything. As long as we live in a mixed economy that consists of private, public, and charitable sector, Smith’s idea will remain relevant.

It is, therefore, most unfortunate that the Adam Smith Institute in London does so little to help disseminate the complex ethical ideas of its namesake. Recently, it has promoted the very different ideas of Ayn Rand. Last Thursday, the Adam Smith Institute hosted the Ayn Rand Lecture, which was held at Drapers’ Hall in the City of London. (Drapers’ Hall, it should be noted, belongs to one of London’s historic guilds).

I suppose the Adam Smith Institute has endorsed the ideas of Ayn Rand because they are congruent with the classical liberal ideology of the think-tank.  Whether or not its decision to use Rand’s ideas as intellectual ammunition is a politically strategic one is something only time will tell. To my mind, a far more important question is this: to what extent would disseminating Rand’s ideas in the City of London have on the prevailing ethical standards in that community. This is a vitally important question for any number of reasons. For one thing, foreigners flock to the City of London to do business is that the people there have long had a reputation for honesty and fair dealing.

Let’s say for the sake of argument that large numbers of people in the financial district become followers of Ayn Rand. Would that be good for the ethical tone of the City?

Let’s take a look at Rand’s message. Ayn Rand was a Russian-American philosopher who celebrated greed, denounced all forms of religion, sneered at charity, and has had a major impact on American culture.  Rand expressed her philosophy is a series of novels and non-fiction works. Rand’s writings were characterized by the extremism and dogmatism for which her homeland is famous. For instance, Rand did not advocate trimming the budget for welfare by a certain percent or making it harder for the able-bodied unemployed to claim benefits, policies that traditional Anglo-American centre-right political parties might support. Instead, Rand advocated the abolition of all welfare-state programmes, along with the abolition of the Post Office and publicly owned roads.

Although Rand’s ideas were, in a sense, deeply alien to the Anglo-American political tradition of moderation and compromise, they have become popular in the United States. As the University of Virginia historian Jennifer Burns has noted, Rand’s ideas have had a major impact on US politics since the 1950s. Rand’s influence contributed to the rise of an extreme form of free-market fundamentalism within the Republican Party.

Randian philosophy has inspired a generation of libertarian activists who believe that any form of progressive taxation is evil and that it is truly immoral for the government to spend any amount of charity for the disadvantaged in society. The Randians have marginalized the moderate, Eisenhower-style Republicans and have shifted political discourse in the US far to the right. In his period as chairman of the Federal Reserve, Alan Greenspan, a follower of Rand, encouraged US policymakers to dismantle many of the financial regulations that were imposed after the Great Depression.

Burns’s focus is on Rand’s ideas on the political life of the US, not the activities of business people. However, I would speculate that the small minority of business people who identify with the belief-system of Ayn Rand are probably more ruthless than their counterparts who subscribe to more mainstream political ideologies or to one of the major organized religions.

It would also be interesting to measure whether followers of Rand were more or less honest than businesspeople who subscribe to other belief systems. We know that religious people are less likely to cheat or display other anti-social behaviour when playing games with fake monopoly money in a laboratory setting. See here. There’s actually a vast literature on the behavioural economics of religion.  Of course, not all religions have the same economic teachings. One would imagine that followers of a religion that permits lying would be, say, more likely to cheat on their taxes than someone who goes to a church that teaches that lying is wrong under all circumstances.

I bring up this point because Rand’s message on the legitimacy of lying was a bit muddled, for while she condemned dishonesty in her non-fiction works, her novel Atlas Shrugged celebrates a conspiracy by rich industrialists who live in a tax-haven in the Rocky Mountains that is hidden from the outside world by a sort of invisibility ray.

To my knowledge, no behavioural economist has conducted a study to determine whether fans of Ayn Rand are more or less dishonest than other economic actors. One theory is that fans of Atlas Shrugged would more honest than other people. Another interpretation is that they would be more likely to engage in different types of dishonesty.  For instance, they might emulate the heroes in Atlas Shrugged and hide their cash in offshore tax havens, such as the Cayman Islands. [Sadly invisibility rays do not yet exist].

I’m unaware of any research on this subject, but would welcome any suggestions/links to papers if my readers know of work on this subject.