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by Peter A. Belmont / 2013-04-13
© 2013 Peter Belmont
On April 10, 2013, the eminent economist Prof. Joseph Stiglitz delivered a lecture at Columbia University’s Italian Academy. His topic was the irrationalities in economic theory as taught and in economic practice—by banks, regulators, and government.
The ostensible topic of his talk was these (many!) irrationalities, and they were quite interesting and comprehensible even to a non-economist-layman such as myself.
However, what made his talk most interesting to me was his constant “between the lines” delineation of the quite rational behavior—behavior I call corruption—within the academic economic profession, the business economic profession, the regulators, and the legislators.
Roughly, what I got from the talk was that the managers of the nation’s economy—banks and bank regulators chiefly—and the theoretical framework upon which these folks sometimes claim to base the correctness and usefulness of their economic decision making—the framework being the work of academic and business economists—eagerly embrace theories and practices which are outrageously damaging to the nation’s economy. Prof. Stiglitz called these theories “irrational” chiefly because they fly in the face of observable experience.
In the course of the lecture, the audience must have been wondering why these (often eminent) people were so eagerly adopting irrational theories and practices. Prof. Stiglitz gave some hints but shied away from using using the term “corruption” or any of its cognates. For example, he mentioned that “Treasury” (meaning the USA’s Treasury Department) was a “wholly owned subsidiary of the banks”, but didn’t explain this further, didn’t elaborate on the wide-spread problem of “regulatory capture” in USA’s regulatory agencies (the situation wherein the businesses intended to be regulated by a regulatory agency appear to be working in the interest of those businesses rather than controlling them).
Perhaps seeking to explain why academic economists continued to hold to and teach (and, as he said, examine their students upon) theories which he called irrational, he mentioned the similar example of the (religious or ideological or professional) steadfast belief of medieval physicians in the efficacy of “bleeding” (blood letting) as a cure for diseases—a belief which flew in the face of most experience at the time. People are just irrational, he seemed to say, and academics are not immune to irrationality.
I prefer a different explanation. Although groups of people can indeed be irrational, or otherwise moved by emotion rather than by reason—think of mobs—my idea of university professors is one so exalted (especially considering their often quite high pay and the high cost of university education these days) that I exclude individual or even group irrationality as an explanation of defiantly-maintained opinion presenting as “theory” which flies in the face of experience.
My explanation is “corruption”.
Economics professors get and keep their well-paid university jobs depending on their “reliability”, “dependability”, and other qualities which amount to the ways that quite articulate and intelligent people hew to “party lines”, regurgitate “received wisdom”, fail to “question authority”. And, too, they often get consultantships with banks and other businesses, and these even better-paid plums are awarded on the same basis—academic standing, reliability, dependability, etc. They also wear the right clothes, have good table manners, make small talk well at parties, and have other behaviors which mark them as members of the establishment—rather than outsiders, or, worse, enemies.
Going along to get along is a form of corruption when “going along” means lying, stating as a truth something which you know or suspect is false. Perhaps these people temporize and, when asked for an opinion, say things like, “Well, the well-established economic teaching is that . . .”—while avoiding the question of whether that teaching is correct. And then, when wearing their professorial hats, they continue to teach that same well-established teaching.
And if a few mavericks, radicals, trouble-makers warn that the theories are wrong and are shown to be wrong by years of experience—the experience of people who live in the real world rather than in the university cloister—the great bulk of the professoriate ignores their fulminations. And the well-established teaching goes on. And the advice given to banks, businesses, and governments—including the very regulators who are responsible for preventing disasters such as the banking disaster of 2008—continues to hew to the (irrational) party line.
The corruption of the bankers is more obvious. The banks want to make (short-term) profits and will not continue the employment of people who warn of the irrationality of practices which while likely to enrich the banks will damage the national economy. Thus the economists and others in the employ of the banks will act to continue their employment and suppress warnings related to dangers (among which even dangers to the banks themselves) if they perceive their jobs, salaries, and sometimes huge bonuses to depend on suppressing the warnings. This is the corruption of the employee.
The corruption of the regulators may be closer to what we normally think of as “corruption”. If “Treasury” or “The Fed” or “The SEC” is peopled by folks who play the Washington game of “revolving door employment”, then then bankers who take a few years off from lucrative jobs at Goldman Sachs to work at “Treasury” or “The Fed” or “The SEC” can be expected to act—while regulating banks—in the interest of the banks rather than in the public interest.
The corruption of the legislators who make the banking laws is even more clear, though we charmingly do not usually call it “corruption”. We all know about Lobbying and Campaign Contributions and how Congressmen find their re-election prospects depending on keeping on good terms with big givers. and no-one (outside defense contractors and oil companies, perhaps) is such a reliable big-giver as the banks and their vastly-well-paid CEOs and other high officials.
We live in a troubled time marked by “oligarchy”—my term for the concentration of political power and control of governments in the hands of big money. Though oligarchy has been typical of America for a long time, it has now has pushed its way beyond safe limits.
If the very wealthy (corporations, their CEOs, and other wealthy individuals) were forbidden by law from making political contributions or taking other political action, including the operation of revolving-door-employment, it seems likely that legislators would cease acting like employees of the very wealthy, and those who appoint or hire regulators to work in the regulatory agencies would begin to act in the public interest again, as was intended when their agencies were created, instead of acting like servants of the industries they regulate.
The “oligarchy” has always operated in its own perceived-and-usually-short-term interests, but this problem is particularly critical today. Because the control of energy policy by BIG OIL, BIG COAL, BIG GAS, etc., makes the USA powerless to try to minimize climate change. The nation and the world are committing suicide because political power is concentrated in the hands of a few profit-minded CEOs rather than distributed in the hands of the many (a/k/a “democracy”).
The problem of oligarchy is a form of class war, the very rich against the rest of us. That is why unemployment is so high and wage-earners’ salaries have dropped. That is why the USA is fighting its teachers and other public employees. That is why the USA does not have a national health system. That is why the environment is so endangered (and in many cases actually devastated).
Prof. Stiglitz’s talk was merely about banks and economists. What he described is bad enough. What he described flows, I believe, from the USA’s system of “oligarchic” political control. But “oligarchy” would not matter so much if it did not threaten the earth’s entire human experiment by its insistence that climate change be ignored.
Some times, some strongly-held beliefs—whether religious beliefs, ideological beliefs, or the desire to make a quick buck (or a quick billion) here or there—get too dangerous to continued to be ignored.
We live in such a time.
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