Countdown 3/2/10: Excerpt from Econned

Folks, the time has come when I must start shamelessly promoting my book, Econned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism, which is being released March 2, 2010.

I thought the extract below would give readers an idea of what the book is about, with one caveat. Econned goes into some detail about crisis mechanisms (as in why it got as bad as it did) and has unearthed a heretofore unexamined hedge fund trading strategy that turned the subprime mania into the detonator of the global debt bomb (and yes, we have the goods).

Enjoy!

In 1776, Adam Smith published The Wealth of Nations. In it, he argued that the uncoordinated actions of large numbers of individuals, each acting out of self-interest, sometimes produced, as if by “an invisible hand,” results that were beneficial to broader society. Smith also pointed out that self-interested actions frequently led to injustice or even ruin. He fiercely criticized both how employers colluded with each other to keep wages low, as well as the “savage injustice” that European mercantilist interests had “commit[ted] with impunity” in colonies in Asia and the Americas.

Smith’s ideas were cherry-picked and turned into a simplistic ideology that now dominates university economics departments. This theory proclaims that the “invisible hand” ensures that economic self-interest will always lead to the best outcomes imaginable. It follows that any restrictions on the profit-seeking activities of individuals and corporations interfere with this invisible hand, and therefore are “inefficient” and nonsensical.

According to this line of thinking, individuals have perfect knowledge both of what they want and of everything happening in the world at large, and so they pass their lives making intelligent decisions. Prices may change in ways that appear random, but this randomness follows predictable, unchanging rules and is never violently chaotic. It is therefore possible for corporations to use clever techniques and systems to reduce or even eliminate the risks associated with their business. The result is a stable, productive economy that represents the apex of civilization.

This heartwarming picture airbrushes out nearly all of the real business world. Yet uncritical allegiance to these precepts over the last thirty years has produced a world in which corporations, especially in finance, are far less restricted in their pursuit of profit. We show in this book how this lawless environment has led the financial services industry to pursue its own unenlightened
self-interest. The industry has become systematically predatory. Employees of industry firms have not confined their predation to outsiders; their efforts to loot their own firms nearly destroyed the industry and the entire global economy. Similarly destructive behavior by other players, often viewed through a distorted lens that saw all unconstrained commercial behavior as virtuous, added more
fuel to the conflagration.

Some economists have opposed this prevailing ideology; indeed, comparatively new lines of inquiry focus explicitly on how economic actors can fool themselves or others into making poor, even destructive, choices.

But when the economics profession has used the megaphone of its authority to dominate discussions with policymakers and the public, it has spoken with one voice, and the message has been the one described here. We therefore confine our criticism to these particularly influential ideas.

Theories that fly in the face of reality often need to excise inconvenient phenomena, and mainstream economics is no exception. Idealizing the rational aspects of business decisions means refusing to notice behavior that is predatory, destructive, criminal, or simply stupid. Believing that risk is manageable through mechanical systems has required not just unrealistic assumptions but also willful
blindness to clear signs of danger.

We offer here another point of view. This book lays bare both the actions leading to the credit crisis and the economic constructs that defended, facilitated, and even exacerbated this behavior. Our case makes clear that if our economic system is to harness the self-interest of individuals to achieve the general
good, it must be supervised within a democratic society and responsive to criticism by outside voices of those who are unafraid to think independently.

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37 comments

  1. EmilianoZ

    The table of contents of the book would be useful.

    Also, does it have a didactic inclination for people not in finance? I fear it could be too technical for lay persons. I like Baseline Scenario because Simon Johnson and James Kwak seem to make the effort to keep things understandable for most people.

    1. Yves Smith Post author

      Thanks for asking. The book has been written for laypeople, at a more generalist level than the blog.

      The chapters are:

      1. The Sorcerer’s Apprentices

      2. Blinded by Science

      3. Financial Economics, Courtesy P.T. Barnum

      4. Neoclassical Economics: The Triumph of Simplistic Math Over Messy Facts

      5. How “Free Markets” Was Sold

      6. How Deregulation Led to Predation

      7. Looting 2.0

      8. The Wizard of Oz

      9. The Heart of Darkness: The Shadow Banking System Self-Destructs

      10. Plus ca change, plus c’est la meme chose

      1. Uncle Billy Cunctator

        Does it discuss how the entire meltdown was engineered by some bright and peppy folks at Oxbridge/LSE, BIS, and Columbia University?

        If not, I’ll still read it, but it would be fantastic if it fed a voracious confirmation bias.

      2. Maggie Knowles

        This is great! We should all buy multiple copies and distribute widely! Yves, thanks for all you do, it’s important work. We all have a responsibility to help inform our family, neighbors, relatives and friends.

  2. Hugh

    My best wishes to on your success. Markets are never free. The only question is who controls and for whose benefit.

    Market players are often irrational. There are information asymmetries. We see in material information withheld, instruments sold then shorted by the seller without notification, frontrunning.

    There is also the separation of risk and reward. The whole IBG YBG culture. The way risk can be passed on to investors, through securitization, or ultimately the government and the taxpayer. It is a system which guarantees moral hazard and looting.

    It will not be markets that punish these kinds of activities. Nor will it be by the captured, complicit elites in government. Nothing will happen to them short of depression and/or revolution.

  3. MyLessThanPrimeBeef

    Yves, can you still work in a chapter 11, Adventures of Zorba the Greek accoutant and this quote: “Man is a brute…. If you’re cruel to him, he respects and fears you. If you’re kind to him, he plucks your eyes out?”

    1. Yves Smith Post author

      Have you been channeling your post Homo Sapiens?

      The quote at the start of the Afterword:

      Find out just what any people will quietly submit to and you have the exact
      measure of the injustice and wrong which will be imposed on them.

      —Frederick Douglass

      Not as visceral as your Zorba, but same concept.

  4. bob goodwin

    I am looking forward to my copy of your book I pre-ordered.

    I am assuming your comment in the book: “it must be supervised within a democratic society” includes Jail. I believe incarceration is a form of supervision. I’m not so sure about beauracrats being a net positive, but I am sure that sociopaths are a net negative.

    1. Yves Smith Post author

      Thanks so much!

      Yes, I say in the short section on reform that punishments need to be tough, and we need more criminal sanctions (that means jail). I forget the exact language, but yes, I agree completely.

      1. Francois T

        Andy Xie wrote a remarkable piece about the 1st year of Obama. For me, the most notable snippet is: (emphasis mine)

        Why protest the bailout? In previous financial crises, big shots who contributed to bubbles went to jail; Americans expect heads on pikes after a financial crisis. Jailing even a few crooks is extremely important because it resets the system with a new psychology. For example, after the junk bond bubble burst in the 1980s, junk bond king Michael Milken and top executives at many bankrupt savings and loans went to jail. And after the IT bubble burst in 2000, jail terms were ordered for top guys at Enron, Tyco and even some Wall Street analysts.

        The bubble that just burst was bigger than any in the past, yet none of the big shots went to jail. Instead, the president has dined with them and begged them to support his financial reforms. Americans see this as a farce. And if the Obama administration is unwilling to change, voters will choose someone else.

        In addressing the financial crisis, Obama’s team continued a Bush administration policy aimed at protecting the status quo. Obama didn’t have to, but the government needed a financial system to protect the economy. It could have let the system go down before nationalizing it, leaving a clean sheet for a new system without the flaws that led to the bubble. Instead, the Obama administration created an enemy to its own financial reforms by bailing out the existing system wholesale. No one could expect the same people who benefited from the system’s flaws to support abolishing them.

  5. Toby

    This looks like a book I want to read, so I will be buying it, and wish you, Yves, every success with it. Pushing this debate forward into the mainstream is a top priority for us all now. Economics needs a thorough going over, and books of this sort can only help.

    Anything in there on altruism? Economics is always about self-interest of one variety or another, as if there were nothing else to consider. I’m a parent, a friend, a husband, a colleague. I know I am selfish, but I can be selfless too. Humans, as is life, are complex. Economics needs to take this far more into account, seeing as it deals with, in part, group behaviour and group psychology.

    1. Yves Smith Post author

      That discussion comes up in Ch. 4, which talks at some length about the assumptions that underlie neoclassical economics, and how problematic they are (both that the fact that they ignore altruism puts them in all kinds of intellectual binds, and that promoting a world view that is basically dog eat dog is unworkable even in the commercial realm, and to broader society). Some sections in Chs. 5 and 7 also touch on these issues.

      1. Sid

        I don’t see “dog eat dog” as “workable” or “unworkable.”

        As long as wants are unlimited and resources limited, “dog eat dog” is just a description of reality, not to be confused with an ideal state.

  6. Sukh Hayre

    Yves,

    I wish you the best with the book.

    Many thanks for sharing all you knowlege. The world is a better place for all that you have done.

    To you and all your readers, as crazy as things are, enjoy life for all it has to offer, and help others wherever you can, if for no other reason, it feels great, and it is a great way to enjoy the life we are given.

    shayrethewealth.com

  7. attempter

    It sounds like an excellent expose of the “invisible hand” Big Lie, that

    1. Smith never meant by it what market fundamentalists claim he meant;

    2. that whatever he meant, today’s markets aren’t “free” by any measure, but heavily rigged, and this Hand isn’t at all Invisible, but very visible and heavy-handed as it drags chains across the river.

    (I read somewhere not long ago that researchers had established that in Smith’s time the phrase “invisible hand” was current and pejorative, and that Smith was actually probably being sarcastic in his fleeting use of the phrase.)

    Does the book indict the MSM for the same sins as the academy? (Basically receiving its ideological marching orders and acting as popularizer and performing day-to-day amintenance of the fraud.) Or would that be a whole nother book?

  8. chicago mike

    There’s nothing “shameless” about promoting your book.

    I’ve been looking forward to reading your narrative ever since you announced you were writing one.

  9. A. Romanov

    Thank you Yves,
    I’ve just preordered your new book. Looking forward to read it, as soon as it arrive.
    Best wishes with your book.
    A. Romanov

  10. Dave

    Thank You Yves,

    I just preordered your book.
    May I suggest you provide ‘Kindle’ as well as audio versions (e.g. Audible.com) of ‘Econned’?

    Best Wishes,
    -Dave L.

    1. Yves Smith Post author

      Dave,

      I am just about 100% certain there will be a Kindle version, so I assume the reason that you don’t see it now is that it can’t be pre-ordered, that that gets added on the release date.

  11. Paul Tioxon

    Yves,
    Congrats on the book. Thanks for making it more accessible to people like me. I think this site is a treasure, even if you are an East Coast Ivy League Elitist, you are still my kind of people. Although the same pejorative can be leveled at me, mine would probably also include commie pinko, something you could never be accused of. I will get your book and see if I can’t get it some traction in my local media market. Delenda Est Oligarcho.

  12. Mickey, Akron, Ohio

    Yves,

    I’m on board as well. Look forward to purchasing it and reading it. We all owe you that much. Self-interest be damned.

  13. Ceci

    It looks interesting. It’s in my wishlist at Amazon. I buy most of my books for my kindle. (I have to admit that I’m hooked reading on it because of a bum left hand and poor vision.) So here’s hoping that there will be a kindle release.

  14. jake chase

    Very good opening paragraph. Looks like you are on the right track. Some questions:

    Does the book call for:

    federal incorporation of public corporations;

    progressive franchise tax on corporate capital;

    regulation of CDS as insurance and unenforceability of contracts in favor of buyers not holding actual bonds;

    registration of OTC derivatives and a transaction tax on notional value;

    draconian restrictions on executive stock option looting;

    elimination of accounting footnotes and off balance sheet transactions;

    prohibition of corporate campaign contributions;

    single term limits for Senators and Congressmen;

    transportation of lobbyists to Devil’s Island;

    RICO prosecution of investment bankers who received bonuses in excess of $2 million during any of the past ten years;

    the pillory for Summers, Rubin, Greenspan, Clinton, Snow, Bernanke, Paulson, Geithner, Blankfein, anyone convicted of shaking hands with any of them after 1994?

    We may be out of time for baby steps.

  15. Siggy

    Well said promotional piece. I look forward to reading the book.

    I worked on LaSalle St for 20 years before leaving for other employment. In the course of that time I came to know a great many players and a few who never got the nod. Most notably Beryl Sprinkel. I always felt that Greenspan was a very poor choice over Beryl. I hope you have enough ‘goods’ to hoist the guilty on their individual petards.

    I’d like a signed copy of your book, will that be possible? If not directly then perhaps I buy it, ship it, you sign it and return it. I have a collection that includes Sydney Homer, Henry Kaufman, Beryl Sprinkel, Mark Zandi and Elliot Janeway. Each of whom has given me valuable insights into the economic world we live in. Based on your blogs, I think you’d be an excellent addition.

    Best wishes for your book, would love a signed copy.

    Siggy

    1. Yves Smith Post author

      Thanks for asking, I’m sorta late in getting organized, but there will be two routes for getting signed copies.

      One is to get a signed bookplate. I have a book website that will be going up (it had better get up soon, I’m having the usual delays) that will allow readers to get a bookplate.

      If you want the book signed, then I hate to say, I don’t think there is any other way than to send it to me. I’ve asked Palgrave re organizing a bookstore reading in NY and DC (I may be getting there) so if that comes to pass, people in those cities could also come to the reading and have me sign their book.

  16. sangell

    Look forward to reading your book would also like your take on this ( to me) breathtaking assertion from Barclay’s Bob Diamond this morning on CNBC Europe’s Squawk Box.

    http://www.cnbc.com/id/15840232?video=1414788685&play=1

    Beginning at 8:50 into the interview Diamond is asked about Glass Steagall. He suggested those who advocate its return do not even understand what its provisions are and, even more astounding, that “there is no academic or empirical evidence that big is bad!”

  17. angryfutureexpat

    I’ve been looking forward to the release of this book for some time now. I hope it’s a bestseller.

    You should feel free to consider this high-brow, middle-brow, or low-brow praise, but I’ll be picking up a copy on the first day it’s available.

  18. M. Ritz

    Congratulations Yves. I’ll buy it in the bookstore here in Zurich. And will tell everybody about it! Reading your blog every day keeps me sane. Knowing that our current financial system is run by a bunch of psychopaths, is a bit more than an ex-psychoanalyst can take. And yes, you said they’re narcissists (as in diagnosis: narcissistic personality disorder, but they rather exhibit behaviour of pathological dimension.

  19. MIchaelC

    We’ve heard enough from Adam, its about time we hear Yves side.

    Best of luck. I look forward to reading it

  20. Wendell

    I’m well trained!

    I just put in my pre-order with Amazon in order to boost your standing in their rankings—a trick taught to blog readers earlier by Glenn Greenwald.

  21. Anonymous Jones

    I’ve been in NOLA having fun at Mardi Gras and am finally back and just catching up today.

    This was an excellent introduction to your book. As you might have gleaned from reading my one-note comments here, I always think things are more complex than what they seem, but that shouldn’t discourage anyone from laying out what they know in as rational, clear and justifiable a manner as possible. I expected nothing less from you, Yves. Just excellent; something I wish I could have written. Keep hammering away!

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