September 14, 2006

The Unbearable Innocence of Economists

I always had a tendency toward hero worship, in the sense that I assumed that if somebody is very good at one thing, then he must be an all-around great guy. If O.J. Simpson rushes for 2003 yards, then he's just got to be nice to everyone around him. If Michael Milken is making bundles of money, then he must be doing it in the most ethical manner imaginable.

One advantage of now being an old coot is that this boyish faith in the inevitable moral goodness of the accomplished has been beaten down over the decades by experience.

You might think that economists would be inoculated against hero worship by the skepticism that ought to be inculcated by their studies. After all, Adam Smith observed (in the words of Leo Rosten):

Smith knew perfectly well that businessmen are prone to possess "a mean rapacity [and] monopolizing spirit." "People of the same trade seldom meet together," he wrote, without concocting "a conspiracy against the public." In a typically dry, wry, memorable passage, he observed:

"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves not to their self-love, and never talk to them of our own necessities but of their advantages."

And yet, economists are often suckers for the rich. Bryan Caplan, a libertarian professor of economics at George Mason U., offers this astonishingly naive post on his EconLog blog:

Demographics of the Oligarchs
Bryan Caplan

You've heard about the Russian "oligarchs," right? They're the richest men in Russia. The insinuation is almost invariably that they owe their riches not to entrepreneurial ability, but to political connections. It's not "what you know," but "who you know," right?

If this theory were true, you would expect the oligarchs to have unusual demographics for business leaders. In particular, they should be:

#1 Unusually likely to have been important members of the Communist Party before they went into business.

#2 Unusually unlikely to come from groups - like Jews and Armenians - known around the world for their entrepreneurial talent.

Both predictions are wrong.

Most of the oligarchs are too young to have been Communist Party bigwigs...

Even more striking: The oligarchs are disproportionately Jewish. 90% of Russian Jews have left the country over the last 30 years, but 6 out of the 7 leading oligarchs have Jewish ancestry. This would be hard to explain if their success were primarily due to political connections - but expected if their success largely reflected entrepreneurial ability.

Of course, in a corrupt and chaotic environment like post-Communist Russia, no successful businessman is going to have a perfectly clean record. You've got to compromise with the system to get by, and cut corners to get ahead. The real question is: "How much of the oligarchs' success stems from entrepreneurial ability, and how much from political connections?" Demographic information alone can't resolve the question, but it does tilt the scales in the direction of ability.

It's just so unfair the way the media despises entrepreneurs who make us all better off. Look how they called Rockefeller and Carnegie "robber barons," yet as they got rich, America got richer too. Same with Russia under Yeltsin. As these so-called "oligarchs" got unimaginably rich, the average Russian also got ... well, uh, he got ... okay, maybe in crude money terms he didn't do so well, but his life expectancy .. oh ... Look, let me get back to you on this...

Bryan, Yeltsin overthrew Communist Party rule when he came to power. His runoff opponent in 1996 was Gennady Zyuganov, a Communist. Of course, the crooks Yeltsin turned to to finance his re-election campaign in return for his handing them much of the newly privatized national industries of Russia (through the loans-for-shares rigged auctions) tended to be newer men. They had frequently been clever fixers and black marketeers whose machinations had been tolerated under the Communists. But they hadn't wormed their way into the heart of political favor until Yeltsin's anti-Communist regime.

But being Yeltsin's bankroller was lucrative indeed. Khodorkovsky, for example, bought about 1% of the world's oil reserves for $159 million in an auction that he himself ran for the Russian government! (He's currently serving 9 years in prison for tax evasion.) Similarly, Roman Abramovich bought the giant Sibneft oil company for $100 million. The Russian government recently bought 73% of it back from Abramovich for $13 billion.

Khodorkovsky and Abramovich didn't discover the oil or pump it out of the ground as Caplan imagines - they just bought proven reserves in rigged auctions. I'm sure they are talented wheeler-dealers, but they aren't exactly Henry Ford or Thomas Alva Edison when it comes to increasing national productivity.

What happened in Russia in the 1990s was one of the great economic crimes in all history. And it happened largely with the approval of the American economists who were employed in large numbers, typically at American taxpayer expense, to advise the Yeltsin regime. Indeed, one of America's top economists, Harvard's Andrei Shleifer (Larry Summers' best friend), was in on the corruption himself. Yet, the economics profession has done nothing to chastise Shleifer for his crookedness that ended up being penalized $28 million by a U.S. federal judge. David Warsh reported:

Meanwhile, the elders of the economics profession have expressed solidarity with the embattled professor by appointing Shleifer editor of the "Journal of Economic Perspectives." Since the quarterly is intended by the American Economic Association to represent technical economics to the general public, the job is a position of enormous influence. The fact that former World Bank chief economist Joseph Stiglitz doesn't mention the government's case against Harvard in his otherwise incendiary Globalization and Its Discontents suggests just how far professional courtesy extends. For that matter, the Shleifer story doesn't come up in [Paul G. Hoffman's] The Oligarchs, either.

Let me make a prediction: That interested parties like Shleifer and Summers will not take up Caplan's "demographic" argument to defend their involvement in what happened to Russia in the 1990s. You will not start reading widely Caplan's observation that:

"The oligarchs are disproportionately Jewish. 90% of Russian Jews have left the country over the last 30 years, but 6 out of the 7 leading oligarchs have Jewish ancestry."

Call me crazy, but for some vague reason, I'm guessing that Caplan's logic just isn't going to prove that popular with his fellow defenders of the Yeltsin era.

My published articles are archived at -- Steve Sailer

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