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June 12, 2014

Yes, Theoclassical "Economists [are] Basically Immoral"

By William K. Black, J.D., Ph.D.

The failures of theoclassical economists and economics are total and myriad. Many of their theories are long-falsified dogmas. Their methodological preference is econometrics -- which gives the worst possible results in bubbles and when accounting control fraud epidemics occur.

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What Economists Know
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Reprinted from neweconomicperspectives.org

The failures of theoclassical economists and economics are total and myriad. Many of their theories are long-falsified dogmas. Their methodological preference is econometrics -- which gives the worst possible results in bubbles and when accounting control fraud epidemics occur. Theoclassical policies are intensely criminogenic, anti-democratic, and grotesquely unfair. Their proudest creations -- their risk and price models -- proved to massively understate risk and overstate asset values. They betray the scientific method that they purport to exemplify because they are overwhelmingly mono-disciplinary, in thrall to their dogmas, driven by self-interest, incapable or unwilling to follow logical standards of internal consistency, and intellectually dishonest. They award Nobel Prizes to economists who fail what economists claim is the decisive test of truth and success -- predictive ability. Theoclassical economists are infamous for their arrogance, praising their field as the only social science worthy of the term "science" and celebrating its "imperial" nature while ignoring work in other fields that has proven to have far superior predictive success. Theoclassical economists are infamous for their lack of altruism.

But the gravest failure of theoclassical economists; and one that is the source of many of these other deficiencies I have just described is that they are basically unethical. The obvious aspects of this lack of ethics are that theoclassical economists act as if their conflicts of interest are so irrelevant that they do not even require disclosure -- much less avoidance. Theoclassical economists, however, are immoral in a more fundamental manner. They repeatedly advance positions that are profoundly unethical -- and bad economics and bad criminology.

Paul Heyne's Defense of Theoclassical Economics

I recently came across one of the primary efforts to defend theoclassical economists against the criticism that they are basically immoral. "Are Economists Basically Immoral?" and Other Essays on Economics, Ethics, and Religion (2008). The compendium was created after Heyne's death by the "Liberty Fund."

The desire of theoclassical economists for such a defense is easy to understand. Heyne was an obvious choice for the task because he was a theologian and then studied economics at Washington University, a bastion of theoclassical thought. Heyne was even more dismissive of other fields than was George Stigler.

"[L]ess than 1% of what is published by academics in the social sciences and the humanities has any value and 90% of it would have been rejected by any editor with a modicum of intelligence and a concern for the public interest and would thus not even have been allowed to compete for attention and survival; theology has absolutely nothing to contribute to the discussion of public policy issues".

"[E]nvironmentalism has become a dogmatic, fundamentalist, persecuting religion that will keep us from ameliorating our environmental problems (p. xvi)."

In sum, he was a theologian who came to believe that theology was irrelevant to public policy and that the social sciences and humanities were overwhelmingly unworthy of existence or study. Heyne concluded that Christian social teachings were not simply useless but actually harmful. The Liberty Fund editors that published the book of his essays on the subject of economists' morality say that Frank Knight, his greatest intellectual influence, and Heyne agreed on "the futility of Christian 'social teaching'" and that "'established' religion is likely to do more harm than good" (pp. xix-xx). Theoclassical economics became Heyne's one true religion in the social sphere. The editors state that Heyne shared their view that "Economics is a way of thinking."

Economics is not "a way of thinking"

The claim that "economics is a way of thinking" is bizarre. It cannot survive even the briefest examination. The "way" we "think" as humans is a fascinating question that we are just beginning to study with the aid of neurobiology and psychology. There is evidence that economists differ in values from the general human population. Most studies find that those that choose to study economics are less likely to be altruistic (presumably from self-selection) and that over the course of studying economics they become still less altruistic (presumably due to learning, socialization by their professors, and peer influences). But we have no good data suggesting that economists "think" differently than other humans, much less other social scientists.

It is true that we are increasingly learning that the human brain is plastic and that the way we use it rearranges the neural architecture. In this sense, if there were some approach to "thinking" largely unique to economists it could be that we could influence our students' "thinking" processes to be more likely to mirror our unique cognitive process of "thinking." There is, however, nothing remotely unique about economists' mode of "thinking" that one can readily discern from the actual teaching or practice of economics. Economists purport to use the scientific method, to rely on standard logic, and to engage in hypothesis testing using statistical techniques. The same could be said of many social sciences. While economists like to think of their statistical techniques as uniquely sophisticated, mathematicians and physicists think our statistical techniques are remarkably unsophisticated and unsound. In any event, I have never met an economist who claimed that econometricians "think" differently than statisticians. It would be profoundly disturbing if there were a scientific field -- any field -- in which the scholars had a "thinking" process unique among human beings. It would be equivalent to finding a new species of humanoid had long existed among us, but never been recognized.

The claim -- wholly unsupported -- that economics is the unique "way of thinking" is an astonishing arrogant claim of disciplinary exceptionalism. Only economists are purportedly capable of this (wholly unspecified) "way of thinking" that is purportedly (in a second, equally unsupported, claim of exceptionalism) uniquely capable of understanding the economy and human behavior in the economy. I have dealt closely with economists for forty-five years and I can assure the reader that their "way of thinking" is not unique. They are all too human. When they attempt to describe their "way of thinking" economists use the same terms everyone else uses (some mixture of logic and inspiration).

Economists simply have different tribal taboos and cultural norms

Economists are not just like everyone else, and theoclassical economists vary a great deal from most humans, but the reason is not that they have a different way of "thinking." The French and Germans have different cultures. They have been socialized to frame the issues that they will think about and the issues and the modes of analysis that are taboo. Economists have different cultures than other fields. The theoclassical culture is a powerful sub-culture within economics. I warn constantly about the risks of theoclassical economists' false implicit assumptions because these cultural taboos and dogmas are so dangerous and result in recurrent, disastrous errors to which theoclassical economists are blind.

Heyne Refutes His Thesis on Page One and Shows Why Theoclassical Economics Fails

The Liberty Fund editors do not bury the lead. The first article they present is entitled: "Are Economists Basically Immoral?" It, unintentionally, refutes Heyne's thesis that theoclassical economics is basically moral and that theoclassical economists have strong predictive abilities. As someone who taught for years in a public policy school (the LBJ School of Public Affairs at UT Austin) and as a white-collar criminologist who studies elite corruption I found the two examples Heyne (and his editors) chose to present first of particular interest. Here is the first page of the article in its entirety.

"Whenever my wife and I have economists and their spouses over for dinner, I try to keep the conversation away from politics, because otherwise it almost always ends up in a somewhat rancorous dispute, not about candidates or policies, but about the democratic political process itself.

The division is always the same: all the economists insist that voters have no incentive to cast an informed ballot, while the non-economists protest that this is a cynical and immoral view of the world.

As another example, I recently gave my students a newspaper article that was headlined 'Food Aid from West Falls Prey to Corruption.' It began with this line: 'Western food aid to former Soviet Republics is being syphoned off to the black market or falling into the hands of corrupt local authorities.' I asked my students to tell me in writing what difference this makes and why donor nations should be concerned that their food is being stolen. I found that some of the students were appalled at my claim that stolen food was more likely to get to hungry people than food that had not been stolen. I hastened to add, I said, that I do not approve of theft. But the damage was done; the students were very upset. It was wrong to argue that thieves are usually more effective in getting food to hungry people than Red Cross officials are. But thieves have a more effective incentive: no sale, no profit."

Reprinted from Policy 9 (Autumn 1993): 33

Voting

Heyne's description of the "rancorous dispute" between economists and non-economists about voting is a non sequitur that demonstrates the poor predictive ability of economists. First, consider the multiple dimensions of falsity and intellectual dishonesty inherent in his description of the economists' position (and recall that he is one of those economists): "all the economists insist that voters have no incentive to cast an informed ballot." There is nothing in economics that could support that claim. Indeed, to an economist the fact that so many people do in fact vote should lead to the assumption that they have powerful incentives to vote. Even theoclassical economics recognizes that people have a vast range of incentives, not simply economic.

There is a significant literature in other disciplines about why people vote and what factors drive turnout. It is possible, of course, that the economists were blind to the research in other fields. Heyne's contempt for other social sciences and the humanities, if shared by the other economists at his table, was particularly likely to render them ignorant of why people choose to vote.

In any event, in his first example of the supposed superiority of economics he shows that economists are not simply wrong but dogmatically hold to their errors after centuries of experience prove that their views are false. Indeed, economists, in Heyne's telling, are such jerks that they engage in "rancorous disputes" with their own spouses because the economists insist on pushing claims that are false -- and that their spouses know to be false. In Heyne's telling of the tale, the economists are always wrong, but never willing to admit their errors. Instead, they attack even their spouses. Heyne's telling of the story makes it plain that he still claims that that there is "no incentive" to vote. Imagine what Heyne and his economic colleagues did to students who dared contest their long falsified dogmas in class.

Note also that Heyne adds the word "informed" before "ballot." The implication is that people may vote but their votes are not entitled to respect because they will not bother to inform themselves before they vote. Heyne is a big fan of Friedrich von Hayek, who consciously sought to discredit the legitimacy and efficacy of democratic government by making even more insulting insults about voters.

Second, notice the hidden issue of gender. The only folks invited to these dinners, as Heyne describes them, are economists (in this era, overwhelmingly male) and their spouses. So all the men engage in a "rancorous dispute" with all the women -- and the fight is frequently between spouses where each wife knows her husband's expertise in theoclassical economics -- and knows he's dead wrong and immoral in what he considers to be his core area of expertise.

Third, the "rancorous dispute" is in a non-economic field -- voting -- in which other disciplines have far greater expertise than economists. Several of the wives may well have had a far better understanding of voting than their economist-husbands because they studied political science, sociology, anthropology, or psychology.

Heyne was a Terrible Criminologist

Heyne's second example is even more revealing about theoclassical economists' immorality and incompetence. Heyne takes Stigler's distortion of Coase's work and amps it up to a classic (unintended) reductio ad absurdum. Coase's work on the critical role of transaction costs emphasizes that Stigler's formulation of the so-called "Coase Theorem" (which assumes transactions costs out of existence) has no application in the real world. In Heyne's extension of Coase (as distorted by Stigler) and Adam Smith it really does not matter if "property is theft" and if the "invisible hand" is boosting your wallet. Private sector theft is inherently superior in providing aid to poor than NGOs because private thieves have superior incentives to NGO volunteers. Heyne takes the twin myths that lie at the core of theoclassical economics -- that the "unintended consequences" of private sector actions are inherently desirable for society while the unintended consequences of NGO and governmental actions are inherently harmful to society -- and supercharges it with his ode to thieves and disdain for NGOs. Unintended consequences can be either positive or negative in any sector. An example of unintended negative consequences is the unintentional spread of infectious disease by private commerce, NGOs, and governments.

Heyne's story of private sector virtue through theft of food aid was obviously intended to shock his students. Note that Heyne's tale of the beneficent food relief thieves is premised on zero facts. Heyne assumes that the thieves' actions must prove beneficent because he assumes that the thieves' incentives are superior to the NGO volunteers' incentives. He presents no evidence that the thefts actually helped society and no evidence that NGO volunteers' incentives are inferior from a societal perspective to that of thieves of food relief. In short, he has invented a fictional "just so" myth with no supporting facts and presented it to his students as if it were indisputable truth.

Let us examine three examples of such thefts where we have facts. We will consider how a white-collar criminologist would evaluate Heyne's claim that the invisible hand turns thieves of relief aid into creative capitalists. He asserts that the thieves will act as if they were moral (after the theft) because they are subject to the mandate of the "invisible hand" to (unintentionally) maximize social utility due to their quest to maximize their wealth -- "thieves have a more effective incentive: no sale, no profit."

Doctors Without Borders

Doctors Without Borders is an NGO that provides medical care in regions with health crises. The NGO has equipment and medicines that can be stolen, including many vaccines such as those that protect against polio. The NGO faces three major crime problems. First, combatants may kidnap its personnel to hold them for ransom. Second, combatants may murder NGO personnel and destroy the equipment because they are engaged in terror tactics or believe (or purport to believe) that the vaccines are a Western plot against Muslims. Third, thieves steal the NGO's medicines and equipment. It is not true that the theft of drugs from the NGO inherently aids society because thieves inherently have superior incentives arising from their "more effective incentive." Doctors and other volunteers from this NGO have died due to the strength of their incentive to aid those that most need their help. Heyne's casual dismissal of altruism in favor of a thief's greed as an inherently superior incentive and a demonstration of the intrinsically moral nature of capitalism is another example of our family rule that it is impossible to compete with unintentional self-parody.

A criminologist (or anyone who worked with the NGO) would know that Heyne's "efficiency" claims for theft was typically nonsense. First, people and property frequently suffer damage during a theft. Second, the people who steal medicine from such an NGO often have to grab quickly and try to escape rapidly. This too can destroy drugs. Other drugs may be ruined without refrigeration or because they are contaminated unintentionally by the manner of theft. Third, when the thieves go through what they have stolen they may destroy or abandon (and allow to be ruined) drugs or equipment that are too hard to sell without a material risk of detection or simply lacks a sufficient profit relative to the risk of sale. Fourth, the people who steal the drugs from the NGO may use the proceeds to purchase arms and IEDs that they use to murder and maim hundreds or thousands of people. Fifth, the group that steals the medicine from the NGO may not sell the medicine -- or use it. It may reserve it for use only by a particular Somali clan. It may build up an inventory of medicines and supplies such as bandages that will be necessary for the clan's own medical needs once the clan initiates a war against rival clans. Sixth, medicines and medical equipment may require skilled nurses and/or doctors to be effective, so once they are stolen they may be far less effective in helping people in need. Seventh, the thieves may dole out the medicine and equipment to aid rival clan leaders in order to recruit war allies and punish opponents. Eighth, stolen medicines and medical equipment may not be sold, but instead traded for sexual favors by mothers who are desperate to get medicines for their children. Ninth, stolen medical equipment can easily be misused, e.g., by reusing needles, in a manner that spreads disease. Tenth, stolen medicines and equipment will, at best, go to those best able to pay for it rather than to those who most need them. Eleventh, people who steal often also cheat the purchaser by ripping them off entirely or providing inferior, contaminated drugs and medical equipment. This is the reality of thieves, rather than Heyne's "fable of the bees" (or, more aptly in the case of those who steal huge amounts of relief aid, "myth of the maggots").

Theft of Food Aid in Somalia

The massive thefts of food aid in Somalia, primarily by the dominant clan, have worked just like Heyne predicted. As a result, Somalia is a true utopia. (It is also an NRA paradise in which because nearly everyone has an automatic weapon the streets are perfectly safe.) The reality of course is the same as what I described above in my discussion of thefts from Doctors Without Borders -- except that thefts of food aid have caused far more deaths and widespread malnutrition. As with Heyne's tale of economists' invariably false predictions about voting based on a primitive misunderstanding of incentives the common denominator is that theoclassical economists are terrible at understanding the true nature of human incentives. The very thing that theoclassical economists claim to the defining element of their approach to predicting behavior, understanding incentives, turns out to be a great weakness.

Iraq: a similar ode to "privatization" via theft becomes a nightmare

As I write, Sunni Iraqi extremists have taken over Mosul, Iraq's second largest city, Tikrit, much of Falluja, and key facilities in a key oil city. This is eleven years after President Bush's infamous "Mission Accomplished" propaganda event on an aircraft carrier. One of the primary reasons that the U.S. occupation turned into a strategic disaster for Iraq and the U.S. is that the Bush administration took Heyne's approach to epidemics of the theft from the Iraqi and U.S. governments. They treated epic thefts of state assets as "privatization" -- and assumed it made Iraq's government, society, and economy stronger. Rajiv Chandrasekaran wrote a classic, deeply disturbing book revealing the theoclassical dogmas that underlay so much of our occupation policy failures entitled Imperial Life In The Emerald City -- Inside Iraq's Green Zone (2005). On pp. 135-136 he describes how the ideologues interpreted the theft of government trucks and police cars as desirable "privatization" -- and the reality that the thefts crippled police effectiveness and the ability to distribute aid to the needy. We will never know how many people died as a result of the "privatization" of these vehicles by those who used them, and continue to use them, to transport terrorists, heavy weapons and ammunition or to create car and truck bombs.

Conclusion

Heyne demonstrates the unintended consequences of trying to create ethical apologia for theoclassical economics. He demonstrates that theoclassical economists are not simply wrong but wrong in areas in which an eight year old would consistently get the right answer. It is good to vote and tens of millions of Americans vote for reasons that reflect well on them and the Nation. The inability of theoclassical economists to comprehend this fact and their efforts to destroy the legitimacy of democratic government demonstrates a sad combination of incompetence, intellectual dishonesty, and immoral shilling for their plutocratic patrons.

Eight year olds understand that theft is morally wrong and harmful. Excluding sociopaths, only theoclassical economists think that if they assume an incentive or the non-existence of an incentive they can predict results without determining though a real factual inquiry whether their assumptions are correct. When they make those assumptions about incentives implicitly they are most vulnerable to disastrous error.

Heyne's editors have, unintentionally, selected an article by Heyne that self-destructs his thesis that theoclassical economists are "basically moral" on the first page of the book by demonstrating the opposite. Heyne unintentionally proves that theoclassical economists make massive predictive errors based on false assumptions about incentives -- and refuse to abandon their dogmas no matter how many times they are falsified by reality. He also unintentionally demonstrated the folly that comes from the arrogance that he shared with theoclassical economists that leads them to ignore the literature not only of other social sciences with expertise in the subject matter they are guessing about but also of economists like George Akerlof and Paul Romer who have successful predictive records but contradict theoclassical dogmas.

I would have loved to see how Heyne sought to justify private sector fraud as optimizing, but the book contains the word "fraud" only once -- and that is a brief mention that opponents of evolution originally tried to claim that the theory was a "fraud." There are, of course, strong reasons why libertarians so religiously ignore fraud led by CEOs. Control fraud falsifies a vast array of theoclassical dogmas, reveals their policies to be criminogenic, and makes their econometric studies and pricing models perverse. When the concepts of control fraud and the Gresham's dynamic are combined the core immorality of theoclassical economics emerges. Worse, the paramount function of democratic government -- the provision of a rule of law and effective regulation and prosecution of the unethical CEOs who breach that rule of law -- is revealed as a necessary condition for efficient and moral markets.



Submitters Website: http://neweconomicperspectives.org/

Submitters Bio:
William K Black , J.D., Ph.D. is Associate Professor of Law and Economics at the University of Missouri-Kansas City. Bill Black has testified before the Senate Agricultural Committee on the regulation of financial derivatives and House Governance Committee on the regulation of executive compensation. He was interviewed by Bill Moyers on PBS, which went viral. He gave an invited lecture at UCLA’s Hammer Institute which, when the video was posted on the web, drew so many “hits” that it crashed the UCLA server. He appeared extensively in Michael Moore’s most recent documentary: “Capitalism: A Love Story.” He was featured in the Obama campaign release discussing Senator McCain’s role in the “Keating Five.” (Bill took the notes of that meeting that led to the Senate Ethics investigation of the Keating Five. His testimony was highly critical of all five Senators’ actions.) He is a frequent guest on local, national, and international television and radio and is quoted as an expert by the national and international print media nearly every week. He was the subject of featured interviews in Newsweek, Barron’s, and Village Voice.
He is the author of The Best Way to Rob a Bank is to Own One, and c–founder of Bank Whistleblowers United.

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