Kalle and me. Schumpeter, too.

[One of my intellectual heroes, Karl Marx, had his 200th birthday (May 5) this weekend. So I decided to reflect on his influence.]

My first encounter with Kalle was when I was still in (the equivalent of) high school. Things were heating up in (West) Germany around that time: students started marching against a “system” that had allowed atrocities abroad (Remember Vietnam, that last and long-lasting proxy battle of the Cold War?) and also at home where the old Nazis (Remember “Silver Tongue” Kiesinger?) were still very much in power and, it seemed, had adopted the Social Democrats (being themselves quite an old-boys network, although of another kind) via a Grand Coalition with him and his.

The suffocating stuffiness that still hung over Germany in the early sixties soon fell by the wayside, culturally as much as politically, and by the late sixties Kiesinger was gone and in the fall of 1969 that “traitor”, Willy Brandt, was German chancellor. People like Udo Lindenberg, and a number of the Krautrock and Schneeball groups, started to sing in German and it was not embarrassing. Alles klar auf der Andrea Doria! Keine Macht fuer Niemand! (Of course, all of these German bands had to fight the onslaught of bands from Great Britain and the United States … .) There were charismatic figures such as the informal leader of the extraparliamentary opposition, Rudi Dutschke, the Kommune 1  with its fun guerilla faction, and the no-fun guerilla of the Red Army Faction (Baader, Ensslin, Mahler, Meinhof, et al.) which soon after went from agitating to murder and brought about, in 1977, The German Autumn. There was also an emerging environmental movement in the seventies that did its fair share, and then some, to change the policy discourse in Germany for decades to come. All of this happened against the backdrop of a divided Germany, in a key theatre of the Cold War, where one part called itself the German Democratic Republic but was hardly that.

Around the same time (ca 1967 – 1970) my parents fought hard a battle of the roses that saw my (younger, by three years) brother’s life derailed (and him dead of an overdose a decade later) and me dropping out of school, leaving “home” prematurely, moving to the big city (well for me, that was what Bielefeld was then), and becoming part of the proletariat at age 18, working for about a year as warehouse worker and delivery driver for Thyssen-Schulte, before — after a few months of hitch-hiking through Europe –, I joined the army. I spent much of the next two years deep in the heart of conservative and catholic Bavaria (1972 – 1974), much of it in an alpine communication unit.  Quite an experience it was.

After the years in the military, I entered an experimental college back in Bielefeld, studying political economy, math, Russian, and Portuguese during 1974 – 1978. I also spent a couple of weeks in Oberhof, Thuringia (then part of the German Democratic Republic), on an all-expenses paid trip where I was taught the Socialist way of thinking in the morning and got to ski in the afternoon, with enough space left for plenty of drinking and carousing in the evenings. Paid by the Konsumgenossenschaft, the trip was the East-German Communist Party’s attempt to pry away from the West promising young things. I was not quite persuaded and did not take it up on the invitation.

It was during that first year in Bielefeld, and way before my trip to Oberhof, when I started reading Marx. In reading groups we slugged our way through The Communist Manifesto (quickly) and then (way more slowly) through Das Kapital, volume one.  Never quite finished it from what I vaguely recall. Not even close.  And, frankly, we all got quite bored reading it and had trouble buying into the promises of the discussion leaders that, in the end, it all would make sense. It did get me interested enough though that — when I entered that experimental college in Bielefeld — political economy was my choice of major, together with math. And it was there that I studied Marx’s work more carefully. And I was not the only one … several fellow students and teachers were into it … (a couple of the teachers being true armchair Marxists who thought that interpreting the world on a decent salary was good enough after all.)

I read a lot those years, often sitting in my small rented basement room in the Von-Ossietzky-Strasse until deep in the wee hours, sipping cheap Moroccan red wine, popping Adumbran to be able to sleep, with good old Brecht looking over my shoulder from a huge poster. Among the things I read – I can tell because I still have the marked-up copy — was Wygodski’s book, published in East Berlin in 1976, on how Das Kapital emerged from Marx’s early writings. Wygodski’s books were remarkable in that they showed how early some of Marx’s (and Engels’s) theories about society, economics, politics, and culture were fixed. There are interesting parallels here to how the ideas underlying Adam Smith’s Wealth of Nations emerged over decades of thinking about them. I also read Theorien über den Mehrwert, often called the fourth volume of Das Kapital which demonstrates that Marx knew his stuff and was indeed a first-rate historian of thought to start with. But of course, he was much more: Philosopher, sociologist, economist, political scientist, activist, agitator, …

As I progressed in my career, I lost sight of the insights to be found in Marx’s writings. With the fall of socialism, in the USSR and its satellite states in Central Europe, the evidence seemed to suggest that certain realizations of Marxian ideas (or what some people considered them) had overstayed their welcome. Of course, Marx’s ideas do live on these days in China where Xi Jinping just recently made clear the importance of The Communist Manifesto. Marx’s ideas havea also lived on in some academic branches such as sociology. The authors of the Wikipedia entry on Kalle seem to assert correctly that he is typically cited as one of the principal architects of modern social science. Even that curmudgeon of a historian, Schumpeter, who thought little of Adam Smith but can hardly be accused of having communist sympathies, was surprisingly positive about Marx, calling him a “first-rank economist” (History of Economics Analysis p. 224), among other laudatory names.  It was no coincidence that Schumpeter featured Marx prominently in Ten Great Economists. In contrast, Smith did not make the cut. Go figure.

Here are some selected excerpts from Schumpeter’s History of Economic Analysis (Perlman edition), for your easy perusal:

p. 370 Any economist who wishes to study Marx at all must resign himself to reading carefully the whole of the three volumes of Das Kapital and of the three volumes of Theorien über den Mehrwert.Fn

Further, there is no point whatever in tackling Marx without preparation. Not only is he a difficult author but, owing to the nature of his scientific apparatus, he cannot be understood without a working knowledge of the economics of his epoch, Ricardo in particular, and of economic theory in general. This is all the more important because the necessity for it does not show on the surface. Again, the reader must be on his guard against being misled by traces of Hegelian terminology. It will be argued below that Marx did not allow his analysis to be influenced by Hegelian philosophy. But he sometimes uses terms in their specifically Hegelian sense, and a reader who takes them in their usual sense misses Marx’s meaning.

Fn. The Communist Manifesto is also indispensable, of course. But for any purpose short of becoming a Marxologist, I think that nothing need be added except the Class Struggles in France, articles written in 1848–50, published as a book, with an introduction by Engels in 1895. Only the Marxologist need go into Marx’s correspondence.

p. 366 … nobody will ever understand Marx and his work who does not attach appropriate weight to the erudition that went into it—the fruit of incessant labor that, starting from primarily- philosophical and sociological interests in his early years, was concentrated increasingly on economics as time went on, until his working hours were all but monopolized by it. Nor was his the kind of mind in which scholarly coal puts out the fire: with every fact, with every argument that impinged upon him in his reading, he wrestled with such passionate zest as to be incessantly diverted from his main line of advance. On this I cannot insist too strongly. This fact would be my central theme were I to write a Marxology. Perusal of his Theorien über den Mehrwert suffices to convince one of it. And, once proved, it serves to establish in turn another fact and to solve a much discussed riddle: it serves to establish that he was a born analyst, a man who felt impelled to do analytic work, whether he wanted to or not and no matter what his intentions were; … our information warrants the statements that he was very much a philosopher dabbling in sociology and politics (as do so many philosophers) until he went to Paris; that there he quickly made headway and found his feet as an economist; and that by the time he and Engels wrote the Communist Manifesto (1847; published 1848); that is to say, at the age of 29,7 he was in possession of all the essentials that make up the Marxist Social Science, the only important lacunae being in the field of technical economics. For the rest, the main line of his intellectual life may be described as a series of efforts to work out that Social Science and to fill those lacunae—tasks which, I believe, Marx did not expect would involve any insurmountable difficulties, though he did expect that a great deal of further work would be required to straighten out and co-ordinate everything that was to find a place within the vast structure.

p. 33 Half a century before the full importance of this phenomenon [ideological bias, AO] was professionally recognized and put to use, Marx and Engels discovered it and used their discovery in their criticisms of the ‘bourgeois’ economics of their time. Marx realized that men’s ideas or systems of ideas are not, as historiography is still prone to assume uncritically, theprime movers of the historical process, but form a ‘superstructure’ on more fundamental factors, as will be explained at the proper place in our narrative. Marx realized further that the ideas or systems of ideas that prevail at any given time in any given social group are, so far as they contain propositions about facts and inferences from facts, likely to bevitiated for exactly the same reasons that also vitiate a man’s theories about his own individual behavior. That is to say, people’s ideas are likely to glorify the interests and actions of the classes that are in a position to assert themselves and therefore are likely to draw or to imply pictures of them that may be seriously at variance with the truth. … Such systems of ideas Marx called ideologies.4 And his contention was that a large part of the economics of his time was nothing but the ideology of the industrial and commercial bourgeoisie. The value of this great contribution to our insight into the processes of history and into the meaning of social science is impaired but not destroyed by three blemishes, …

p. 20 … an economics that includes an adequate analysis of government action and of the mechanisms and prevailing philosophies of political life is likely to be much more satisfactory to the beginner than an array of different sciences which he does not know how to co-ordinate—whereas, to his delight, he finds precisely what he seeks ready-made in Karl Marx. An economics of this type is sometimes presented under the title Political Economy.  …

p. 363 The difficulty is that in Marx’s case we lose something that is essential to understanding him when we cut up his system into component propositions and assign separate niches to each, as our mode of procedure requires. To some extent this is so with every author: the whole is always more than the sum of the parts. But it is only in Marx’s case that the loss we suffer by neglecting this2 is of vital importance, because the totality of his vision, as a totality, asserts its right in every detail and is precisely the source of the intellectual fascination experienced by everyone, friend as well as foe, who makes a study of him. Marx figures in this book only as a sociologist and an economist. Of course, that creed-creating prophet was much more than this. And his creed-creating activity, on the one hand, and his policy-shaping and agitatorial activity, on the other hand, are inextricably interwoven with his analytic activity. So much is this the case that the question arises whether he can be called an analytic worker at all. This question may be answered in the negative from two very different standpoints.  …

p. 364 My answer to our question is, however, in the affirmative. The warrant for this affirmative answer is in the proposition that the bulk of Marx’s work is analytic by virtue of its logical nature, for it consists in statements of relations between social facts. For instance, the proposition that a government is essentially an executive committee of the bourgeois class may be entirely wrong; but it embodies a piece of analysis in our sense, acceptance or refutation of which is subject to the ordinary rules of scientific procedure. It would be absurd indeed to describe the Communist Manifesto, in which this proposition occurs, as a publication of scientific character or to accept it as a statement of scientific truth. It is not less absurd to deny that, even in Marx’s most scientific work, his analysis was distorted not only by the influence of practical purposes, not only by the influence of passionate value judgments, but also by ideological delusion. Finally, it would be absurd to deny the difficulty that in some cases rises to impossibility of disentangling his analysis from its ideological element. But ideologically distorted analysis is still analysis. It may even yield elements of truth. …

To sum up: … we simply recognize him as a sociological and economic analyst whose propositions (theories) have the same methodological meaning and standing and have to be interpreted according to the same criteria as have the propositions of every other sociological and economic analyst; we do not recognize any mystic halo.

p.367 The ‘pieces’ divide up into two groups, one sociological and the other economic. The sociological pieces include contributions of the first order of importance such as the Economic Interpretation of History, which, as I shall argue, may be considered as Marx’s own, quite as much as Darwin’s descent of man is Darwin’s own. But the rest of Marx’s sociology—the sociological framework that, like every economist, he needed for his economic theory—is neither objectively novel nor subjectively original. His preconceptions about the nature of the relations between capital and labor, in particular, he simply took from an ideology that was already dominant in the radical literature of his time. If, however, we wish to trace them further back, we can do so without difficulty. A very likely source is the Wealth of Nations. A.Smith’s ideas on the relative position of capital and labor were bound to appeal to him, especially as they linked up with a definition of rent and profits—as ‘deductions from the produce of labour’ (Book I, ch. 8, ‘Of the Wages of Labour’)—that is strongly suggestive of an exploitation theory. But these ideas were quite common during the enlightenment and their real home was France. French economists, ever since Boisguillebert, had explained property in land by violence, and Rousseau and many philosophers had expanded on the subject. There is, however, one writer, Linguet, who, more explicitly than others, drew exactly the picture that Marx made his own: the picture not only of landlords who subject and exploit rural serfs, but also of industrial and commercial employers who do exactly the same thing to laborers who are nominally free, yet actually slaves.This sociological framework offered most of the pegs that Marx needed in order to have something upon which to hang his glowing phrases. And since historians are primarily interested in these, no matter whether they admire them or are shocked by them, it is difficult to gain assent to what is the obvious truth about the nature of thepurely economic pieces of the Marxist system. This obvious truth is that, as far as pure theory is concerned, Marx must be considered a ‘classic’ economist and more specifically a member of the Ricardian group. Ricardo is the only economist whom Marx treated as a master. I suspect that he learned his theory from Ricardo. But much more important is the objective fact that Marx used the Ricardian apparatus: he adopted Ricardo’s conceptual layout and his problems presented themselves to him in the forms that Ricardo had given to them. No doubt, he transformed these forms and he arrived in the end at widely different conclusions. But he always did so by way of starting from, and criticizing, Ricardo—criticism of Ricardo was his method in his purely theoretical work.

p.369 … admit that Marx could ever grow out of date in any respect. However, in order to drive home a point that seems important, I have strictly confined myself in the preceding paragraph to Marx’s theoretical technique. But there are two features of Marxist theory that transcend technique. And these were not period-bound. The one is his tableau économique. In his analysis of the structure of capital, Marx developed Ricardo once more. But there is an element in it that does not hail from Ricardo but may hail from Quesnay: Marx was one of the first to try to work out an explicit model of the capitalist process. The other is still more important. Marx’s theory is evolutionary in a sense in which no other economic theory was: it tries to uncover the mechanism that, by its mere working and without the aid of external factors, turns anygiven state of society into another.

p.408 … the period’s great performance in the field of political sociology stands in the name of Karl Marx. …  I wish merely to say by way of anticipation that Marx’s theories of history, of social classes, and of the state (government) constitute, on the one hand, the first serious attempts to bring the state down from the clouds and, on the other hand, the best criticism, by implication, of the Benthamite construct. Unfortunately, this scientific theory of the state, like so much else in Marxist thought, is all but spoiled by the particularly narrow ideology of its author. What a pity, but at the same time, what a lesson and what a challenge!

p.413 [Marxist Evolutionism] I have just adverted to the possible implications for sociology that a despiritualized Hegelian philosophy might harbor. This suggests that here we have after all more than a phraseological influence of Hegel upon Marx. If, nevertheless, we maintain substantive autonomy of Marx’s so-called Materialistic Interpretation of History as against Hegelism, and if we list it as a separate type of evolutionism, we allow ourselves to be guided by two considerations. First, Marx’s theory of history developed independently of Marx’s Hegelian affiliation. We know that his analysis started from a criticism of the current (and apparently immortal) error that the behavior that produces history is determined by ideas (or the ‘progress of the human mind’), and that these in turn are infused into actors by purely intellectual processes. To start with this criticism is a perfectly sound and very positive method but has nothing to do with Hegelian speculation. Second, Marx’s theory of history is a working hypothesis by nature. It is compatible with any philosophy or creed and should therefore not be linked up with any particular one—neither Hegelianism nor materialism is necessary or sufficient for it. What remains is, again, Marx’s preference for Hegelian phrasing—and his own and most, though not all, Marxists’ preference for anything that sounds anti-religious.

p.414 Both the achievement embodied in that hypothesis and the limitations of this achievement may be best conveyed by means of a brief and bald statement of the essential points. (1) All the cultural manifestations of ‘civil society’—to use the eighteenth-century term—are ultimately functions of its class structure.8 (2) A society’s class structure is, ultimately and chiefly, governed by the structure of production (Produktionsverhältnisse), that is, a man’s or a group’s position in the social class structure is determined chiefly by his or its position in the productive process. (3) The social process of production displays an immanent evolution (tendency to change its own economic, hence also social, data). To this we add the essential points of Marx’s theory of social classes, which is logically separable from points (1) to (3) that define the economic interpretations of history but forms part of it within the Marxian scheme. (1′) The class structure of capitalist society may be reduced to two classes: the bourgeois class that owns, and the proletarian class that does not own, the physical means of production, which are ‘capital’ if owned by employers but would not be ‘capital’ if owned by the workers who use them. (2′) By virtue of the position of these classes in the productive process, their interests are necessarily antagonistic. (3′) The resulting class struggle or class war (Klassenkampf) provides the mechanisms—economic and political—that implement the economic evolution’s tendency to change (revolutionize) every social organization and all the forms of a society’s civilization that exist at any time. All this we may sum up in three slogans: politics, policies, art, science, religious and other beliefs or creations, are all superstructures (Überbau) of the economic structure of society; historical evolution is propelled by economic evolution; history is the history of class struggles.

This is as fair a presentation of Marx’s social evolutionism as I am able to provide in a nutshell. The achievement is of first-rank importance although the elements that enter into it are of very unequal value or, rather, unequally impaired by obvious ideological bias. … … the economic interpretation of history … . If we reduce it to therole of a working hypothesis and if we carefully formulate it, discarding all philosophical ambitions that are suggested by the phrases Historical Materialism or Historical Determinism, we behold a powerful analytic achievement. Points (1) and (3) may then be defended against objections, most of which turn out to rest upon misunderstandings. We have reached a point of vital importance for a proper understanding of Marx’s work. … we can now visualize his unitary Social Science, the only significant all-comprehensive system that dates from this side of utilitarianism: we see the manner and the sense in which he welded into a single homogeneous whole all branches of sociology and economics—a venture that might well dazzle the modern disciple even more than it dazzled Engels, who stood too near the workshop. .. Here I wish only to insist on the greatness of the conception and on the fact that Marxist analysis is the only genuinely evolutionary economic theory that the period produced.14 Neither its assumptions nor its techniques are above serious objections—though, partly, because it has been left unfinished. But the grand vision of an immanent evolution of the economic process— that, working somehow through accumulation, somehow destroys the economy as well as the society of competitive capitalism and somehow produces an untenable social situation that will somehow give birth to another type of social organization—remains after the most vigorous criticism has done its worst. It is this fact, and this fact alone, that constitutes Marx’s claim to greatness as an economic analyst.

Some of Marx’s insights have stayed with me,. Here is a list of ten great insights and phrases, straight from the horse’s mouth. Memorable, and still rather pertinent.

10. “The philosophers have only interpreted the world, in various ways. The point, however, is to change it.” [These words are also inscribed upon his grave]” (Eleven Theses on Feuerbach)

9. “There is no royal road to science, and only those who do not dread the fatiguing climb of its steep paths have a chance of gaining its luminous summits.” (Capital, Vol 1: A Critical Analysis of Capitalist Production)

8. “The tradition of all dead generations weighs like a nightmare on the brains of the living.” (The Eighteenth Brumaire of Louis Bonaparte)

7. “In the social production of their existence, men inevitably enter into definite relations, which are independent of their will, namely relations of production appropriate to a given stage in the development of their material forces of production. The totality of these relations of production constitutes the economic structure of society, the real foundation, on which arises a legal and political superstructure and to which correspond definite forms of social consciousness. The mode of production of material life conditions the general process of social, political and intellectual life. It is not the consciousness of men that determines their existence, but their social existence that determines their consciousness. At a certain stage of development, the material productive forces of society come into conflict with the existing relations of production or – this merely expresses the same thing in legal terms – with the property relations within the framework of which they have operated hitherto. From forms of development of the productive forces these relations turn into their fetters. Then begins an era of social revolution. The changes in the economic foundation lead sooner or later to the transformation of the whole immense superstructure.” (A Contribution to the Critique of Political Economy)

6. “It is not the consciousness of men that determines their being, but, on the contrary, their social being that determines their consciousness.” (A Contribution to the Critique of Political Economy)

5. “The ideas of the ruling class are in every epoch the ruling ideas, i.e. the class which is the ruling material force of society, is at the same time its ruling intellectual force. The class which has the means of material production at its disposal, has control at the same time over the means of mental production, so that thereby, generally speaking, the ideas of those who lack the means of mental production are subject to it. The ruling ideas are nothing more than the ideal expression of the dominant material relationships, the dominant material relationships grasped as ideas.” (The German Ideology)

4. “The history of all hitherto existing society is the history of class struggles.

Freeman and slave, patrician and plebeian, lord and serf, guildmaster and journeyman, in a word, oppressor and oppressed, stood in constant opposition to one another, carried on an uninterrupted, now hidden, now open fight, that each time ended, either in the revolutionary reconstitution of society at large, or in the common ruin of the contending classes.” (The Communist Manifesto)

3. “Modern bourgeois society with its relations of production, of exchange, and of property, a society that has conjured up such gigantic means of production and of exchange, is like the sorcerer, who is no longer able to control the powers of the nether world whom he has called up by his spells.” (The Communist Manifesto)

2. “Let the ruling classes tremble at a Communistic revolution. The proletarians have nothing to lose but their chains. They have a world to win. Workingmen of all countries unite!” (The Communist Manifesto)

1. “Religion is the sigh of the oppressed creature, the heart of a heartless world, and the soul of soulless conditions. It is the opium of the people.” (A Contribution to the Critique of Hegel’s Philosophy … )

Ethical failures: Where they come from and how to address them

A review of

Gentilin, Dennis. The Origins of Ethical Failures. Lessons for Leaders. A Gower Book. Routledge (2016). ISBN: 978-1-138-69051-6

Ethical failures were in the press big-time in 2017. Prominently, creeps like Harvey Weinstein, James Toback, Bill Cosby, Larry Nassar, etc. were accused of sexual transgressions of various sorts (and in some cases admitted them to varying degrees). The sheer number of accusations leaves little doubt that, in their substance, they are correct. One thing that was truly shocking, on top of the specifics of many of the allegations, was that some of these transgressions went on for literally decades, that many people seem to have known about them for years (if not decades), and that the perpetrators did get away with them for an unconscionably long time. It is clear that organizational failures must have played a major role. This was implicitly acknowledged in the name of  The Royal Commision (RC) into Institutional Responses to Child Sexual Abuse, established under the Gillard government in 2013 and which reported all 17 volumes of its findings on December 15, 2017. The RC also laid out recommendations.

It did not really come as a surprise that once again massive organizational failure, in particular of the Catholic Church, was identified as a major finding. It did not come as a surprise because for years there had been a never-ending stream of trials, not just in Australia, suggesting just that, and providing plenty of evidence that the Catholic Church – in its (continued) belief that it is a law and world unto itself — had engaged for decades in what might generously be called economy with the truth.

Two weeks earlier, after another year of numerous reports of questionable practices, and record profits of the four major banks, the Turnbull government saw itself forced — by its own backbenchers, no less — to announce that it would establish a RC into misconduct in the banking industry. It was a step that Labor and the Greens had urged for more than a year. (The recent draft report of the Productivity Commission has made clear that some such RC is indeed overdue.) The Turnbull government’s acceptance of something that it could not prevent, and its subsequent attempts to undermine the effectiveness of the RC by simultaneously widening its scope and imposing an essentially unrealistic timeline, demonstrates, at the minimum, the kind of myopic opportunism that Australian politics seems drenched in.

Having graduated in 2001, Gentilin became a member of the FX trading desk of the National Australian Bank (NAB), one of the four major banks.  In 2004 that trading desk became involved in a trading scandal that rocked NAB and led, within a couple of weeks, to the resignation of both its chairman and CEO, the reconfiguration of the board of directors, and significant financial and reputational losses. Gentilin was the young trader who blew the whistle. Contrary to many other whistleblowers (who are typically harrassed out of the organizations on which they blew the whistle), he stayed with NAB for more than a decade – as head of the institutional sales team and a member of the corporate strategy team — before he resigned in January 2016 to found Human Systems Advisory, a name meant to be programmatic. The foreword of his book was written by the current chairman of NAB who states: “There are no simple answers in this book. But there are answers. And there are important truths, supported by deep and rigorous analysis. These should be of interest to all corporate leaders, in both executive and non-executive roles.” (p. xvi).   One such truth, says the chairman – apparently quoting Gentilin – is that “leaders must strive to articulate a meaningful social purpose for their organizations that is underpinned by a virtuous set of values.” That’s quite a mouthful, and the impending Royal Commission on the banking system suggests strongly that the major banks (that tried at first to fight off the RC until they realized that fight had been lost) have continuing trouble to understand that particular message, as does the recent draft of the related Productivity Commission report.

Below, I am interested in both the depth and rigor of the analysis and the truths that Gentilin establishes.  I am also interested in the implementability of the measures that he proposes.

In his Introduction, Gentilin states that he draws his evidence from “behavioural business ethics” which he defines as the intersection of business ethics and psychology (p. 5). While he is credited on his website with a degree in psychology, Gentilin makes clear that he wrote this book as a “practitioner” rather than “an academic, a philosopher or an ethicist” (p. 4). He does so in four chapters that explore “The Power of Context”,  “Group Dynamics”,  “Our Flawed Humanity”, and “What We Fail to See”.  A conclusion follows.

Gentilin relies heavily on summaries of articles from psychology that explore human nature and the circumstances under which nice behaviour might turn into, well, not so nice behaviour of different shades. While there is brief perfunctionary nod (p. 3) to the replicability crisis that has afflicted psychology, throughout the book there is little discussion of relevant laboratory design and implementation issues such as incentivisation, experimenter expectancy effects, external validity, and so on (Hertwig & Ortmann 2001; Ortmann 2005). Never mind the fact that much of the evidence on unethical behaviour paraded in this book has been produced with deceptive practices, arguably an unethical practice itself (Ortmann & Hertwig 2002; Hertwig & Ortmann 2008). There is no discussion of statistical issues such (lack of) power computations, p-hacking, publication biases, and what not here either.

Claiming that “explanations of unethical conduct rarely give proper consideration to the system within which people operate … (and) tend to focus on identifying ‘bad apples’ or ‘rogues’” (p. 7), in Chapter 1, Gentilin explores how the environment can impact human (mis)behaviour and, on balance, concludes that “the ‘barrel’ within which the ‘bad apples’ operate must be given as much (if not more) attention as the ‘bad apples’ themselves.” (p. 8). Before he reviews the lessons to be learned from the Stanford Prison Experiment, Gentilin reviews literature on social norms and how they affect behaviour.  The well-known Cialdini et al. littering and Mazar et al. (dis)honesty studies are paraded, as is an interesting lab study by MacNeil & Sherif (1976) in which the authors demonstrate generational transfer of (questionable) practices, and a related field study by Pierce & Snyder (2008). Distinguishing between descriptive (“derived from what is”) and injunctive (“derived from what ought to be”) norms, Gentilin documents cases where unethical descriptive norms tear to smithereens injunctive ones. He relates this to his reading of what led to the FX trading scandal at the NAB: “young people in particular are vulnerable and endorsing immoral social norms … In the FX trading scandal that engulfed the NAB, immoral social norms emerged that promoted excessive risk taking and misstating the true value of the currency options portfolio.” (pp. 18 – 19). This is hardly surprising, and indeed Gentilin mentions the LIBOR rate-fixing scandal and the professional cycling drug-taking as other high-visibility events. He could have also mentioned the lending practices of major US banks before the housing and mortgage crises (e.g., Gjerstad & Smith 2014), the despicable transgressions at Abu Ghraib, or zillions of other real-world examples.  After having reviewed the Stanford Prison experiment in some detail, Gentilin identifies two important take-home lessons from it: first, a specific context “can cause people of sound character to behave in totally uncharacteristic and inappropriate ways.” (p. 24) and, second, the emergence of such contexts is possible only when leaders allow it. Drawing on more experimental evidence (such as Bandura’s children imitating adults’ behaviour experiments), he suggests the obvious parallel for what happened at NAB: “Just as the adults were the role models in Bandura’s experiments, leaders that control the bases of power are the role models in large organizations. For these leaders there will inevitably appear some key moments where, through their actions, choices and decisions, they will send powerful messages that shape the ethical climate for their organizations and types of social norms that emerge.  … how a leader responds in these ‘defining moments’ shapes the ‘character of their companies’.” (p. 30). Only leaders who are veritable role models will be able to prevent formal mechanism being eroded by informal mechanisms that hammer away at them. Again, Gentilin suggests that such failure of leadership is what happened at NAB and at the Barclays Bank during the LIBOR rate-fixing schedule, and for that matter in the phone-hacking scandal that led to the demise of News of the World. Gentilin concludes the chapter with a list of “ten questions for senior leaders within any organization” (pp. 37 – 38). Presumably, these questions are unlikely to be answered in an honest manner where it matters. It is the evidence accumulated in this chapter but also elsewhere (Dana et al. 2007 comes to mind, or Miller & Ross 1976) that suggests that much.

Gentilin starts off Chapter 2 with a Nietzsche quotation that sets the stage: “Madness is the exception in individuals but the rule in groups.” (p. 45). The basic point made is that group membership can reinforce – cue social media echo chambers – the drifting away from injunctive norms to descriptive ones. Writes he: “In my experience at the NAB, dysfunctional group dynamics in the currency options business played a significant role in promoting the emergence and maintenance of immoral social norms and unethical behaviour [such as flagrant and persistent limit breaches or excessive risk taking, AO]”.  To buttress the case, Gentilin presents Milgram’s 1974 obedience studies, as well as Gina Perry’s recent critique of them (Perry 2012) which, in light of considerable supporting evidence of the original studies (e.g., Haslam et al. 2014), he dismissesin their substance. He then highlights what we learn from Milgram’s inclusion of a variation that drew on the group paradigm.  That motivates a discussion of the conformity experiments through which Asch (1956) tried to identify the conditions under which participants would contradict a majority.  In this context, Gentilin also briefly discusses a between-subjects study by Woodzicka & LeFrance (2001) who had a male interviewer ask female applicants inappropriate questions. The basic result was that 6 out of 10 subjects claimed they would object (hypothetically) but none in the control group refused the answer in a “real-life” scenario.  That seems the kind of pattern that allowed the Weinsteins of this world to get their way for too long. Only in the case of Weinstein and similar assholes (here used in the technical sense of Sutton 2007), the stakes were arguably considerably higher. People’s lack of willingness to stand up and be counted is, unfortunately, so widespread that it is well documented and it is a recurrent theme of great movies such as Hidden Figures.  Gentilin makes clear that, based on his experience at NAB, “facing in the fork in the road in a hypothetical scenario is vastly different from facing it in reality.” (p. 67) He also states, “I am personally sceptical of other research into whistleblowing that focuses on ascertaining the types of personality or dispositional characteristics that may predict whether an observer of wrongdoing will take action and report it. …This line of enquiry fails to properly consider the power of the situation.” (p. 67). Gentilin concludes the chapter with another list of “ten questions for senior leaders (and followers) within any organization” (pp. 73). I doubt that these questions will be answered in an honest manner where it matters, for essentially the exact reason that Gentilin has identified in the chapter.

In Chapter 3, Gentilin – notwithstanding his, in my considered opinion, sensible stand on the relative importance of context and dispositional characteristics – dives into “our flawed humanity”. Programmatically, he starts with an epigraph featuring a quotation from Kant, “Out of the crooked timber of humanity, no straight thing has ever been made.” (p. 80).  Gentilin then tries to answer questions such as “Are Humans Self-Interested?”, cursorily sampling evidence from experimental economics, neuroscience, and evolutionary biology. Predictably he concludes that this research shows that “human nature (is) far different from the one suggested by the axiom of self-interest” (p. 86), though he qualifies the statement with the caveat that we are not always altruistic and cooperative.  This alleged “paradigm shift” (p. 87) is, unfortunately, the major bone of contention between those marketing Behavioural Economics (and often shamelessly benefitting from it) and those doing Experimental Economics, and I believe that the social-preferences literature that has created it has as much merits as the IN oxytocin, ego depletion, and power poses research now, for all I can see, thoroughly debunked. Better not plan your life, or organization, on such flimsy evidence. From an evidence point of view, and also a theory point of view (e.g., the important insights stemming from repeated game situations), this chapter is the weakest.  Gentilin’s sampling of the evidence strikes me as scattershot and unsystematic. After discussions of issues such as power and its corrupting influence and fear and awareness of our own mortality that feeds into it, Gentilin concludes the chapter with a list of “eleven questions for senior leaders within any organization” (pp. 118)  I fear, these questions, again, are unlikely to be answered in an honest manner where it matters.

In Chapter 4, Gentilin starts with a quotation from Kahneman’s best-seller Thinking Fast and Slow: “We can be blind to the obvious, and we can also be blind to our blindness.”  This double-whammy – a variant of the Dunning – Krueger effect — is why questions to senior leaders are unlikely to be answered honestly and self-critically.  After a brief mention of another persistent bone of contention – the System 1 / System 2 delineation  – and our alleged propensity to rely too much on automatic system 1 which makes us, presumably, liable to various biases (in this chapter loss aversion, framing, overconfidence, moral disengagement, euphemistic labelling), Gentilin lays out the slippery-slope argument that in his view was at the heart of the events that led to the NAB trading scandal: “The FX trading incident at the NAB classically illustrated the slippery slope in action. Not only did ethical standards erode over time, but the seriousness of the ethical transgressions accelerated … “ (p. 130). Laboratory evidence is provided to  make that point (e.g., the interesting Gino & Bazerman 2008 study) along with field evidence from the NAB case (pp. 131). An intervention discussed here is to give people more time and essentially get them to break out of their System 1 mode: “There are now numerous studies that illustrate how providing a person with more time whenever they are confronted with an ethical dilemma tends to lead to a more virtuous decision being made.” (pp. 146-7). I have serious doubt about the relevance of, say, the Good-Samaritian study mentioned here for real-world decision making and suspect that a theoretical grounding in organizational economics and repeated game theory would really help to address the challenges that organizations and their leaders face.

Gentilin concludes his book with a plea for more (business ethics) education, a call for the installation of Chief Ethics Officers, and more Lessons for Leaders. He wants business schools to challenge their students intellectually, emotionally, and spiritually. That sounds like something straight out of a high-gloss advertisement such schools produce. The reality, however, of Australian business schools (and undoubtedly business schools everywhere) is that they are rarely intellectually demanding. Their inability to challenge their students emotionally and spiritually is shown effectively by their treatment of casuals and staff. What business schools typically do not have are, in particular, truly independent ethics officers, and HR departments, that could hold the feet of currently widely unaccountable senior leadership to the fire. So, while the idea of a Chief Ethics Officer, who has “a genuine ‘seat at the table’” (p. 161), and is independent, able to freely raise matters of concern, and able to freely “speak truth to power” (p. 161), is conceptually on the money, realistically it is very unlikely to be implemented any time soon, as are truly independent HR departments. As to Lessons for Leaders, Gentilin wants them to be virtuous in the sense of having some community-oriented values.  There is a lot of wishful thinking on display here (e.g., that others are willing to take the same risks that he took in 2004) but I think, after everything we learned through the flurry of recent examples mentioned at the beginning of this review, there is not much reason for hope. Even something that should have been uncontroversial, such as the Royal Commission on banking, and the way it came about, demonstrates that common ground is hard to find and cannot be relied on. I fear much harder thinking will be needed to address ethical failures and I fear some strategies will be of the innovative kind provided by the #MeToo campaign that not only has brought down some true monsters but is likely to have changed power and gender relations in the working world irreversibly.

In summary then, Gentilin tackles arguably the most important issue of our times – ethical failures within organizations and for that matter ethical failures more generally. His book is strongest where he illustrates the emergence of his insights with examples from his own NAB 2004 experience. His illustration of various arguments he makes with evidence from behavioural business ethics is wanting. As pointed out above, to his credit Gentilin himself – although unaware of important methodological debates among psychologists as well as between psychologists and economists – grasps intuitively the lack of external validity of some of the evidence that he presents and it is clear that his NAB 2004 experience has been a good guide to identify which laboratory evidence has some external validity, and which does not. I think the book could be considerably improved with a more even-handed and complete assessment of the evidence from psychology and other social sciences (and here in particular economics) as well as an additional focus on incentive-compatible organizational design.  To rely on business ethics education in business schools (whether in Australia or elsewhere) or a sense of community oriented-ness of business leaders is just not going to cut the mustard, as the widely perceived need for the Royal Commission in the banking system demonstrates.

Having recently interacted with NAB, once again, with mortgage related issues, I have no doubt that NAB culture is pervaded with everything but a meaningful social purpose that is underpinned by a virtuous set of values (e.g., the loan officer I dealt with did everything to prevent me from comparison shopping, and essentially gave me misleading information about the rates that I would be getting), and I have little doubt that the same applies to each of the other three major banks. There is a reason why the major banks in Australia have had outsized profits and some of the highest returns on equity in the world. The recent draft of the related Productivity Commission report spells them out.

 

I appreciate Dennis Gentilin’s comments on a draft of this review.

 

How to tax the platform economy?

In the engine room of nation states, ie the tax departments, the coming battle with platform providers is taking shape. Uber, airbnb, facebook, linkedin, ebay, jobseek, and a myriad of specialised platform providers facilitate micro-trades that are largely untaxed by the authorities. In stead, the platform providers themselves take a cut, partially via advertising and partially via a direct fee for their services. They have taken over an activity that has mainly been provided by governments in the past: places to trade. The town square, the stock exchange, public infrastructure, and the unemployment office are relics of a past where governments were market providers that facilitated trades. Now, it is largely private companies with tax-avoidance structures that have taken on this role on the internet. That role is set to expand hugely.

This is a crucial battle that, so far, the tax authorities are losing because they have not yet grasped the magnitude of the shift. They lack the key new power that they must attain: the power to deny the operation of a platform provider in their country.

At the moment, tax authorities around the world, lead by the Scandinavians whose tax needs are high, are going the usual ‘reporting route’. They are trying to get Uber, Airbnb, and all the other ones to report the trades and the value of the trades that they have facilitated. Understandably, these companies are refusing to play ball because they of course are taxing the same trades themselves in a different way. They are competing with national tax authorities and hence their business model depends on tax evasion, so of course they refuse to help their competitors. Their lawyers make millions from refusing to play ball. The horror example for these companies is the 2015 data on Uber that had to be released to the Dutch tax authorities and that was subsequently shared with Denmark which promptly went after the drivers for added tax payments. This reflected the circumstance that the administration of Uber was in the Netherlands at that time, which allowed the Dutch to force Uber to hand over some of their data, a mistake Uber wont make again. The others too will have learned a salutary lesson from that episode.

Frustrated, the tax authorities are turning to pretty hopeless measures, such as new international treaties on the reporting of micro-trades by private entities. In a race to the bottom between countries trying to attract large companies, that is just a hopeless avenue where the authorities will always be many steps behind the tax-advisers of the big trading platforms.

What are the next moves we might then see when the tax authorities get up to speed? I think two developments are likely: full internet observation by national agencies and government-lead internet firms.

Full internet observation follows the model of China, which now has the capacity to track most of the internet activity of most of the population. That allows it to observe the trades facilitated on internet platforms, which in turn can be used for tax purposes. Those observations can be used to directly go after individual traders or can be used to go after the platform providers, simply by making their activities illegal if the platforms do not assist in tax observations. Adopting the China route would spell the end of internet privacy, but it probably works. And tax is such a key part of the nation state that it in the end trumps privacy concerns.

The second possibility is for the government to re-enter the market for platforms and set up its own internet firms for micro-trades and social media. It can simply copy the best examples on the internet for how to set these things up. The transition will come with losses, but authorities can appeal to national pride to get support from their populations and companies cannot compete with that. For micro-trades within a country or tax region (the US and, in the future, the EU) that should work. For international trades, one should expect more difficulties because government-backed firms from different countries might then directly compete with each other, which in turn might lead to competency battles and new dispute resolution mechanisms.

Review: Tomer’s Advanced Introduction to Behavioral Economics

In the next couple of months I shall, in preparation for an invited longer review essay on recent books on BE, post reviews of individual books such as Tomer’s, Angner’s A Course in Behavioral Economics, Cartwright’s An Introduction to Behavioral Economics, and Dhami’s The Foundations of Behavioral Economic Analysis. Comments are welcome.

Here is the first review, for your entertainment:

Tomer, John F. Advanced Introduction to Behavioral Economics. Elgar (2017). ISBN: 978 1 78471 991 3 (cased), ISBN: 978 1 78471 993 7 (paperback)

Tomer, an Emeritus Professor of Economics at Manhattan College, covers much ground in a fairly superficial manner. We are lectured about the scientific practices of “mainstream economics” (narrow, rigid, intolerant, mechanical, separate, individualistic; see p. 10) and the emergence of behavioral economics (BE). In passing, we hear about different “strands” of BE (chapter 3: “The bounded rationality strand”, chapters  4 and 5: “the psychological economics strand”, chapter 6: “behavioral finance”), “BE, public policy, and nudging” (chapter 7), “law and BE” (chapter 8), “behavioral macroeconomics” (chapter 9), “the empirical methods of BE” (chapter 10), and neuroeconomics (chapter 12).  We are also treated to an answer (I am sure you can guess it) to the question: “Are mainstream economists open-minded toward behavioral economics or do they resist it?” (chapter 11) In chapter 13 the author enlightens us about paths “Toward a more humanistic BE” and in chapter 14 we can read about “Behavioral economic trends”.

Each of these chapters are about 10 – 12 pages long. Along the way we hear about ENE’s  (Early Neoclassical Economics) and NE’s (Neoclassical Economics) “lack of behavioral realism. NE’s lack of connection to other social sciences in particularly regrettable for those who place a high value on a unified social science or at least on having many viable linkages among the different social sciences.” (p. 9) Referring to a decade-old study of his that was published in an inconsequential journal, we learn that “The results for NE (also referred to as mainstream economics) are quite clear. NE is rated high on all six dimensions (narrowness, rigidity, intolerance, mechanicalness, separateness, and individualism,” (p. 12).  After this paper tiger has been successfully constructed, we are told how it is being torn to smithereens: “ In contrast, the eight strands of BE … are in general far less narrow, rigid, intolerant, mechanical, separate, and individualistic than NE. … Overall, there is clear evidence that BE is 1) less positivistic than NE … , 2) distinctively different from NE, and 3) much more integrated with other social science disciplines than NE. In other words, BE is arguably better than NE in the way it conducts its scientific practices.” (p. 12)

This tired rhetorical figure has been used by those marketing BE for a long time. It also shows up regularly in the press (e.g., Elliott 2017 but see Attanasio et al. 2017 or for that matter Ortmann 2012), the related blogosphere, and even literature (Schumacher 2014): while BE is much more realistic and useful, NE is the old staid economics (that has done little for us). In the words of the protagonist of Dear Committee Members, “ … sociology has gone the way of poli-sci and econ, now firmly in the clutches of rabid number crunchers who have abandoned or forgotten the link between their abstruse theoretical  musings and the presence of human beings on the planet’s surface; .. ” (p. 152)

That lack of behavioral realism is, so we learn, addressed by behavioural economists’ wholesale adoption of psychological insights which inevitably “enrich” the dismal models of mainstream  economists.  Ignoring the interesting question what the trade-off is that these richer models come with – in this book this trade-off is never discussed –, there are at least two issues here.

First, and to repeat a theme that I have belabored elsewhere (see also this comment here), there is no such thing as a monolithic body of evidence in psychology that economists could mine to inject more behavioral realism in their allegedly dismal models. The fact is, much of the evidence on heuristics and biases that is being appealed to has been questioned left and right. Every halfway knowledgeable (behavioral) economist will agree that the only interesting question about cognitive biases (such as reference dependence, endowment effects, availability, anchoring & adjustment, and representativeness) is when, and under what circumstances, they exist (if they exist at all).

Second, and more importantly, psychology as a field has, at least since Bem (2011), gone through what many people have called a replicability crisis (e.g., OSC 2015, Spellman 2015, Schimmack 2018) that played out at first in blogs and discussion groups such as the Facebook Psychological Methods Discussion Group, but increasingly also in journals and their practices. You would not know that some such upheaval is happening from reading Tomer’s book.

Take, for example, Tomer’s telling discussion of Zak’s oxytocin research in chapter 13. We learn that he is “a well-known economist who appreciates the softer, more intangible side of human behavior” (p. 145) and has shown through his research that “there is a direct link between the amount of oxytocin in humans’ blood and brains and humans’ concerns for each other. … Most importantly, oxytocin fosters trust. Oxytocin surges in a person’s bloodstream when an individual is shown a sign of trust and/or when something engages in a person’s sympathies and they experience empathy. ” (lit cit) Unfortunately, these claims have been thoroughly debunked and even effectively ridiculed in one of John Oliver’s excellent shows. All the literature I know suggests strongly that Intranasal oxytocin has no discernible effect and claims to the contrary are about as much bogus science as claims of ego depletion and the empowering effects of power poses:  what these alleged phenomena reflect is little but shoddy science that people got away with for too long, demonstrating a cavalier attitude to questionable research practices from p-hacking over lack of proper powering up to hiding unsuccessful trials in drawers. You would not know about this crisis if you trusted Tomer who seems completely unaware of these developments that are slowly also starting to be recognized in economics.

Yes, I am not impressed by Tomer’s book. The knowledge laid out in Tomer’s slim volume is severely out of date and unabashedly partisan. According to the December 2017 IDEAS/RePeC data,  there are at least 50,000 research economists out there world-wide and they innovate every day in what is most likely one of the most brutally competitive industries the world has seen. The idea that somewhere someone (“mainstream economics”) has a monopoly on doctrinal truth and can enforce it, shows a stunning cluelessness about the current state of the art (and science) of economics and its sociology.  In his recent presidential address, Alvin E. Roth – an outsider of sorts himself — has argued that economics has been very open to various outsiders and their ideas and practices and you have surely seen that in the emergence of experimental economics and also in some quarters of BE (although BE remains afflicted with many charlatans, often of the non-academic kind that sell BE as panacea to everyone who thinks they can get something for nothing).

I doubt that Tomer’s slim volume is “particularly useful for advanced undergraduate students, graduate students, policymakers, and other professionals who participate economic-related matters.”  (statement on the  back of the book)  In fact, I fear it will promote more sloppy science of the kind that is on display in this book. That kind of sloppy science is also too often on display when you speak with policy makers and Behavioral Insights architects and the like these days.

When all is said and done, it is this kind of sloppiness that undermines trust in the joint enterprise called science.

Lemonade and the question of (laboratory) evidence

Lemonade Inc., the New York based fintech startup that sells home and renters insurance has been in the news recently. It has raised tens of millions in venture capital  and also considerable interest in the top echelons of corporate Australia. I know because I was asked to reflect on it as part of a workshop on behavioral economics/behavioral science that I conducted a couple of months ago. I have to admit that I did not know about Lemonade before that request.

Turns out that Lemonade uses “Behavioral Science (and Technology) To Onboard Customers and Keep Them Honest”, so the title of a piece in Fast Company earlier this year. Lemonade bets that insights from Behavioral Economics (BE) will give it the edge over incumbent competitors. It bets specifically that the BE insights of Dan Ariely (he of Predictably Irrational and TED talk fame, and now Lemonade’s CBE = Chief Behavioral Officer) will provide that edge, important components being “trusting our customers” and “giving back” to charity all unused excess funds. On top of these components, or maybe undergirding it, is the promise that Lemonade commits to spending at most 20 percent of its income on administration and marketing, which presumably prevents it from profit maximizing at the expense of its customers. Lemonade also promises that it will process claims fast and relatively un-bureaucratically, at least by the standard of an industry that has a reputation for delaying tactics and for its persistent attempts to evade having to pay up. Examples of speedy processing are featured prominently on Lemonade’s website.

And not only that: A couple of months ago, Lemonade launched its Zero Everything policy which gets rid of deductibles and rate hikes after claims and is supposed to pay for itself through elimination of the paperwork that comes with relatively small claims.

BE principles are also appealed to when customers that make claims are asked to submit a brief video outlining their claim and to provide at the same time a honesty pledge which supposedly induces more honesty.

In sum then, Lemonade builds its business allegedly on the trust(worthiness) of its customers, and of itself, and also honesty on the part of both parties.

Let’s start with the (laboratory) evidence for trust(worthiness). On its web page, Lemonade illustrates the advantages of trust(worthiness) with one of the workhorses of experimental economics, the trust, or investment, game. According to the web page, a person that invests (the trustor) will see her investment to a trustee of $100 quadruple and then see the trustee return half of that $400 to herself (the trustor), for an impressive ROI of one hundred percent. Trust pays off, we learn: “We are more trusting and reciprocating than what standard economic theory predicts.”

Ignoring the stab at economic theory (which shows little more than a lack of elementary knowledge of modern economic theory), there are at least three problems with the Lemonade narrative. First, it is not clear at all why this particular game, in this particular parameterization, captures the customer – insurance company situation. Second, I am not aware of anyone ever having experimentally tested this game with that specific parametrization (specifically, a multiplication factor of 4), and I am not aware — the multiplication factors typically used being 3 or 2 — of responders returning more than what was invested. In fact, the results of my own work (which are very much in line with the literature in this area) suggest that trustors invest about half of what they were given and trustees return slightly less than what was invested. It is noteworthy that there is much heterogeneous behavior to be found in these experiments, with many of those that trust (“invest”) being brutally exploited.

  “Everyone has a price, the important thing is to find out what it is.” (P. Escobar)

Which brings us to the question of honesty. There is indeed some evidence that the way in which people are being prompted makes a difference and, more generally, that context matters (see Various, JEBO 2016). Friesen & Gangadharan  (Economics Letters 2012) use an individual performance task (“matrix task”) after which they ask their subjects to self-report the number of successes that participants had. While very few of their participants – only one out of 12 — are dishonest to the maximal extent, about one out of 3 are to different degrees, with men (in particular those of Aussie and NZ provenance) being more dishonest, and more frequently so, than female participants. Rosenbaum, Billinger, & Stieglitz  (Journal of Economic Psychology 2014) review experimental evidence of (dis)honesty 63 experiments from economics and psychology (including Friesen and Gangadharan EL 2012) and find the robust presence of unconditional cheaters and non-cheaters with the honesty of the remaining individuals being particularly susceptible to monitoring and intrinsic lying costs. Most of these experiments involve fairly low stakes, so those intrinsic lying costs are unlikely to be much of a constraint when stakes increase. The fraction of unconditional non-cheaters is almost certain to shrink towards the Escobar limit when stakes increase.

Interestingly, notwithstanding its public declarations in the good of people, Lemonade tells itself that, while trust is good, control is better.  It runs its claimants, on top of the honesty pledges, through 18 different fraud detection algorithms before it pays up. On top of this, Lemonade engages in blatant cream-skimming. For example, it did not quote half of their customers that wanted to insure their homes. And it reports that the customers that are joining, or allowed to join, are younger, educated, tech-savvy, above-average earners, and female. So much for trust, trustworthiness, and all that BE marketing horsemanure. Pretty cold-blooded standard economic theory if you ask me. Note that this screening takes care of a key problem with their advertised approach: the likely adverse selection of bad types that mere trusting would invite, a very likely whammy on top of the moral hazard problem that every insurer faces.

So is Lemonade a viable business model?

Time will tell.

In the State of New York, Lemonade claims to have overtaken Allstate, GEICO, Liberty Mutual, State Farm, etc. in what is probably the single most critical market (renters and home insurance) share metric of all: NY renters buying new insurance policies since 1 Jan 2017.

Lemonade, we are told, is growing “exponentially” = “new bookings have doubled every ten weeks since launch, and show no sign of letting up.” According to its most recent Thanksgiving Transparency ‘17 report, Lemonade has now branched out into, and is selling in, Illinois, California and Nevada, Texas, New Jersey and Rhode Island, and has been licensed in 15 other states.

Of course, collecting insurance premia is one thing. Paying insurance claims and balancing the books is another thing altogether and the verdict on that one will be out for a while.

If Lemonade succeeds – and we all should hope it does –, it will do so because it engages in cream-skimming, targeting of low-risk market segments, and massive control and surveillance of its clientele. It will not do so because of its invocation of the feel-good alleged BE findings so prominently displayed on its web page.

 

 

 

 

 

 

 

 

Why Blockchain has no economic future

When Bitcoin went public in 2009 it introduced to the world of finance and economics the technology of blockchain. Even the many who thought Bitcoin would never make it as a major currency were intrigued by the BlockChain technology and a large set of new companies have tried to figure out how to offer new services based on blockchain technology. It is still fair to say that very few economists and social scientists understand blockchain, and governments are even further behind.

I will argue that blockchain has no economic future in the regular economy. I will give you the bottom-line, then describe blockchain, discuss its key supposed advantages, and then take it apart as a viable technology by giving you a much more efficient alternative to the same market demand opportunities.

The bottom line for those not interested in the intricacies of blockchains and public trust

The essence of my argument is that a large country can organise a much more trustworthy information system than a distributed network using blockchain can, and at lower costs, meaning that any large economic role for blockchain is easily displaced by a cheaper and even larger national institution.

So in the 19th century, large private companies circulated their own money, in competition with towns and princedoms. In that competition, national governments won, as they will again now.

The reason that the tech community is investing in blockchain companies is partially because some are in love with the technicalities of blockchain, some hope to attract the same criminal and gullible element that Bitcoin has, some lack awareness of the evolution and reality of political systems, and some see a second-best opportunity not yet taken by others. But even in this brief period of missing-in-action governments, large companies will easily outperform blockchain communities on any mayor market. Except the criminal markets, which is hence the only real future of blockchain communities. Continue reading “Why Blockchain has no economic future”

EU plans for VAT taxation are doomed to fail. Again.

Taxation is the potential downfall of the EU as an institution. The reason is that within the EU, several member states are making money from the tax evasion in other member states, a situation akin to having a wife slowly murdering her husband with poison. Unless this stops, a divorce becomes inevitable.

Luxemburg, the Netherlands, Ireland, Lichtenstein, Austria, London, and several others are at it: they help large corporations avoid their taxation responsibilities. They either make deals that allow companies to hide their tax obligation, have idiosyncratic definitions under which there are less tax obligations, provide re-labelling services such that head-offices can be a mere post-box, etc.

These tax-avoidance enablers have also systematically frustrated all attempts over the last 30 years to harmonise taxation and reverse the damage they have done to the integrity of the other nation states in the EU. Whenever the issue of tax evasion was in the public eye, for instance during the GFC, they stalled by insisting tax evasion should be solved internationally and should include all other tax havens. Predictably, these were impossible demands. They have also made life difficult inside committees and government forums.

The EU bureaucracy has just put out a new set of proposals regarding VAT on large international corporations (like Google and Amazon), impact evaluated and all. I have read them and predict they will not be implemented, nor would they work anyway.

For one, the EU commission has no power to enforce new tax rules, and these proposals are in a long line of ignored prior proposals. To become law they would need the unanimous backing of all EU members. They hence need the cooperation of about 5 countries that would lose billions if they complied. Fat chance, even with Brexit reducing the political clout of London.

Secondly, the proposals repeat the main mistake of the past: they advocate a rules-based administrative system of taxation which is cumbersome, highly-complex, and easy to game. I explain how over the fold. Continue reading “EU plans for VAT taxation are doomed to fail. Again.”