Archives For Journalism

Gretchen Morgenson’s latest scandal

Larry Ribstein —  1 June 2011

Gretchen Morgenson (with Louise Story), in today’s front-page NYT “newsatorial” reports on and complains about the fact that the SEC’s civil case against Goldman’s Fabrice Tourre (“Fabulous Fab”) in connection with the Abacus deal has not been accompanied by other civil and criminal prosecutions. 

The story notes that Tourre worked closely with others at Goldman and hints that Goldman is forcing Tourre to use its lawyers so that he alone and not one of his more prominent colleagues will take the fall. Morgenson/Story don’t explain why the SEC is collaborating with Goldman in this fall-guy strategy, and indeed provide a more innocent explanation:  that the SEC had incriminating emails on Tourre that it didn’t have for any others.  Nevertheless, Morgenson/Story imply that the fire of more prosecutions should in justice follow the smoke of the Tourre case. That, of course, assumes Tourre was doing something wrong, which is far from clear in the Morgenson/Story article.

I’m also disturbed by the Tourre case, but for entirely different reasons.  I discussed the suit’s weakness when it was filed and observed that its real motivation was to help push through Dodd-Frank’s regulation of derivatives trading.  I noted that “this could be the deal that saves financial regulation and brings down the derivatives business.”  I’ve also criticized here and here the use of these allegations to gin up a new broker-dealer fiduciary duty.

Oddly enough, Morgenson & Story end their article with a discussion of allegations that Goldman employees “tried to manipulate prices of securities used to bet against mortgages.”  This differs from the allegation against Tourre that he failed to disclose John Paulson’s involvement in constructing the reference portfolio of the security he was selling.  In other words, whether others should be sued or prosecuted for what Tourre did has nothing to do with whether somebody should be sued or prosecuted for different manipulation regarding other securities, or for any other financial misdealings in the last couple of years. 

By somehow gluing all this together into a big ball of wax, Morgenson is following her common practice of “leveraging” a story to make it look bigger than it is.  For more examples of these and other Morgensonian journalistic practices, see my extensive criticism of many of her weekly columns.

Cutting through Morgenson’s typical blustering and rhetorical flourishes, there’s a lot less to this story than meets the eye.  Fortunately for Morgenson and her co-author, there are no prosecutors or government agencies scrutinizing whether they are over-selling their product.

In Corporate & Securities Law, Securities ,
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WAPO Concludes that Vertical Efficiencies Trump Horizontal Market Power

Steve Salop —  30 May 2011

A Washington Post editorial last week reached the surprising conclusion that a series of vertical and horizontal acquisitions that led to a firm owning about 40% of the gas stations in the District of Columbia was procompetitive.  The editorial apparently concluded that the vertical integration efficiencies were more important than the adverse horizontal effects.  The editorial cited to an FTC report on the efficiencies of vertical integration.  This is a very counterintuitive conclusion for an allegedly liberal newspaper.   Even more counterintuitive, however, is the fact that the editorial also reports the results of a natural experiment that concluded that prices have risen as a result of the acquisitions.  The gap between prices in DC and Maryland/Virginia rose from 10 cents to 17 cents.  According to the numbers in the editorial, tax increases account for about half of the gap.  Does this mean that WAPO has bought on to the Aggregate Welfare Standard over the Consumer Welfare Standard?  Or, is this just one more example of skillful advocacy by the gas station owner combined with poor understanding of economics by the editorial board?  I vote for the latter.  Do others disagree?

In Antitrust & Competition, Federal Trade Commission, Monopolization
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Gladwell on US News

Larry Ribstein —  7 February 2011

Malcolm Gladwell tackles US News college and law school rankings in the 2/14 New Yorker (subscription required).  The result is the usual Gladwellian light-headedness, a lot of cleverness but best taken like most situation comedies, without a lot of reflection.

Gladwell begins by making the simple and unarguable point that you can’t capture the quality of schools with a single score that depends on the factors you choose to emphasize.  As Gladwell notes, Jeff Stake long ago made this point about USN rankings.

But then Gladwell veers from the obvious to the wrongheaded by suggesting that USN rankings are ideologically driven — that is, “designed to reward Yale-ness.”

So here’s the syllogism:  the rankings do in fact reward Yale-ness (obviously, whatever that means), a ranking like this depends on which factors you emphasize, and therefore US News designed the rankings in order to reward Yale-ness. 

Let’s think about this for a minute:  why would USN want to reward Yale-ness?  Because it’s an elitist publication?  Because its writers graduated from Yale?

More likely USN just wants to sell a product.  This explains why it uses a single ranking despite the obvious criticism that it depends what you’re looking for.  Who would buy a ranking that says “you decide”?  The news value lies in the definitive score. 

If the ranking is meaningless, why not just be random and save a lot of time and money?  Obviously a random score wouldn’t be newsworthy either.  But then why should we care about even a non-random ranking if it depends on whatever USN chooses to emphasize?

My guess is that we keep buying those USN scores because USN actually has gotten it right.  The rankings aren’t about educational quality or value, but about the signal you send by going to a particular school. Yale should be number 1 not because you get the best education there, but because it sends the best signal:  very expensive, very selective.  USN emphasizes inputs rather than outputs not because inputs matter to your education but because the cost and selectivity of going to Yale sends the best signal to future mates, employers, etc.

Gladwell ends his story by saying: “Who comes out on top, in any ranking system, is really about who is doing the ranking.” But in a capitalist economy, where USN is in it for the money, what really matters is who is doing the buying not who is doing the selling. 

We have met the superficial status-monger and he is us.

In Truth on the Market ,
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No, Nudge Was Not on Trial

Josh Wright —  28 January 2011

Slate’s David Weigel ran an otherwise informative piece on Cass Sunstein’s testimony, as head of OIRA, at a recent House Energy and Commerce Committee.  The headline?  Nudge on Trial: Cass Sunstein Defends the White House Against a Republican Attack.  From Weigel’s description of the hearing, there was some general hand wringing about whether there is too much or too little regulation, whether the number of regulations is higher or lower under the Obama administration than during the George W. Bush administration, some run-of-the-mill posturing from questioners.  Weigel concludes the hearing ended “with Sunstein having done no obvious harm to his mission.”

All fine.  And like I said — the article was informative with regard to the hearing.  But its a pretty sloppy and misleading headline.   There are, I think, some interesting issues concerning whether the Obama administration has retreated from behavioral economics a la Nudge, whether (as Ezra Klein contends) Republicans hate behavioral economics, and the role of behavioral economics in administrative agencies and regulation.   Unfortunately, the article really wasn’t about Nudging or behavioral-economics based regulation at all.  If Nudge is going to have its trial — it will be another day.

In the meantime, you can start here for some good background reading on the topic.

In Free to Choose Symposium, Regulation ,
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The return of Rudy G

Larry Ribstein —  21 November 2010

The WSJ has breathlessly reported:

Federal authorities, capping a three-year investigation, are preparing insider-trading charges that could ensnare consultants, investment bankers, hedge-fund and mutual-fund traders, and analysts across the nation, according to people familiar with the matter.

The criminal and civil probes, which authorities say could eclipse the impact on the financial industry of any previous such investigation, are examining whether multiple insider-trading rings reaped illegal profits totaling tens of millions of dollars, the people say. Some charges could be brought before year-end, they say.

The investigations, if they bear fruit, have the potential to expose a culture of pervasive insider trading in U.S. financial markets, including new ways nonpublic information is passed to traders through experts tied to specific industries or companies, federal authorities say.

Peter Lattman’s NYT story provides some perspective, noting that Justice and the SEC “have taken an increasingly aggressive — and public — stance in pursuing insider trading” and that the prosecutor in the latest case (as in the Galleon case), Manhattan U.S. attorney Preet Bharara, is among those taking the “hardest line.” 

The NYT article quotes recent Bharara statements that insider traders “are already among the most advantaged, privileged and wealthy insiders in modern finance” for whom “material nonpublic information is akin to a performance-enhancing drug that provides the illegal ‘edge’ to outpace their rivals and make even more money” and reminding us of “the lengths to which corrupt insiders will go to misuse confidential information for their own personal gain.”  Lattman notes that

Mr. Bharara’s sharp rhetoric is evocative of the insider-trading scandal during the 1980s when Rudolph W. Giuliani, then the United States attorney in Manhattan, prosecuted Wall Street executives using laws that had rarely been enforced. (Exactly 20 years ago Sunday, a federal judge sentenced the financier Michael Milken to 10 years in prison for securities violations relating to the insider-trading scandal.)

And, says Lattman, the United States attorney’s office has adopted “increasingly aggressive techniques” to match its “sharp rhetoric,” including wiretaps like those used on organized crime figures and drug traffickers.

It’s fitting that Lattman summons the memory of Giuliani’s patented perp walks of the 1980s, which Rudy G rode to a mayoralty and presidential campaign, as well as riches as a lobbyist and lawyer.  Some years later, in soberer times, a former federal prosecutor wrote in the NLJ:

In 1987, at the height of then-U.S. Attorney Rudolph Giuliani’s insider trading war, he had three Wall Street investment bankers handcuffed and arrested at their desks. When one demanded an immediate trial, Giuliani had the case dismissed (without prejudice) to avoid a speedy trial violation, since the government wasn’t ready for trial. Much later, two pleaded guilty to relatively minor charges. The third case was never pursued, but a reputation was ruined. This abusive exercise of the arrest power is still remembered.

The three traders were Timothy Tabor, Richard Wigton, and Robert Freeman.  The scene was evoked in the film of the same year, Oliver Stone’s Wall Street.  One wonders if Bharara is gearing up for a similar high-profile media event, with a similar financial and political payoff.

All of this theater can’t hide the dubious public policy underlying these prosecutions.  Insider trading is, at worst, a breach of fiduciary duty which, like other such breaches, can be dealt with under state law.  There’s only the thinnest basis for getting the federal government involved — that insider trading might increase trading spreads and therefore might reduce trading by outsiders.  But sensible outsiders don’t do a lot of trading.

Even if there’s a case for a federal law against insider trading, criminalizing this conduct and unleashing aggressive publicity-seeking prosecutors to enforce the criminal laws is particularly dubious.  The vast majority of trading on non-public information does a lot of good by making stock prices more accurate and, occasionally, exposing fraud.  (Sometimes it seems legal insider trading does more to inform the markets than does the SEC — remember Madoff?).   

The line between legal and illegal insider trading is shadowy at best.  Branding anybody who crosses the line as a hardened criminal subject to a potentially huge jail sentence or at least career-ending prosecution could shut down or at least discourage legitimate firms that deal in non-public information, including the expert services that Bharara’s investigation is supposedly targeting.   Bharara may succeed in cleaning the markets of a lot of good information along with a few criminals (actually, no criminals if this crime wave is like the one targeted by Giuliani).

Finally, there’s the journalistic aspects of all this.  One can be forgiven for sniffing an implicit deal here between Bharara’s office and the WSJ.  The WSJ got a prized story, to which it devoted four top reporters (according to the byline).  In return it reported the story exactly the way Bharara’s office wanted the public to see it — as “expos[ing] a culture of pervasive insider trading in U.S. financial markets,” rather than as a costly lark by a publicity-seeking prosecutor.   This smells a little like the way the traders in “Wall Street” used a newspaper called the “Wall Street Chronicle” to leak non-public information (Blue Horseshoe loves Preet Bharara).

In Corporate & Securities Law, Intellectual Property, Patent, Securities , , , ,
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Some Economics of Contractual Restrictions on Political Contributions by Cable Pundits

Josh Wright —  7 November 2010

Jonathan Adler and Orin Kerr chime in over at VC to make the point that MSNBC’s rules against contributions from television personalities is pointless, or perhaps counterproductive.  Here’s Adler:

I agree with Orin that strict application of rules against political activity by journalists to opinionated commentators and hosts is silly.  No one believes these figures are neutral or objective journalists.  They’re not reporters; they are commentators and entertainers.  They have strong — often quite partisan — political views, and that’s part of their appeal.  Whether or not Olbermann (or Hannity) gives a dime to a political campaign, we all know which candidates and causes they support.

And here’s Professor Kerr:

I find this exceedingly silly. Keith Olbermann is not shy about his personal views, and no one who has watched him has any doubt as to who he supports. Why he should be suspended for donating money to the candidates he supports is a mystery to me.

There appears to be some debate over whether Olbermann’s conduct violated provisions in his contract.  Assuming Olbermann did violate the contractual obligation to seek permission before donating, that seems like a pretty good reason to suspend someone.  I doubt that either Jonathan or Orin mean that flouting contractual obligations is a silly or exceedingly silly or mysterious reason to suspend someone — instead, they must mean that it is silly for those obligations to appear in the contract in the first place.

Maybe.  Maybe not.  But I suspect not.  Here’s why.

Continue Reading…

In Truth on the Market , , , , ,
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Journalism as advertising

Larry Ribstein —  19 October 2010

This NYT article about management problems at the Tribune came with the following ad:  “The finest journalism in Chicago?  The New York Times, as low as $3.70 a week.”

In Truth on the Market , ,
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State Antitrust Law in Action

Josh Wright —  15 August 2010

A predatory pricing case in California under Section 17043 results in a $21 million fine awarded to one newspaper, the Bay Guardian, in a suit against a competitor, San Francisco Weekly (HT: Reason).  The suit alleged that the SF Weekly was selling advertising below cost for the purpose of harming a competitor.  A summary of the appellate decision (available here): No recoupment, no market power, no harm to competition, no problem.  One of the benefits of those requirements for predatory pricing claims under the Sherman Act is to minimize the use of litigation to subvert the competitive process.  No such luck under California law.  To get a sense of how different operation of 17043 from conventional federal antitrust analysis, consider the following excerpt from the opinion:

In section 17043, in contrast, the very gravamen of the offense is the purpose underlying the anticompetitive act, rather than the actual or threatened harm to competition. The intent or purpose of the below-cost sale is at the heart of the statute, and distinguishes the violation from a below-cost pricing strategy undertaken for legitimate, nonpredatory business reasons. (Food and G. Bureau of S. California v. United States (9th Cir. 1943) 139 F.2d 973, 974.) Section 17043 “does not make all sales below average total cost illegal per se. Instead, such sales must have been made for the purpose of injuring competitors or destroying competition.” [Citations.]” (William Inglis, etc. v. Itt Continental Baking Co. (9th Cir. 1981) 668 F.2d 1014, 1049; see also Food & G. Bureau, Inc., supra, at pp. 974–975.) The intent requirement imposed by section 17043 is an especially stringent one. “Section 17043 uses the word “purpose,” not “intent,” not “knowledge.” (Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co., supra, 20 Cal.4th 163, 174.) Therefore, the California Supreme Court has concluded “that to violate section 17043, a company must act with the purpose, i.e., the desire, of injuring competitors or destroying competition.” (Id. at pp. 174–175; see also Chicago Title Ins. Co. v. Great Western Financial Corp. (1968) 69 Cal.2d 305, 323 [70 Cal.Rptr. 849, 444 P.2d 481]; Fisherman’s Wharf Bay Cruise Corp. v. Superior Court, supra, 114 Cal.App.4th 309, 330.)

Notice the way that “anticompetitive act” encompasses the below-cost sale which, with purpose of course, takes sales from competitors.  Price-cutting, of course, is the quintessential pro-competitive act.   And anticompetitive seems like such an odd term to use in this context where there is no interest at all on the impact of the sale on competition.  In fact, one need not even demonstrate an effect on the competitor:

Further, section 17043 does not require an anticompetitive impact. “[A]n injurious effect is not an essential element of the violation. The violation is complete when sales below cost are made with the requisite intent and not within any of the exceptions.” (People v. Pay Less Drug Store (1944) 25 Cal.2d 108, 113–114 [153 P.2d 9].) The language of sections 17043 and 17071 make “it sufficiently clear that the Legislature deemed that injury to a competitor or destruction of competition was an “injurious effect,” and therefore within the ban of the act; and that it was not necessary to await success in the monopolistic effort before the measures provided to safeguard the public interest and welfare could be invoked.” (Pay Less Drug, supra, at p. 113.)

Now, the appellate court may have interpreted the statute exactly as intended by the California legislature.  But both anticompetitive wake left by 17043 and similar laws makes a strong case for abolishing these state antitrust laws or harmonization provisions that tie interpretation to the Sherman Act.  Regardless, with all of the focus on federal antitrust law, as well as international antitrust, it is easy to ignore what is going on in the states.  But the states matter a great deal.  Given the evidence discussed in the opinion, and required by the court to uphold the substantial verdict, its hard to imagine that this decision doesn’t have the attention of counsel representing newspapers, magazines, or just about any firm operating in a two-sided market.

In Antitrust & Competition ,
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Ribstein on Business, Film and Law

Josh Wright —  25 April 2009

Wrapping up what looks like a very interesting conference at the University of Illinois on the interaction between business, film, and law, Larry Ribstein shares some thoughts in an excellent post.  Readers of Ideoblog will be familiar with Professor Ribstein’s take on how artists’ negative views of capitalists find their way into film. In summing up his retrospective thoughts on the conference, Ribstein concludes:

The bottom line is that it is pretty clear that a narrative of business is being constructed both in film and the popular press (though Mae Kuykendall has her doubts). Law and economics types like me generally eschew narrative theory as soft stuff, lacking rigor. But that leaves the construction of the critical stories to others. Moreover, this is an area that is susceptible to both rigorous public choice analysis and data about the construction and effect of the story. That’s the discussion I’m trying to promote.

Finally, this conference further convinced me of the value of this type of gathering. Unlike the typical law school conference, this was not a law-review-driven collection of mini-workshops on papers in process. Though that sort of conference can be valuable, too often it amounts to the retailing of ideas that are best done in other ways. This was instead an extended discussion that, I hope, contributed to the process of forming ideas. In our digital age, this could end up being the primary function of physical meetings among academics.

Go read the whole thing.

In Truth on the Market ,
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Wanna Keep This Economic Mess to a Minimum? Honor Contracts.

Thom Lambert —  9 February 2009

New York Times business columnist Joe Nocera insists that current economic conditions call for courts to ignore carefully negotiated contracts between sophisticated business entities. Arguing that Dow Chemical Company should be free to walk away from its agreement to buy specialty chemical manufacturer Rohm & Haas, Mr. Nocera contends that “maybe, just maybe, deals that stop making sense ought to be called off, especially in the middle of a once-in-a-lifetime financial crisis.” He says he can’t understand why so many people don’t agree with him on that point. Perhaps I can explain their position.

First, though, some background. Last summer, Dow won a hard fought bidding war for Rohm & Haas. Beating out rival BASF, Dow agreed to buy Rohm & Haas for $78 per share — a 74% premium. To persuade Rohm & Haas to accept its offer over BASF’s, Dow agreed to a number of pro-seller terms: the deal was not contingent on Dow’s obtaining financing; there was no provision permitting Dow to back out if the deal threatened Dow’s investment-grade credit rating; the deal was not dependent on either company’s stock price; and, most importantly, the deal would be subject to specific performance by Rohm & Haas if Dow tried to back out. (For non-lawyers out there, specific performance is a court order that the breaching party actually perform its contractual obligation; paying money damages for non-performance will not suffice.)

Dow had planned to finance the Rohm & Haas deal with $9 billion in proceeds from another transaction it was to enter with the Kuwaiti government. When the Kuwaitis found themselves financially strapped because of falling oil prices, they first renegotiated the deal with Dow and ultimately backed out altogether. That meant that Dow could complete the Rohm & Haas aquisition only by taking a short-term bridge loan that would lower Dow’s credit rating to junk bond status.

Dow is now trying to get out of its deal with Rohm & Haas, which is insisting that Dow proceed with the deal. Mr. Nocera argues that the court should side with Dow. Citing the difficulties the deal will create for the combined entity, he writes:

[S]houldn’t somebody be worrying about those problems? Dow Chemical employs around 45,000 people; Rohm & Haas employs more than 15,000. The American chemical industry — which was suffering even before the financial crisis because of the rise of commodity chemical companies in China and elsewhere — is going to be in a bad place for the foreseeable future. At a time when every job matters, and when the economy is holding on for dear life, does it really make sense that “shareholder value” should be the only value that counts? Many of the current shareholders are merger arbitrageurs, who dive into pending deals and bet on their outcome.

In other words, given that this deal may cause job losses and would benefit only unsympathetic stock gamblers who create little real value for society, wouldn’t society as a whole be better off if the court were to allow Dow to walk away from this deal?

No, it wouldn’t. Putting aside the fact that arbitrageurs play a vital information-producing role in our economy and should be rewarded for their efforts, giving Dow a mulligan on this deal would have systematic, wealth-destructive effects.

Contracts (i.e., voluntary exchanges) create wealth, for each party perceives itself to be better off because of the exchange. Thus, a key to economic growth — that thing we so desperately need right now — is contracting behavior. As people exchange goods and services, thereby moving them from lower to higher valued uses, our economy will grow out of the mess it’s in. To facilitate contracting, the rules of the game have to be clear. Parties must be able to predict when they execute a deal how things will ultimately play out. If they can’t be assured of outcomes, they’ll be less inclined to enter into contracts in the first place, and wealth will be squandered. A legal precedent permitting a sophisticated business entity to walk away from a clear deal when a well-known risk materializes would create a tremendous amount of uncertainty, thereby discouraging wealth-creating trades.

Mr. Nocera undoubtedly understands the importance of legal certainty. But mustn’t there be some exceptions? “Sometimes,” he writes, “the climate really does demand that the rules of the game be changed, at least temporarily.”

In fact, contract law does incorporate some flexibility for changed circumstances. Several contract doctrines — most notably the “impracticability” and “frustration of purpose” defenses — permit parties to get out of improvident deals when risks materialize. The problem for Dow is that the law permits parties to create greater predictability by effectively contracting around these doctrines. Thus, if the contract allocates a risk to one of the parties, that party can’t avail itself of one of these defenses if the risk materializes. That is essentially what happened here.

Presumably in order to minimize the price it would have to pay, Dow agreed to several terms that would insure Rohm & Haas against the risk that the deal wouldn’t materialize. Dow agreed to forego a number of standard contractual outs, such as a financing contingency, and it went so far as to guarantee that a court could force it to proceed with the deal, rather than just order it to pay monetary damages, if it tried to back out. Dow’s a big boy, and it knew precisely what it was doing: it was giving Rohm & Haas an insurance policy in exchange for a lower share price.

If a court were now to hold that Dow could walk away from this deal, the court would effectively destroy the ability of contracting parties to trade assurance (“Don’t worry, this deal will happen!”) for money (a lower price). By thus cutting back on the freedom of contract, the court would reduce the possibility of creating value through trade. Many deals, those in which assurance of performance is very important to one of the parties, would be squelched altogether.

This is assuredly not the way to bring our economy out of its current straits. We need to encourage wealth-creating trades by strengthening, not weakening, the institution of contract.

In China, International, Law & Economics , ,
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Economic Illiteracy of the Week Award Goes To …

Josh Wright —  26 October 2007

Michael Kimmelman at the NY Times.  Luke Froeb beat me to the punch of this one and has already got a post up, but this is too good not to share.  The article is on book sales and book culture in Germany, the latter of which is:

 sustained by an age-old practice requiring all bookstores, including German online booksellers, to sell books at fixed prices. Save for old, used or damaged books, discounting in Germany is illegal. All books must cost the same whether they’re sold over the Internet or at Steinmetz, a shop in Offenbach that opened its doors in Goethe’s day, or at a Hugendubel or a Thalia, the two big  chains.

Ok, fair enough.  The Germans don’t have any sort of monopoly on anticompetitive legislation.  We’ve got a few great examples here in the States.  And apparently this debate over the German rule is sparked by the Swiss allowing discounting of German books.  But you don’t have to be an economist to correctly anticipate the effects of a “no discount” rule on prices, right?  Or maybe you do?  Here’s the award winning line from Kimmelman:

What results has helped small, quality publishers like Berenberg. But it has also — American consumers should take note — caused book prices to drop. Last year, on average, book prices fell 0.5 percent.

I’ll bet you it caused no such thing, Mr. Kimmelman…

In Justice Department
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The most embarrassing thing Joe Stiglitz ever wrote?

Geoffrey Manne —  30 September 2007

In case you haven’t already, I recommend taking a gander at today’s New York Time Book Review.  In it, there is a review of Naomi Klein’s new book, The Shock Doctrine, by Nobel-winning economist, Joe Stiglitz.  It’s an abomination (I’m sure the book is an abomination, too, but I’m referring to the book review). 

If you know anything about Klein you know that she is an ideological zealot, impervious to facts and reason (although I’m sure some would say the same of me.  Except in her case, it’s actually true).  I’m sure she’s well-meaning and all that, but her book No Logo (yes, I have read it), and now this book, as well (judging only by the reviews–I won’t make the mistake of reading more than one Naomi Klein book), reflect an ignorance of economics, markets and politics that can be born only of utter disdain.  I won’t belabor the point. 

But what’s truly embarrassing is that an economist of Joe Stiglitz’s stature would write an utterly fawning review of her book!  I didn’t know that Stiglitz had slipped as far as Paul Krugman into the land of the “formerly-great-now-blinded-by ideology-to-all-reason” but I can only conclude now that he has.  There is not a single word of criticism in this review.  Not one.  At one point he does note that “she’s not an economist but a journalist,” and he similarly says that she “is not an academic and cannot be judged as one.”  But one gets the powerful sense that these are actually compliments!  Rather than follow these statements by noting one or two errors of, say, oversimplification, omission or confusion (of the sort inexcusable, I guess, by an academic or an economist), he follows them with praise for her tenacity and perspicacity as a journalist and he excuses her oversimplification (apparently there is some in the book (shocking!), but Stiglitz can’t be bothered to hold Klein’s shortcomings up to the light) by claiming that her academic targets–Milton Friedman and his ilk–were guilty of oversimplification, too.  Nya, nya!  I’m rubber and you’re glue, whatever bad you say bounces off me and sticks to . . . economists I disagree with!  It’s very illuminating (but not at all in the way one might want to be illuminated by a book review.  But then I guess most reviews are more about the reviewer than the subject, right?).

And, of course, there is the obligatory, barely disguised self-promotion (remember that part about reviews really being about the reviewer).  Just read this paragraph:

Klein is not an academic and cannot be judged as one. There are many places in her book where she oversimplifies. But Friedman and the other shock therapists were also guilty of oversimplification, basing their belief in the perfection of market economies on models that assumed perfect information, perfect competition, perfect risk markets. Indeed, the case against these policies is even stronger than the one Klein makes. They were never based on solid empirical and theoretical foundations, and even as many of these policies were being pushed, academic economists were explaining the limitations of markets — for instance, whenever information is imperfect, which is to say always.

Now which academic economists were doing all this explaining about imperfect information, Joe?  I can’t recall.  Anyway, even the claims he generously makes here on Naomi’s behalf are themselves untenable oversimplifications.  Please, do show me where Friedman believes that ideas can be implemented in a frictionless world?  The claim that Friedman’s models employed simplifying assumptions is true.  But, then, that’s the point of models, even the ones Stiglitz uses.  They are called “models” not “complete, messy representations of reality.”  The implication that Friedman’s assumptions, because they were simplifications, led to results with no relevance is a claim only a journalist or a non-academic would make.   I commend one of Friedman’s most important works–The Methodology of Positive Economics–to Stiglitz’s attention.  He shouldn’t find it too troubling to read–it doesn’t even mention free markets or Ronald Reagan.  Here’s just one important bit:

A theory or its “assumptions” cannot possibly be thoroughly “realistic” in the immediate descriptive sense so often assigned to this term. A completely “realistic” theory of the wheat market would have to include not only the conditions directly underlying the supply and demand for wheat but also the kind of coins or credit instruments used to make exchanges; the personal characteristics of wheat-traders such as the colour of each trader’s hair and eyes, his antecedents and education, the number of members of his family, their characteristics, antecedents, and education, etc.; the kind of soil on which the wheat was grown, its physical and chemical characteristics, the weather prevailing during the growing season; the personal characteristics of the farmers growing the wheat and of the consumers who will ultimately use it; and so on indefinitely. Any attempt to move very far in achieving this kind of “realism” is certain to render a theory utterly useless.

Most important, however, what Friedman knew and what Stiglitz and Klein utterly ignore is that world is a messy place, and implementation of even the best academic ideas must be undertaken with appropriate expectations about the limitations of the institutions doing the implementing.  The only oversimplification here is the one (propounded by Klein, who is an ardent activist, and Stiglitz, who has no excuse) that says that because markets don’t always work perfectly, government solutions are better.  If you read Stiglitz’s review, you’ll see that all of Klein’s examples have one thing in common:  The only alternatives to the actions she abhors are ones entailing more government “solutions” to the endemic problems of the market. 

But the best part is that the refutation of her (and Joe’s) philosophy jumps off every page of her books.  For the common element in each of the actions she decries (Bush taking advantage of misery in Iraq to impose capitalism; the Sri Lankan government displacing poor fishermen in the wake of the 2004 tsunami, etc.) is that the evil being perpetrated, even by her own standards, is being perpetrated by the government!  I know enough about Klein from her other book to know that the irony of this is completely lost on her.  While advocating tirelessly for various forms of government solutions to the evils of capitalism run amok, it is completely lost on her that all of her alleged examples of such run-amokery are perpetrated by . . . governments.  I’m sure she and Joe believe that if only the right governments were in charge, then none of this would happen and the world would be a shiny, happy place.  The naiveté in that is thick.  Again, excusable for an anti-globalization hack like Klein; a bit jarring for a Nobel Prize winner like Stiglitz.

But enough ranting.  There are more important things to do.  I’ll leave you with just this:

I’ve included a longer excerpt from Friedman below the fold.  It contains not only the above bit about the usefulness of simplifying assumptions, but also a nice refutation of the specific claims Stiglitz makes about the irrelevance of models assuming perfect competition.  Frankly this may be the most embarrassing part:  That Stiglitz would make the claims he does in full knowledge that the very person he tries to tar with irrelevance had long ago penned his own clarification (and refutation) of precisely this point.  As I said, it’s an abomination.

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In Economic Theory, International, International Trade, Truth on the Market , , , ,
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