Not the point.
What would libertarians say about economic theory which
says that laissez faire / invisible hand is inherently
flawed because of
pervasive fraud ? What about a market where the butcher
will
always have his thumb on the scale ?
Libertarian economic theory as I understand it says that
fraud is
a marginal phenomenon and can be discounted. Control
fraud theory
says that , in effect, by way of metaphor, don't take
this literally,
the mafia is always a player in the stock market and all
other markets.
Therefore,while markets can produce equitable outcomes,
probably moreso
is new niches more than elsewhere, generally all outcomes
are to some extent unfair.
As well control fraud theory seems to also allow for the
possibility of
the gvt being a bad-actor player.
All of this, plus the fact that people in the market are
sub-optimal
rational advantage maximizers ( do stupid things, make
dumb decisions,
and are susceptible to panics and stampedes and "gold
rushes )
and laissez faire theory seems really weak, at least as
weak
as Keynesianism. Therefore, we need new economic theory.
No idea how you read this as blaming libertarians
for the problem of fraud.
Billy
==================================================
message dated 11/1/2010 8:33:56 P.M. Pacific Daylight
Time,
[email protected] writes:
Libertarians will wonder why they always find
themselves associated with fraud when they don't commit
any.
Enron was not a Libertarian corporation, for instance.
Neither were many savings and loans, like the McDougal
one in Arkansas with its crony Clinton connection. There
will always be bad players, why is it assumed that I or
any other Libertarian is that DAMN NAIVE?? Or is it
STUPID??
David
"Anyone
who thinks he has a better idea of what's
good for people than people do is a swine."--P. J. O’Rourke
On 11/1/2010 1:10 PM, [email protected] wrote:
First impression : Absolutely profound
analysis. Will need some time for this to sink in.
Want to think about this for a while, but WOW
! what great insights.
Big observation : Where is this wrong ?
Damned if , at least for now,
I can see any serious flaws. Seems to hit the
nail on the head with a sledgehammer.
There are other arguments that knock the props
out from under classical laissez faire
( some of which is perfectly OK, but NOT as an
infallible theory that covers
all bases, which it cannot do ), but this
utterly flattens that theory.
WWLS ? What will libertarians say ?
Billy
=====================================================
In a message dated 11/1/2010 9:39:21 A.M.
Pacific Daylight Time,
[email protected]
writes:
I
think Billy will like this. True,
neo-classical economics in theory recognizes
this as part of the danger of agency failure,
but in practice virtually nobody seems to have
made any effort to understand (much less
mitigate) this threat.
Especially
since the line between "fraud" and
"creativity" is awfully thin, when it comes to
accounting...
--
Ernie P.
Schneier on Security
A blog covering security and security
technology.
« Halloween and
the Irational Fear of Stranger Danger
| Main
November 1, 2010
Control Fraud
I had never heard the term "control fraud"
before:
Control fraud theory was
developed in the savings and loan debacle.
It explained that the person controlling
the S&L (typically the CEO) posed a
unique risk because he could use it as a
weapon.
The theory synthesized criminology
(Wheeler and Rothman 1982), economics
(Akerlof 1970), accounting, law,
finance, and political science. It
explained how a CEO optimized "his"
S&L as a weapon to loot creditors
and shareholders. The weapon of choice
was accounting fraud. The company is the
perpetrator and a victim. Control frauds
are optimal looters because the CEO has
four unique advantages. He uses his
ability to hire and fire to suborn
internal and external controls and make
them allies. Control frauds consistently
get "clean" opinions for financial
statements that show record
profitability when the company is
insolvent and unprofitable. CEOs choose
top-tier auditors. Their reputation
helps deceive creditors and
shareholders.
Only the CEO can optimize the company
for fraud.
This is an
interesting paper about control fraud.
It's by William K. Black, the Executive
Director of the Institute for Fraud
Prevention. "Individual 'control frauds'
cause greater losses than all other forms
of property crime combined. They are
financial super-predators." Black is
talking about control fraud by both heads
of corporations and heads of state, so
that's almost certainly a true statement.
His main point, though, is that our legal
systems don't do enough to discourage
control fraud.
White-collar criminology has a
set of empirical findings and theories
that are useful to understanding when
markets will act perversely. This paper
addresses three, interrelated theories
economists should know about. "Control
fraud" theory explains why the most
damaging forms of fraud are situations in
which those that control the company or
the nation use it as a fraud vehicle. The
CEO, or the head of state, poses the
greatest fraud risk. A single large
control fraud can cause greater financial
losses than all other forms of property
crime combined they are the
"super-predators" of the financial world.
Control frauds can also occur in waves
that can cause systemic economic injury
and discredit other institutions essential
to good government and society. Control
frauds are commonly able to defeat for
several years market mechanisms that
neo-classical economists predict will
prevent such frauds.
"Systems capacity" theory examines why
under deterrence is so common. It shows
that, particularly with respect to elite
crimes, anti-fraud resources and
willpower are commonly so limited that
"crime pays." When systems capacity
limitations are severe a "criminogenic
environment" arises and crime increases.
When a criminogenic environment for
control fraud occurs it can produce a
wave of control fraud.
"Neutralization" theory explores how
criminals neutralize moral and social
barriers that reduce crime by
constraining our decision-making to
honest enterprises. The easier
individuals are able to neutralize such
social restraints, the greater the
incidence of crime.
[...]
White-collar criminology findings
falsify several neo-classical economic
theories. This paper discusses the
predictive failures of the efficient
markets hypothesis, the efficient
contracts hypothesis and the law &
economics theory of corporate law. The
paper argues that neo-classical
economists' reliance on these flawed
models leads them to recommend policies
that optimize a criminogenic environment
for control fraud. Fortunately, these
policies are not routinely adopted in
full. When they are, they produce
recurrent crises because they eviscerate
the institutions and mores vital to make
markets and governments more efficient
in preventing waves of control fraud.
Criminological theories have
demonstrated superior predictive and
explanatory behavior with regard to
perverse economic behavior. This paper
discusses two realms of perverse
behavior the role of waves of control
fraud in producing economic crises and
the role that endemic control fraud
plays in producing economic stagnation.
Posted on
November 1, 2010 at 6:02 AM • 16 Comments
To receive these entries once a month
by e-mail, sign up for
the Crypto-Gram
Newsletter.
--
