Bill Black: Great Moments in Nobel Prize History – 2007 Winner Pumps for Plutocracy, Billionaire CEOs

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By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Cross posed from Benzinga


This article begins a project to critique the work by economists concerning regulation that has led to the award of Nobel prizes. The prize in economics in honor of Alfred Nobel is unique. It is not part of the formal Nobel Prize system. It was created by a large Swedish bank and it is the only “science” prize frequently given to those who proved incorrect. The theme of my series is how poorly the work has stood the test of predictive accuracy. Worse, it has led to policies in the private and public sector that are criminogenic and explain our recurrent, intensifying financial crises.

I want to stress that the reason that the work has proven so faulty is not that the Nobel Laureates in economics are incompetent or evil. Indeed, that is part of my theme. Economics is not a hard science and its pretensions that it is have helped make even brilliant economists vulnerable to grievous error, particularly those who were most dogmatic about their hostility to even democratic governments. A recurrent defect that will emerge is the failure of economics to take ethics seriously.

This article responds to the Prize Lecture of Roger Myerson, who was made a Laureate in 2007 for his work on “mechanism design.” Mechanism design theory was developed in parallel to Michael Jensen’s work that led to modern executive compensation. Jensen criticized existing executive compensation as paying CEOs as if they were “bureaucrats” and argued that it led CEOs to shirk effort and avoid taking productive risks. These variants of the classic “unfaithful agent” problem were reminiscent of Ayn Rand’s premise of the CEOs going on a mass strike, but here the strike was against the board of directors and the cause was their “inadequate” pay.

Myerson’s Prize Lecture uses a variant of CEO compensation as central to his argument on mechanism design. CEO compensation is the subject of Myerson’s most interesting policy recommendation – the CEOs of large firms need to be billionaires and his most controversial conclusion – capitalism’s unique strength is plutocracy.

Myerson’s Prize Lecture returns repeatedly to the theme of demonstrating the inferiority of what he refers to as “socialism” (but appears to be referring to communist systems) and to advancing the views of Friedrich August von Hayek. Hayek’s most famous work warned that the democratic governments of the West were headed inexorably on The Road to Serfdom because of their mixed economies. Myerson’s Prize Lecture’s twin laments are that economics had proven unable to prove the inferiority of government programs and Hayek’s dismissal of the utility of mathematical economics.

Ethics, We Don’t Need No Stinkin’ Ethics

At first glance, it might appear that mechanism design involves an emphasis on ethics.

First, to the extent that our social plan depends on individuals’ private information that is hard for others to observe, we need to give people an incentive to share their information honestly. This problem of getting people to share information honestly is called adverse selection. Second, to the extent that our social plan requires people to choose hidden actions and exert efforts that are hard for others to monitor, we need to give people an incentive to act obediently according to the plan. This problem of getting people to act obediently to a social plan is called moral hazard. If it is a rational equilibrium for everyone to be honest and obedient to the central mediator who is implementing our social coordination plan, then we say that the plan is incentive compatible.

There are two important things to say about such incentive-compatible coordination plans. First, they can be characterized mathematically by a set of inequalities called incentive constraints that are often straightforward to analyze in many interesting examples. Second, although we defined incentive compatibility by thinking about honesty and obedience in communication with a central mediator, in fact these incentive-compatible plans characterize everything that can be implemented by rational equilibrium behavior in any social institution or mechanism. This assertion of generality is called the revelation principle.

The revelation principle asserts that any rational equilibrium of individual behavior in any social institution must be equivalent to an incentive compatible coordination plan. Given any possible informational reports from the individuals, the equivalent incentive-compatible plan recommends the results of simulated lying and disobedience in the original institution or mechanism, as illustrated in Figure 1. Thus, without loss of generality, a trustworthy mediator can plan to make honesty and obedience the best policy for everyone [pp. 322-323].

It is a bit subtle, but Myerson’s position on ethics is that we can never rely on ethics and must instead consistently create financial incentives that reward ethical behavior with increased wealth if we wish to have people act ethically. If a CEO can increase his wealth through unethical conduct then his “rational” behavior is to act unethically. If CEOs have a financial incentive to cheat, and fail to do so, they are acting irrationally. Myerson predicts that CEOs will act “rationally” by cheating whenever doing so would increase their wealth. I have criticized this approach in prior articles as “Mankiw morality.”

Myerson and Economists’ Naïve View of Fraud

It is essential, therefore, that Myerson prove that markets inherently and consistently create financial incentives for CEOs in which unethical conduct does not increase their wealth. Ethics provides no constraints on CEOs (or anyone else) in Myerson’s models. Fiduciary duties disappear even though Myerson’s claim is that CEOs will violate their core fiduciary duties unless they are bribed to act as if they were honest. Myerson claims that ensuring that only honesty pays for a CEO is a simple process: “these incentive-compatible plans characterize everything that can be implemented by rational equilibrium behavior in any social institution or mechanism.” Further, “a trustworthy mediator can plan to make honesty and obedience the best policy for everyone.” The mediator is primarily an expositional construct for Myerson. What he is claiming in these two clauses is that the markets can shape the incentives to ensure honesty by market participants, even elites like CEOs. Further, he claims that the principals (shareholders in this context) will shape the CEO’s incentives to be “incentive-compatible” in order to produce a “rational equilibrium” that is wealth-maximizing for the principals.

Myerson presented his Prize Lecture on December 8, 2007 – as the financial world was exploding from the most spectacularly incentive incompatible mechanism design and the greatest epidemic of accounting control fraud in history. The Riksbank either has a wonderful sense of irony or spectacularly bad timing in its awards.

Billionaires Only Need Apply to be CEOs

Economists do not study control fraud and do not read the criminology literature on control fraud. Even when they write about fraud they do not research the most relevant literature. The idea that one can create a contract that will make it impossible for CEOs to increase their wealth through fraud indicates that Myerson views markets as nirvana. Myerson premises his claim on the advantages to society of wealthy CEOs and returns to praising Hayek.

Second, we consider a simple production example, involving moral hazard in management. This example illustrates how incentives for good management may require that managers must have a valuable stake in their enterprise.

Third, we consider an example that introduces politics into a productive economy, involving moral hazard in the government. This example shows how unrestrained power of government over the economy can be inefficient, as capital investors require credible political guarantees against the government’s temptation to expropriate them. The latter two moral-hazard models here may particularly illustrate the kinds of theoretical frameworks that can be used to exhibit practical disadvantages of socialism, which Hayek sought to show [p. 324].

Moral Hazard

Myerson provides two examples of how the CEO could choose to deliberately harm his principals (shareholders). The first example is moral hazard.

[H]ere we can introduce problems of moral hazard, because valuable inputs that are required for production may be misused or diverted by the manager of the production process [p. 332].

Myerson asserts that the answer to the CEO’s perverse incentives is to require him to invest in the firm. Myerson claims that if the CEO invests enough of his personal wealth in the firm the principals will know that he will act to maximize their wealth.
Myerson fails to understand the most elemental aspect of accounting control fraud. His naïve view of such frauds is revealed in this passage:

The manager’s pay cannot depend on his hidden effort, which is not directly observable, but his pay can depend on whether the project is a success or not.

Myerson concedes that pay cannot depend on matters that can be “hidden,” but assumes implicitly that the “success” of a firm is obvious. No one with the faintest understanding of firms or accounting could have such a naïve view. By December 2007, as Myerson was delivering his Prize lecture, scores of mortgage banking firms specializing in making fraudulent loans that had once reported superb earnings had failed – and that ignores their massive liability for the fraudulent sale of fraudulent loans to the secondary market.

Adverse Selection

Myerson has a limited concept of how “bad” CEOs can be.

To compare moral hazard and adverse selection, we might consider an analogue of the above problem where the incentive constraint is about the manager’s hidden information rather than about the manager’s hidden action. In this analogous adverse-selection example, the project’s probability of success depends on the manager’s hidden type, which may be good or bad [p. 332].

Myerson defines “bad” CEOs as “incompetent” CEOs. Incompetence is a problem among CEOs, but fraudulent CEOs cause vastly greater harm than mere incompetents – and the frauds are often incompetent and venal as well as fraudulent.

Myerson’s treatment of adverse selection is exceptionally poor. He assumes that the principals can differentiate between good and bad CEOs. He provides a flawed claim that socialism might be superior in preventing adverse selection because “socialist” systems supposedly do not differentiate between competent and incompetent managers.

Pandering to Plutocrats

It gets better. The CEO not only needs to be wealthy and gets to leverage his investments with the firm’s assets, if he is “not very rich” (relative to the size of the firm) he needs to be paid a bonus for making such investments beyond the profits he receives from the investment (in what used to be condemned as an “usurpation of corporate opportunities”). Myerson asserts that if the CEO is “not very rich” he “must be allowed to get a moral-hazard rent” from the firm when he invests in the firm.

I noted that Myerson’s argument defines “not very rich” CEOs relative to size of the firm and the perverse incentive CEOs have because of moral hazard.

That is, to deter abuse of power without an expected loss to the rest of society, the manager must have stakes in this project worth at least 40% of the cost of the capital input here. If no one has such a large personal wealth to offer as collateral to this investment, as might be the case in an egalitarian socialist society, then society at large cannot profitably undertake this investment.

Thus, moral-hazard incentive constraints can also provide an analytical framework where the initial allocation of property rights may affect the possibility of productive investments. Indeed, this simple example may provide an analytical perspective on problems of socialism, as Hayek was seeking.

Modern industrial production requires integrated managerial control over large scale assets, and whoever exercises that control will have great moral hazard temptations, which are represented by the parameter B in this model.

When managers have great temptations B, the moral-hazard incentive constraint cannot be satisfied unless managers have large stakes in success of their projects [p.334].

The adjective Myerson chose to describe the intensity of the perverse incentives CEOs inherently have is “great.” He describes the “abuse of power” CEOs would engage in as causing “an expected loss to the rest of society.” He emphasizes that the CEO of a large firm must have immense wealth to avoid causing this “great” “abuse of power.” The example he gives is that the firm must “design” a “mechanism” requiring a CEO must make a personal investment of 40% of the firm’s total cost of capital to create an “incentive-compatible” mechanism. Recall that Myerson’s position is that markets will insure that firms adopt “incentive-compatible” governance systems. (Anything else would not be a “rational equilibrium.”) Myerson argues that it would be inefficient (and that is forbidden in his model because it would be irrational) for a large firm to employ a mere multi-millionaire as its CEO because such a “not very rich” CEO would have to be paid a “rent” equivalent to the scale of his “great” moral hazard in addition to his investment profits.

For large firms, the Myerson example would require CEOs to be billionaires. Under Myerson’s theory, the larger the firm the more perverse the CEOs’ incentives and only plutocracy can counter the CEOs’ endemic, perverse incentives. Myerson asserts that the unique benefit of massive inequality provides the proof of capitalism’s superiority to socialism that “Hayek was seeking.” The plutocrats love the idea – and we do not have to pay them “great” “moral hazard” “rents.” We just have to make them plutocrats with billions of dollars in net worth – you know, “efficient.” We couldn’t just have CEOs receive exceptionally high incomes (say $600,000) and work hard and honestly. Only a chump would do that. Myerson tells us that if large firms hire mere millionaires as CEOs they will loot the firm – yet this poses no ethical issue worthy of note by Myerson.

Having explained that Hayek’s “market” solution is an invitation for CEOs to loot “their” firms and that the only way to prevent this is to ensure that large firms employ only billionaires as their CEOs one might expect Myerson to condemn this result as a travesty. Myerson, however, treats his paean to plutocracy as proving Hayek’s claims that markets are marvelous. Myerson saw his plutocracy plan as the ultimate indictment of “socialism.” Myerson claims that an “egalitarian” nation is inherently inferior to a plutocracy. CEOs of large firms that are “not very rich” (mere multi-millionaires) are so rapacious under market systems that they can only be bribed not to loot “their” firms through expensive payments of “rents” by the principals to the CEO.

If, unlike capitalist entrepreneurs, socialist managers do not have substantial personal assets that they can invest in their projects, then the necessary stakes can only be achieved by allowing socialist managers to take a large share of the benefits from successful projects. So considerations of moral hazard cast doubt on the egalitarian socialist ideal that profits from industrial means of production should all belong to the general public [p. 334].

Myerson’s Policies Optimize the Criminogenic Environment for Control Fraud

The most fundamental problem with Myerson’s analysis of moral hazard and adverse selection is that they both predict accounting control fraud and Myerson assumes that his mechanism design prevents accounting control fraud. It does not and cannot. Indeed, by creating complacency through the fabulous claims that plutocrats are pure and principled, markets self-correct, and regulators cause injury Myerson’s proposals would make our economy even more criminogenic. Firm outputs are “hidden” by fraudulent accounting and as George Akerlof and Paul Romer explained in 1993, accounting control fraud is a “sure thing” (“Looting: The Economic Underworld of Bankrutpcy”). Indeed, if a large firm is failing the billionaire CEO who has hundreds of millions of dollars invested in the failing projects has a powerful incentive to falsify the accounting to declare the project was successful and pay himself off with a firm buyout of his “profitable” interest in the project.

Myerson ignores the fact that plutocracies produce crony capitalism, making “free markets” and real democracies impossible. Plutocracy greatly increases the ability of corrupt CEOs to loot with impunity, making a mockery of incentive-compatibility.

Myerson’s pro-plutocracy policy is even more criminogenic with regard to other forms of control fraud. The “dominant strategy” of a plutocrat CEO who has hundreds of millions of dollars invested in a firm project is, according to Myerson’s theory, to engage in anti-purchaser, anti-employee, and anti-public control fraud because each of these forms of fraud add enormously to firm and the CEO’s personal profitability.

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  1. Chris Engel

    Gone are the days when great economists like Gunnar Myrdal openly chastised institutions like the Riksbank Prize for honoring extremists like Hayek. It’s been downhill ever since.

    But it’s nice to see that Bill Black is carrying on the tradition of exposing the Riksbank Prize for the “Third Way” style false equivalence disinterested faux-centrism into which it has evolved.

    Side note: Let’s be honest though…even though it’s not the same as the Nobel Prize system, that too is also a disgraced award and institution. It’s past recipients reads like a who’s who of historical dictators and war criminals.

    1. Jan

      Yes as swede i am ashamed!And indeed Gunnar Myrdal wanted to abandon the Economics Prize.He thought economics was not a qualified as “hard science” and it been politised in extreme.Here you have the name of the recent members.They also have page there there people could leave a comment.
      The Economic Sciences Prize Committee 2013
      Per Krusell (Chairman)
      Professor of Economics
      Tore Ellingsen
      Professor of Economics
      Torsten Persson
      Professor of Economics
      Mats Persson
      Professor of Economics
      Peter Gärdenfors
      Professor of Cognitive Science
      Peter Englund (Secretary)
      Professor of Banking and Insurance

  2. jake chase

    It is difficult to criticize Myerson’s work because none of the cited passages seem to be written in English. I understand what all the words mean, but the sentences totally elude me.

    As one who attended college with a fair cross section of young men who later rose to become billionaire chief executives, let me tell you that the characteristics most of them had in common was a rich daddy, a determination to aggrandize themselves at any cost, a willingness to suck up to anyone who could move them along five or six inches, and disdain for anyone else. Trust me, psychopathy pays and it pays big.

    And by the way: running a monopolistic rent seeking corporation that churns out sugar water or razor blades or tooth paste or salted nuts isn’t brain surgery. What would be brain surgery is removing these cancers from our midst. Save the Nobel Prize for somebody who figures out how to do that.

    1. Saddam Smith

      Amen to that.

      If psychopaths can do anything well, it’s bewitch their prey. We have a system which helps psychpaths rise to the top and holds the empathic and compassionate back. Nice guys finish last.

    2. YankeeFrank

      I have to agree with Jake here. This “econo-speak” is argle-bargle bullcrap. Its worse than consultant-speak for taking relatively simple concepts and making them impossible to comprehend because of their preposterous lingo. This is of course on purpose, so that most of humanity will read this garbage and think that it is beyond them, when in fact it is simply beneath them. The “logic” on display from this nobel-prize winner is so laughably wrong its impossible to take seriously by anyone who isn’t a “trained” neoclassical windbag.

      Shorter dumbass economist (I can’t be bothered to look above and find his name because he isn’t worth the trouble): “CEOs will steal and cheat unless we give them half of everything. Once they have half of everything their incentive to cheat will be less and so we can trust them to run things.”

      Do we really have to point out the lunacy and stupid in that argument? Apparently we do.

      I have a better idea. Let’s arrest, prosecute and imprison the ones who commit fraud so the others will have an “incentive” to not commit fraud. I know its a novel idea, but hadn’t that, like, occurred to this fraud, I mean economist?

      1. Chris Engel

        Are there any good counter-examples of massive corporations with moderately-compensated CEO’s? I was thinking Buffett or Toyota, but they’ve got the equity stake which is better than compensation in many ways. So outside of insanely-compensated CEOs and entrepreneurs who build up huge wealth but don’t insanely compensated themselves — where is there a good example of a multi-national corporation where the CEO doesn’t have the incentives that most offer?

        It seems to me that the cycle began in the 80’s when CEO’s demanded different pay styles and vulture capitalism became really profitable. And so CEO’s, even of non-profits, started demanding ridiculous compensation. And then other corporate Boards thought they had to pay that level to attract talent, and so it has spiralled now for decades to the point where nobody knows why these people are being paid so much other than that they really have not earned it.

        It’s really difficult to narrow down how much of an increase in a corporation’s market value is attributable to management style or action. Some sub-operations are just really mean profit centers that don’t require a lot of hands-on action at all. A lot of the top managers end up getting insane pay and bonuses because they happen to be in the right place at the right time in a stock market boom (higher share prices -> more collateral for leverage -> more inorganic acquisition activity to increase perceived value). The Boards furthermore developed executive renumeration packages that were entirely too focused on short-term share value and it fed into the bubbles that we’ve observed over the past two decades in the S&P.

        Bruno Fey swiftly countered Jensen’s critique and Myerson’s work in his paper “Yes, Managers Should Be Paid Like Bureaucrats“, lauding the underappreciated utility of intrinsic motivations for executives not just extrinsic incentives (particularly the “variable pay for performance”):

        Highpowered incentive compensation, even if optimally designed, aggravates the problems in the corporate sector. Pay for performance gives managers and directors incentives to manipulate performance criteria and to resort to fraudulent accounts to the disadvantage of the long-term interests of the firm.

        The firm should be looked at in terms of a bundle of common pool resources. This basically differs from agency theory’s view of the firm as a nexus of individual contracts. Common pool resources are collective goods. They generate a joint surplus not attributable to single actors. It is essential that the production of such collective goods depends on prosocial intrinsic incentives

        Corporate governance literature is actually very easy to digest (not so much econospeak, and the ones that are can be easily interpreted) compared to econometrics or other subfields. If you’re interested in the opposing academic critique to Jensen and Myerson. Dr. Black provides an excellent critique himself of course but Frey goes into more detail and structure in his paper.

        1. Yves Smith Post author

          Go read Jim Collins’ Good to Great. He had a research team identify companies that exhibited sustained outperformance after mediocre performance, and insisted that they not look at the CEOs.

          The team came back and insisted otherwise. They found that in the group of long term outperforming companies, the CEOs all had the same style, and it is the polar opposite of the CEO from central casting. They paid themselves modestly, did not take credit for successes, and were quick to take the blame for bad outcomes.

          Jeff Immelt initially paid himself modestly as the CEO of GE ($3 million a year) but someone clearly talked him out of that (I say “paid himself” because CEOs can and do do a great deal to stack the deck in their favor. Their influence over the board is considerable and not as often discussed as it needs to be. The idea that boards are independent is corporate PR).

          1. Chris Engel


            At issue isn’t the salary though — it’s the short-term incentive pay (“variable pay performance”) through options, stock grants and bonuses. These additions are what turns the CEO from a bureaucrat into a plutocrat.

            Immelt is probably the worst example you could have had of a corporation that has modest executive remuneration practices but maintains performance that puts it among the top multi-nations in the S&P. As I recall he had been among the CEO’s who had waived their bonuses in the financial crisis (Citi’s Pandit did a similar charitable gesture). But he’s a prime symbol of the anti-bureaucratic pro-plutocratic überwealthy chief exec:

            “…a substantial portion of my compensation is linked to the performance of GE stock. Nearly 70% of my net worth is in GE stock. I hold my stock options to term (10 years), a practice I adopted when I became chairman and which I will continue.”

            Jeff Immelt, Letter to Stakeholders, GE 2002 Annual Report


            I just think it’s become so widespread that there is no real example of a bureaucratic CEO of a multi-national anymore. Either you have the modest guys who still end up having a huge stake in the firm (and benefit form short-term incentives to bilk the share price) or they’re not modest and they have insane remuneration packages anyway. I think boards, shareholders, and executives are just too scared to buck the trend and hire some fresh face with a decent salary and no incentive pay for <10 years or something like that.

            Corporate boards haven't been independent in a while, especially in the US where so many CEOs dominate the boards. There used to be talk of creating a federal corporate charter to create standards that ENSURED an independent board — where you could require that publicly-traded mega-firms have boards that contain women, academics, community leaders, etc. instead of just executives and other figures from the corporate world.

            This type of reform has been easy for small countries to implement, but in the US the idea died because the state-incorporation would be a bit of a pain to sort out and because the big corporate lobby slandered the whole thing. Nader used to promote it, but when I asked Dean Baker recently about why he doesn't openly support such reforms he just shrugged it off as being impossible in the political climate.

            So reform at the government level is hopeless and the dynamics in multi-national corporations are such that it's hard to imagine the market for executive pay correcting downward to reflect true value because of how the market is structured and controlled.

          2. Chris Engel

            Also I’m not huge fan of Good to Great (not just because it stinks of the same failed MBA doubletalk industry). The Freakonomics guy actually demonstrated how useless these types of books are:

            Nine of the eleven companies remain more or less intact. Of these, Nucor is the only one that has dramatically outperformed the stock market since the book came out. Abbott Labs and Wells Fargo have done okay. Overall, a portfolio of the “good to great” companies looks like it would have underperformed the S&P 500.


            And regarding that one goodie Nucor:

            Senior officers had only one incentive compensation system, based upon Nucor’s return on stockholders’ equity above certain minimum earnings. A portion of pre-tax earnings was placed into a pool that was divided among the officers.
            If Nucor did well, the officers’ bonuses, in the form of stock (about 60%) and cash (about 40%), could amount to several times base salary. If Nucor did poorly, an officer’s compensation was only base salary and, therefore, significantly below the average pay for this level of responsibility.


            The one company that actually seemed to be “Built to Last” (Collins) had an executive remuneration policy that still rewarded short-termism and would not at all follow the spirit of Fey’s vision of the CEO as a bureaucrat.

            There are actually plenty of examples of this in small business — but I was curious if anyone had any MNE examples that served as excellent counterpoints in a discussion like this, because I really don’t know of any. Poorly crafted variable pay policies are ubiquitous in the corporate world, making it very difficult to imagine that suddenly Boards and shareholders will start to overhaul the incentives entirely and start a reversal of the exponential rise in executive compensation.

          3. Nathanael


            “it’s hard to imagine the market for executive pay correcting downward to reflect true value because of how the market is structured and controlled.”

            It’ll happen sometime *after* the US sees investor flight — flight away from untrustworthy US companies to companies incorporated in countries which have actual corporate governance regulations.

            It could take a while.

        2. jake chase

          Chris, you tell us “and then other corporate Boards thought they had to pay that level to attract talent?” Surely, you are joking. Have you ever noticed that every so called independent director makes a business of being an independent director on six to twelve public corporations, cashing in on his or her status as a retired military bureaucrat or executive, a defrocked congressman, a celebrity Negro, a female clawing her way to the top in a man’s world, etc? Do you not understand that each of these directors is chosen for public relations reasons, not business acumen, that most of them would be hard pressed to manage a public rest stop, that if asked they could not begin to understand their own company’s financial position or results, that they snooze through monthly lunches and rubber stamp CEO compensation demands, because if they didn’t do exactly that their tenure as independent directors (and their ability to cash those nice checks and free stock option giveaways) would immediately evaporate and they would no longer be welcome at those dinners and golf outings where those on the inside exchange secret handshakes? It is high time we stopped pretending that public corporations are managed for any purpose other than rent extraction and executive looting. I challenge you to name one major company which has not degraded its product and sacrificed its future to the present whims of its top executive.

          The fact that Warren Buffet could create a collossal business empire through the simple expedient of limiting executive compensation and distaining to interfere with the operations of his captive subsidiary companies ought to tell you something about just how valuable all this eggregiously overpaid executive talent in the yellow ties and $10,000 suits who talk nonsense on CNBC all day long really is.

          1. Chris Engel

            jake chase writes:

            “The fact that Warren Buffet could create a collossal business empire through the simple expedient of limiting executive compensation and distaining to interfere with the operations of his captive subsidiary companies ought to tell you something…”

            From Bloomberg:

            Berkshire gave $17.4 million in 2011 compensation to Thomas P. Nerney, CEO of its United States Liability Insurance Group; $12.4 million to Geico Corp. CEO Tony Nicely and the National Indemnity Co. unit gave $9.26 million to Ajit Jain, according to filings to state regulators. Berkshire, which is set to send its annual-meeting notice to shareholders today, said in last year’s proxy that Buffett’s salary remains $100,000 at his request.


            Still looking for that ultimate counterexample of the CEO who comes in and is paid like a bureaucrat and manages just as well as the MNE’s with obscene compensation (but doesn’t have huge independent wealth through stock like Buffett or other similar legitimate value-based entrepreneurs not quick-buck artists).

          2. Chris Engel


            You’re right about how poisonous corporate boards are (especially in the US) — and your descriptions of the typical corporate world Board member is as witty as it is sadly true. But there’s still an element of “we have to pay a certain amount to execs or else we’ll lose “talent”!” amongst corporate executives and governors. So while I’m not saying that the system is not corrupt (it most surely is), I have observed that there is at least the purported concern that if these executives aren’t compensated well enough they’re going to run off to some other firm.

            This is why you even see non-profits like the Red Cross have fairly ridiculous compensation levels (in 2010 the figure was about a million if I recall correctly for the chief exec).

          3. jake chase

            I suppose my information on Buffet is somewhat dated. He seems recently to have become just another bullshitting plutocrat collecting bouquets from that rhapsodic priestess of busness disinformation, Becky Quack, although at least he does occasionally tell the truth which cannot be said for any of the rest.

            In all events, it’s nice to see Mr. Nicely doing so nicely.

          4. Nathanael

            Here’s the thing: as a stockholder, you can’t trust a CEO who is getting paid.

            A CEO who is making his money off stock — and I mean because he bought stock, not because he’s being given free stock — is a CEO who does well when the stockholders do well.

          5. peace

            Yes, boards may include demographic minorities who may be token memberss, but your use of the phrase “celebrity Negro” is an anachronistic, offensive slur.

          6. peace

            I am surprised Wikipedia claims that “Negro” is included in the 2010 census because some individuals self ascribe with that label. Everyone that I know considers Negro a slur.

      2. Barmitt O'Bamney

        Sounds like Zeno’s Paradox: they will never reach the point of satiety because they will always covet and demand at least half of whatever is left. They can win all that there is to win from the present, (they pocketed that ages ago) and they can even dig up and plunder the past, but there’s still all the eminently plunder-worthy tomorrows to pillage. The future Mr. Gittes, the future! Finally, an infinite horizon for piracy. Looting, arson and slave taking without end.

    3. colinc

      Spot on, Mr. Chase! If it were possible I would nominate you for the “Epitomy of Clarity Prize” for your astute observations and outstanding faculty of reason. I, too, have seen these real moochers and looters for the repulsive creatures they truly are. I guess that is why I am now an ostracized pauper. They equate their deceitful, manipulative cleverness with intelligence and wisdom, which is most certainly incorrect, and claim it as justification for their perches on the pedestals power and wealth. Nonetheless, they have managed to foster a system of institutionalized programming that relegates the bulk of humanity to merely Pavlovian behaviors. It is sad to see the breadth and depth of the assimilation and the abject supplication of so many to these masters of the universe.

      This is why Joseph Tainter is dead wrong! Civilizations do not collapse due to complexity, rather, they utterly fail under the near infinite burden of delusional complications. My what a tangled web they weave! The system is truly FUBAR and its end is within sight.

    4. nonclassical


      Having sister who taught International Ed. at Harvard, father who taught Physics-Chemistry, Stanford, with students with Oppenheimer, finishing working years with military-industrial complex, grade one Pentagon clearance, having taught internationally myself, I agree, Jake…as sister defined (she accompanied Hillary-education tour of China), “networking”…

      By the way, sister also defined “no vote” for DLC Hillary…having spent month with her…

  3. craazyman

    this bonehead got a Nobel Prize?

    Wow. Is Dr. Black sure he isn’t confusing reality with the plot of some low-budget cult comedy film he saw on TV late one night after a few chilly Budweiser Tall Boys?

    Nobody’s perfect. We all get confused sometimes.

    If this really happened, I guess the Nobel Prize Selection Committee needs a new incentive compatible coordination plan. Bwaaaaak!

    Let’s make a movie out of this. If you took that speech and read it into the camera, it would be hilarious all by itself.

  4. Stephen Gardner

    Neoclassical economics is the Lysenkoism of the capitalist world. Pseudoscience in service to the party.

  5. DanInChicago

    Wouldn’t this, then, almost be an argument for limiting the size of firms? If “mere” multimillionaires can’t “make a personal investment of 40% of the firm’s total cost of capital to create an “incentive-compatible” mechanism”. According to Forbes, there were less than 1500 billionaires in the WORLD in 2013, and perhaps only 400 in the US. Some fraction, probably not inconsequential, have little interest in being CEO of a firm (e.g. Bill Gates retired from Microsoft).

    So limiting discussion to just the S&P 500 firms, there are more firms than there are potential CEOs, leading to two “rational” solutions.

    1. Attempt to lure one of the limited supply of potential billionaire CEOs by offering outsized compensation.
    2. Reduce the size of the firm so that it no longer needs to limit its CEO pool to the 1500 world-wide billionaires (or 400 US citizen billionaires)

    While option #1 may be rational for an individual firm, taken as a collection of 500 firms would simply lead to CEO-by-musical-chairs as each firm raises compensation to lure another firm’s CEO away. Surely this becomes highly unstable, as firms would eventually be forced to commit ALL profits to the CEO.

    Thus option #2 is really the only viable steady-state solution for the system.

    Of course, both assume Myerson’s conjecture isn’t utter tripe.

    1. Pdooley

      Solution: hire a “not so rich” CEO. He will loot the firm until he reaches an appropriately obscene level of wealth, then “rational equilibrium” will kick in and he will become honest. Of course, the “owners” will have lost 40% of “their” “capital”.

    2. Nathanael

      “Wouldn’t this, then, almost be an argument for limiting the size of firms? ”

      Yes. That was Teddy Roosevelt’s view, anyway.

  6. ScottS

    Every bit of economic literature written in the run-up to the Global Financial Crisis now comes off as incredibly naïve. Possibly, if you’re reading this here, you aren’t surprised. But I mean naïve in a very specific way. Every academic economist seems to think that we can hold the entire world constant except for one input which will change one output and the world will be improved in a measurable way. No economist seems to imagine any kind of feedback loop, or complex and subtle (or social) ramification from any of their tweaks to their toy ship in a bottle.

    Great work, Mr. Black. Keep digging up these bodies. We need more “Looking Backward.”

  7. rich

    Ralph Nader: How Big Business Has Taken Control of the US Government

    What are the consequences of lifting financial regulations and allowing big businesses to accumulate power without limits? What about launching a full-scale invasion that leads to years of endless war? Some pundits echo the voices of their governments, egging them on towards their special interests. Others dissent—and later say, “I told you so.”

    Former presidential candidate and Nation contributer Ralph Nader joins Amy Goodman on Democracy Now! to discuss his new book, Told You So: The Big Book of Weekly Columns, a compilation of his columns from over the years and the social marginalization of those who predict catastrophes from the beginning.

    Read more:

  8. James Levy

    What amazes me is that these Rightist economic neoclassical economic theories are as materialistic and atheistic as Marxism-Leninism, but this is never mentioned. Men and women who call themselves Christian and think that Protestant notions of morality should be inscribed into American law tout these economic ideas and no one seems to ever point out that they are based on a worldview ostensibly ananthema to believing Christians. Myerson and all the rest baldly state that the only thing that people care about is money. The idea that one might act out of pride in one’s craft, or for the respect of one’s fellows, or to aid the community, or out of duty, or for the glory of god, they reject as “irrational.” The only rational course for these libertarians is personal finacial gain. One wonders why anyone would have children if the only rational thing was, as Myerson argues, is to make more money for yourself.

    1. Chris Engel

      The neoclassicals you attack include Jevons and Mill, who introduced utilitarianism to economic analytical frameworks (although it has origins much earlier, but anyway..).

      This de-monetized the rational agent and incorporated all the sociological variables you could imagine, as you say “pride” or “respect” or “aid to the community” — where your rationality constraints depend upon this utility that is subjective to however you feel like modelling it.

      What is it that you find so offensive about neoclassical economic theories?

      I’m starting to think a lot of people on this blog really don’t understand that neoclassical is NOT the same as neoliberal.

        1. Chris Engel

          Criticism of perpetual growth is fine.

          But it’s not definitively “growth off the backs of the untouchable po[or]”. Heck, were considered idealistic in their views incorporating the vague notion of utility.

          It’s merely a foundation, if some use a neoclassical base to try and legitimize neo-feudalism that’s not a reason to hate neoclassical economics.

          In fact the only decent critique I’ve seen of the neoclassicals is the ecological economists.

          neoclassical econ is not an endorsement of feudalism and is not neoliberal free market fundamentalism.

        2. Chris Engel

          By the way, related to your link (but much earlier work that served as the original great critique of neoclassical econ):

          The Economics of the Coming Spaceship Earth by Kenneth Boulding:

          Small is Beautiful by EF Shumaker

          The key here is the focus on finite resources and altering accounting methods to incorporate sustainable versions of what we see now as “perpetual growth”.

          BUT — this has nothing to do with free market fundamentalism or cronie capitalism!

          1. James Levy

            Myerson’s argument is not about utility, which is an empty concept (Charles Manson was rational because he optimised utility by killing people because he enjoyed it) but about monetary compensation, i.e. money, which is what I said was at the heart of his, Hayek, et al.’s arguments about the glories of the free market. The free market is great because it rewards the “best” with shitloads of money and punishes the losers. It is a worldview as atheistic and materialistic as anything Lenin ever said, and yet is never attacked for that reason, but praised to the skies by Bible-thumping Protestant Republicans. That is what I have against neoclassical economics, which I find solipsistic(it has utitlity and therefore it is rational; to be rational is to have utility) and devoid of any humane sense of sympathy, fairness, or justice.

          2. skippy

            Cough… Consumer choice* is a utility – maximizing – function… duh.

            *Labor-leisure tradeoff thingy…

            skippy… classical under new neomanagement methinks… re-branding with a sprinkle of JG fairy dust…

          3. skippy

            @Chris Engel… Whats the difference?

            The utility function plays a foundational role in economics. However, as used in economics, the concept of utility has no measurable counterpart in the real world. Utility functions provide ordinal rankings of choices, thus the numerical value assigned to each utility level is completely arbitrary.

            skippy… both have an a priori problem, therefore any mathematics applied is only a reflection of its incoherence.

            PS… BTW do you have any disclaimers to evidence with modeling bias?

          4. Chris Engel

            skippy — what evidence?

            Also, concepts of human justice, sympathy, etc. can all be incorporated into utility for mathematical analysis. There’s no reason to be scared of math in economics just because there’s a subjective sociological dimension to it!

          5. skippy

            What part of this do you not understand.

            “numerical value assigned to each utility level is completely arbitrary” aka made up, R$R fell into the bias trap to imo.

            Skippy… drop the scared crap whilst your at it, projection writ large, amateurish rhetorical ploy, painting your target.

            BTW you neglected to take up my offer, do you have any disclaimers to evidence with modeling bias.

            Vice President

            Chris Engle, Avalanche’s Vice President, is a national thought leader on the topic of economic development analysis and industry trends. He has nearly 20 years of experience as a researcher and strategist. His expertise includes economic analysis, competitive evaluations, real estate feasibility, labor market studies and site selection. He has focused his career on translating the meaning of global trends on regional economic growth. His strong belief in the power of transforming complicated data into easy-to-use decision making resources for communities led him to develop one of the most dynamic economic development software tools available today,

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      1. jake chase

        Neoclassical economics is built on groundless assumptions for public relations purposes. It is epitomized by Paul Samuelson, a careerist who staged an end run around Keynes to make toadying apparently scientific (and respectable and profitable) for mediocre mathematicians.

  9. Paul Tioxon

    Any man is as faithful as the available options allow. The increasingly plutocratic makeover of CEOs, to ensure adequate stakeholder status to fend off moral hazard and promote the highest and best use of resources to maximize profits and hence, shareholder value, has a converse political lesson. The people with the least stake have no reason to support the system that produces more and more plutocrats at their expense. The formula worked out by the Nobel genius is a the exact plan necessary for growing domestic violence, resulting in what we see in Syria.

    Of course, our largest cities and increasingly, mid size rapidly urbanizing areas of the territories formerly known as the deep South and now by the more antiseptic brand, The Sun Belt, are growing a bumper crop of bullet riddled battle zones, expanding to the occasional ex-urban multiplex or shopping mall crazed killing spree. But, let’s not give too much credit to the Nobel Prize winner of status quo apolgia. The famed Roman General, Attila The Hun, received his illustrious rank for service over and beyond the call of duty, by not attacking the Roman Empire’s seat of power in the East, Nova Roma, aka Constantinople, aka Istanbul, aka the new sick man of Europe as we speak.

    To make sure Attila did not do succumb to the moral hazard of doing too much mass murdering, looting and raping, the savy Romans made an Embassy to his camp and negotiated on several occasions, diplomatic ties resulting in a win-win situation for both parties, as long as the opportunities for getting over on either one were not presented. So, Mr. Attila was given a stake in the Roman scheme of power, provided he held up his end of the bargain.

    Unfortunately, if history is a guide, well, it’s the only guide, the early payments of 422CE of 250lbs of gold gave way to 700 in the formal treaty of Margum in 439CE. As Attila saw the opportunity to make war, the payments exploded to 2,100lbs of gold, annually, making Attila not only powerful as a ceremonial ranking general but as wealthy as some of the richest patricians. But of course, this appeasement strategy was rational due to the cost of warfare to be paid by the Romans was at least 50 times as great.

    The lesson to be drawn here, is that the CEO’s need to be paid off not for loyalty, since they have none, but because it is cheaper than having a war against the management cadre as well as against the laboring class along with the stiff competition from other plutocrats. You know, the don’t call it a War For Talent for no reason!

    Stay tuned for the next big bombshell in political economics, the unsustainable ticking time bomb of executive compensation: How to curb irrational CEO entitlements before they consume all future profits!!!!

  10. Hugh

    “I want to stress that the reason that the work has proven so faulty is not that the Nobel Laureates in economics are incompetent or evil”

    I have no idea why Bill Black feels the need to stress this. Mainstream economists, the kind that win “Nobel” prizes, are chalatans propagandizing for kleptocracy.

    The Roger Myersons of this world are supposed to be the best of the best, the smartest of the smart, the deepest of the deep, the most insightful, etc. Yet if we actually take a look at what they are saying, it’s bilge, but more than this, bilge with a point of view that facilitates criminality and looting. This is not a bug but a feature. Indeed it is the whole point.

    This is how kleptocracy works. It is not a few billionaire CEOs acting badly. It is a system of looting run by the elites (like Myerson) for the rich who employ, credential and reward them, some with cushy lobbying jobs, some with Nobel prizes, and some with just the promise of a place on the lifeboat.

  11. allcoppedout

    The Nobel prizes are junk and not just in economics. If the masters of the universe are so different and brilliant there is an obvious answer to our economic woes. Take all the money off them, reduce them to poverty and then set them loose to prosper again.
    Yves seems to have chosen a poor citation reminiscent of ‘In Search of Excellence’ – only 2 of the 60-odd companies were excellent even in the authors’ own terms 6 months after publication. Good to Great is similarly simplistic manago-babble. There’s a review here if unfamiliar

    and even worse Harvard Business Review dross here
    I believe In Search Of Excellence was a copy of the English bureaucracy’s ’10 Excellent Secondary Schools’ and Good To Great is in that tradition. It’s research with blinkers on.

    There is more to support Jake’s ‘orrible kids of the ‘orrible rich thesis. This in one of 100s of papers relating to the psychopathy of CEOs and picks out narcissism

    We have no idea what makes a good CEO or even whether such leadership is now outmoded and could be replaced by something more transparent, cheaper, less demoralising for the rest of us and so on. Barabara Kellerman’s ‘The End of Leadership’ begins this story.
    Soccer prospered in the UK with a low maximum wage for years. The current obscene payments are as result of a shift in bargaining power. Something similar is true on management payment – the worth of the ‘great individual’ is a diversion from the conditions that make the discussion possible. If CEOs are so great why do they have to steal tax offshore and the rest?

  12. allcoppedout

    We are ‘kept honest’ in complex ways. A bit of personal reflection gets to that – so why would anyone be stupid enough to focus it all down to doing what pays off best in money?
    There were ways to be elite in Soviet societies – food, booze, whores and so on were not much different in a Soviet Dacha weekend or US management development event. Probably better in the USSR. I just don’t do that kind of thing.
    The main thing that keeps most of us honest is effective law enforcement – so why have we made corporate law so easy to evade?

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