The “Chicken(expletive) Club”


The Baseline Scenario

By James Kwak

The only “Wall Street” “executive” to go to jail for the financial crisis was Kareem Serageldin, the head of a trading desk at Credit Suisse, according to Jesse Eisinger in a recent article. Serageldin pleaded guilty to—get this—holding mortgage-backed securities at artificially high marks in order to minimize reported losses on his trading portfolio. 

Now if that’s a crime, there are a lot of other people who are guilty of it. In fact, a major premise of the federal government’s crisis response strategy was exactly that: allowing banks to keep assets at inflated marks in order to pretend they were solvent when they weren’t. FASB changed its rules in April 2009 in order to make it easier for banks to inflate their marks. And the Obama administration’s “homeowner relief program” was designed to allow banks to delay realizing losses on their mortgage loans by dragging out—but generally not preventing—foreclosures. (Remember…

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Why people accept the things they do

I just read this outstanding post on Phil Ebersole’s blog. Everyone should read it.

Phil Ebersole's Blog


I don’t know when, where or if this experiment was actually carried out, but it is a good parable of why bad customs persist.

Hat tip to Carol Avedon (who is listed on my Blogs I Like page).

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It’s obvious, “Those who own the country should run the country.” – John Jay, first chief justice of the SCOTUS

John Jay, the first Chief Justice of the Supreme Court of the United States (“SCOTUS”) wrote this sentence.  In 1800, this claim was axiomatic to governance in the U. S.  The population of the country was 3,000,000; agriculture was the primary source of income for its citizens and land ownership was the primary store of value (source of wealth).

They understood the meanings of “own”, “run” and “country”, as well.  “Own” was a legal term:  legal title was necessary and sufficient.  “Run,” meant, “to manage as a business or farm.”  And, “country” referred to the 13 original colonies.  Everyone knew what Jay meant:  land and business owners should vote and no one else should vote.  Thus, women, slaves, indentured servants (none of whom could own property), tradesmen and merchants who rented their place of business from a landlord couldn’t vote.

Around the time of the founding of the republic (circa 1770), agricultural land constituted about 50% of the total stock of public and private capital assets in the U. S.  Today, it constitutes less than 1% of total capital.  Housing constituted about 25% of capital and other domestic capital (commercial buildings, equipment, private harbors, roads, etc.) constituted about 25%.  Net foreign capital (capital owned by U. S. citizens or corporations) was tiny and remains tiny.  Today, housing amounts to about 40% of domestic capital and other domestic capital constitutes about 60% (I know this list totals to 101%, but these are estimates and I’m not quoting the exact figures, anyway).  In 1800, the population of the United States was about 3,000,000.  Today (2010), it’s about 350,000,000.  Population grew by a factor of 117 during the intervening 210 years.  The United States in 2010 is different from the United States in 1800 in practically every meaningful way.  Its population is larger and more diverse, its territory is larger and more diverse, its sources of income are different, its relative standing in the world is different, forms of ownership and “personhood” are different (corporations are “moral persons”, whatever that means), women can vote, children and women have rights and there are no slaves (legally) here, not to mention the technology gap (essentially, the entire industrial revolution and a good chunk of the information revolution).

Who, then, “owns the country” and “ought to run it”, today?  One unstated and widely believed answer to this question is something that resembles, “the U. S. citizens who own the financial-economic assets located within the borders of the United States own the country and should run it”, an echo of Jay’s pronouncement 214 years ago.  This principle excludes some obvious groups:  U. S. citizens living abroad who own no property in the U. S. and no financial instruments that evidence ownership of U. S. entities; U. S. citizens living in the U. S. who own no real or financial assets located in the U. S.; and U. S. residents who are not U. S. citizens.  This principle includes whom?  It includes me, my spouse and two of my adult children (both of whom own homes), but it excludes my other two adult children (who are college or university students of voting age).  It includes the Koch Brothers, Rupert Murdoch (not a citizen), Barack Obama, Ted Turner and George Soros (these folks are just some of the well-know owners).  It includes homeowners, the investor class and owners of private businesses and farms.  In the current demographic, the owners are the middle class, upper middle class and wealthy, while the indigent, working poor and lower middle class are generally excluded from the owner class and, therefore, from the voting class.

Yet, who, then, owns public property and public assets?  Does every citizen own, by proxy, a share of the national parks, monuments and forests, undeveloped or unincorporated land, wilderness, government buildings, or the oceans within the 12-mile boundary?  Do local residents of a municipality own its public parks, public jails, wastewater treatment plants, public landfills and streets and curbs as well as such service organizations by proxy?  Are all citizens, then, property owners?

What could “run the country” mean, today?  What could “run the country” mean in any period during a democratically elected, representative governing body?  Leading an elected body is not coaching a team, managing a commercial enterprise or growing grain (see my blogpost on this topic).  To “run the country” seems to mean that elected, representative officials would comprise people who own domestic assets (financial, productive or real).  Citizen-owners would direct or influence their elected officials to pass laws that those owners want passed and erect administrative structures of which such owners approve for their implementation.  If the class of owners constitutes all citizens (some as indirect owners of government assets, then, this definition seems to be consistent with the U. S. Constitution.  If, however, the class of owners constitutes a subset of the citizenry and their influence exceeds their portion of the population, this definition describes a situation that is inconsistent with the U. S. Constitutional principle of universal suffrage.  This idea, universal suffrage, expresses the idea that each vote counts equally and connotes its extension to the idea that each voice is heard and understood on the same basis as every other voice.  The day laborer’s vote, the doctors’ vote and the CEO’s vote count once each; the laborer’s voice, the doctor’s voice and the CEO’s voice should be heard equally well.

In the United States, today, there seems to be disconnect between the idea of universal suffrage and its implementation in the political election process.  The SCOTUS majority seems to have forgotten that the world and the U. S. have changed significantly and meaningfully since its founding 238 years ago.


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It’s obvious: “Government should be run like a business.”

It’s obvious:  “Government should be run like a business.”

This assertion has a corollary, which has a strong form and a weak form:

  • Strong form:  “Business leaders should govern.”
  • Weak form:  “Government officials, elected or otherwise, should have at least some business experience.”

It also has an analogous assertion:  “Government finances should be managed like family finances.”

First, we should try to understand the phrase, “like a business”.  How is a business “run”, and, to achieve its goals, how is a business structured?  Economists, sociologists and business people propound more than one “Theory of the Firm”, but, this article is a blog post, and I see no need and insufficient space to discuss this entire topic here.

We can, however, point out some salient characteristics of management structures that are found in almost all companies and non-profit organizations.  I don’t claim that these characteristics are essential for effective management, only that they are endemic to it.  I also claim that these characteristics are a product of design, evolution.  They are:

  1. Command and Control management structure:  The CEO, with the assistance of his or her small circle of senior lieutenants, determines policy unitarily; members of the organization implement it uniformly throughout the organization.
  2. Tightly Restricted speech:  Organization policy determines message content to other organizations (public relations, transaction content, professional and commercial communication) and among the members of the organization (informal and formal speech and writing norms).
  3. Non-representative governance:  Leaders at every level are chosen to lead by their superiors or peers within the organization (or its governing Board, a very small circle of “friends”).  Individual producers have no direct influence on the appointments of leaders, nor do policy makers consider their personal life interests or requirements when forming policy (except as an afterthought).
  4. Opaque operations, structure and decision processes:  The company attempts to hide its operations and specific intentions about many aspects of operations from competitors, observers (the press, the government, the tax authorities, for example) and employees to gain competitive advantage.
  5. The stated goal of for-profit corporations:  to maximize the financial wealth of company owners (shareholders, members, as in LLCs, partners).
  6. Singular focus on achieving this goal, i. e., “winning the game by any means ”.

Promised outcomes, accordance to economic theory of the firm, of this structure include:

  1. Superior (“economic”) returns to shareholders;
  2. Nothing else.

A representative governance structure and management has at least the following salient characteristics:

  1. Distributed Power:  Decisions are taken as a result of collective action; the most frequent form of collective action in governments is voting under the principles, one person, one vote and a majority decides the issue in its favor.
  2. Loosely restricted speech:  Members of the governing body are permitted to participate in framing, arguing and voting issues equally; they make speak to non-members as they wish about any subject they want to discuss.
  3. Constituent representation:  Presumably, representatives express the preferences of their constituents and act on them by voting consistently with them.
  4. The stated goals of the government are several and the representatives and their constituents dispute their composition continuously.
  5. Transparent operations, structure and decision processes.  Admittedly, no government is completely transparent, but citizens require a significant minimum transparency of their governments.
  6. Foci on various means and limitations on means to achieving such goals.

By comparing these lists, item-by-item, it should be obvious that economic entities and political entities differ materially along at least these five dimensions.  Indeed, almost no citizen of any Western democracy would want government according to business principles.  It would be tantamount to wanting governance in the style of Somalia, Syria, Egypt, Saudi Arabia, Senegal, Burma, or any other totalitarian dictatorship that you want to name.  What, then, can one mean by asserting, “Government should be run like a business?”

To run a government like a business means, apparently, that its managers should devise a budget that represents the planned implementation of strategic policy, they should be allowed to deviate from it only by special approval of strategic-level management, and total expenditures should not exceed total operating cash inflow in any single year.  This position is naïve.  The federal and state government have budgets, and expenditures that would exceed budgeted amounts require approval of their legislative bodies.  Private companies do require budgets, and upside deviations from budget do require approval by more senior managers.  But, total expenditures frequently exceed total cash operating cash inflow for companies in a given period and they may do so for several periods (years) without damage to the future viability of the company.  To the argument that this operating cash outflow must turn positive at some time (but no particular time) and over the life of the firm cash inflows must exceed cash outflows, I note that so long as lenders are willing to lend and investors are willing to invest in it, a given company may never achieve positive net operating cash flows during their lifetimes.  Many companies never do achieve positive cash flow.

So, the proposition, “Government should be run like a business,” seems quite dubious to me, at least from the perspective of a citizen of a country with a representative form of government.  No two organizations are structured or operate less dissimilarly than a private-sector company and a representative body.  Representative government is a recent development in the history of civilization; private enterprise is ancient.

Having pointed out some considerable de facto differences between representative governments and private-sector companies, I haven’t addressed the question as to whether governments should be run like businesses or vice versa, i. e., whether businesses should be run like representative governments.  There are successful cooperative private companies that are run and/or owned by their employees in the United States and in Europe.  There was, at least, one in Brazil, documented in two articles in The Harvard Business Review in 1983 and 1985.  The degree of employee (vs. owner) participation in management processes varies among companies and the incidence of companies that include such participation varies from country to country.

One could draw an analogy between the primacy of corporate stockholders and the primacy of the citizenry and claim that as corporations seek to maximize the wealth of their shareholders so should governments seek optimize the well-being of their citizenry.  This analogy only shifts the comparison from goals to methods.  Businesses are managed from the top down with great flexibility and little accountability for any particular actions; governments are managed from the top down according to strict rules developed within the framework of laws passed by their legislative bodies.  The managers of government agencies are accountable to their managers, their legislators and, ultimately, their constituents.

I just don’t see the advantage of business experience versus experience as a professional, non-profit manager or other non-government employee.  I do believe that a political career should be a second career.

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Econ 101: What is a free market? (it’s obvious, isn’t it?) – a short quiz

Econ 101: What is a free market? (it’s obvious, isn’t it?) – a short quiz.

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Econ 101: What is a free market? (it’s obvious, isn’t it?) – a short quiz

We all know free markets when we see them, don’t we?  Lets’ see how reliable our vision is.  Here is a short, fun quiz on the definition and properties of free markets:

  1. What is a “free” market (select all that apply – “all” and “none” are time savers)?
    1. A place where I can get all the free stuff I want.
    2. A place where I can buy stuff without having to pay for admission to it
    3. A place where I can buy any anything I want without government interference
    4. A place where I can sell any anything I want without government interference
    5. All of the above
    6. None of the above
    7. What is a perfectly competitive market (select all that apply)?
      1. A free market
      2. A place where the winner takes all or almost all, like a golf or tennis tournament or the Super Bowl
      3. A place where no buyer or seller can set prices as they see fit, but, must take the price they find there.
      4. A place where there are very many sellers and just as many sellers
      5. A place where the price of everything equals its economic cost (which includes a competitively determined level of profit)
      6. A place where everybody knows everything that everybody else knows and knows that everybody knows it.
      7. None of the above
      8. All of the above
      9. Which of the markets listed below are perfectly competitive (select all that apply – “all” and “none” are time savers)?
        1. Health care products
        2. Health care services
        3. Personal computers
        4. Software operating systems
        5. Transportation
        6. Petroleum products (oil, gasoline, plastics)
        7. Firearms
        8. Labor (including professional services)
        9. Chinese food
        10. Prescription drugs
        11. Over-the-counter drugs
        12. Insurance (any kind, such as flood or medical insurance)
        13. Toys
        14. Database software
        15. Accounting software
        16. Internet search engines
        17. Broccoli
        18. Beef
        19. Beans
        20. Barley
        21. Beer
        22. None of the above
        23. All of the above
        24. Free response:  If you can name a perfectly competitive or free market,
          1. Name it here:__________________________
          2. Is it free or perfectly competitive (select one or both choices)?

i.     Free

ii.     Perfectly competitive

iii.     Both free and perfectly competitive.

  1. I can’t think of one right now
  2. There are none


  1. d
  2. c, d, e, f
  3. v
  4. d

The notion of a “free” market is nonsensical; “free” is a misnomer designed to persuade us that there is such a thing.  It isn’t even a useful fiction.  It’s used, like “unicorn”, as a rhetorical or storytelling device.  Like “the second king Charles of France”, the phrase, “perfectly competitive market” denotes nothing.  The notion of a “perfectly competitive market” is, while not nonsensical, a fiction that is used to tell a story of human behavior.  It appears to be useful because it involves mathematics and has a mathematical apparatus.  This apparatus is supposed to express our intuitions about perfectly competitive markets precisely.  It reminds me of the (apocryphal) story of a doctoral student in Mathematics who proved a theorem using functions the domains of which were empty.  The theorem had, therefore, no range of application; it was related to nothing.  The idea of “perfectly competitive markets” has no range of application because its domain of human behaviors is empty.  People and markets just aren’t as the theory presupposes; it fails to explain any human behavior, either individually or aggregated.  This inference is evident from the fact that the predictive record of economic theory and economists is terrible.



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It’s obvious: “Guns don’t kill people; people kill people”

It’s obvious:

  1. “Guns don’t kill people; people kill people.”  And
  2. “If guns are outlawed, only outlaws will have guns.”

Let me say, first, that both of these claims are slogans.  They are simplistic, conceal assumptions critical to understanding them and are intended to appeal to our emotions, in part by concealing such assumptions.  This much is obvious.  But, although they are simplistic, I’ve seen a lot of car bumpers and windows carrying them around for everyone’s reading pleasure.  To many people, they must be meaningful and important and must express some core belief succinctly.  Our first task, then, is to discover this meaning. Statement A points out that guns, being material objects, don’t “intend” anything; people, being conscious and purposeful by nature (a discussion for another context), do “intend” specific outcomes.  Statement A would be clearer, if written, “Guns don’t intend to kill people; people intend to kill people.”  Still, this says nothing about accidental (unintentional) deaths due to gunfire or about gunfire wounds that aren’t fatal. Statement B, as written, is meaningless and owes its impact to the ambiguity and connotation of the term, “outlaws.”  Prescription drugs are “outlawed”, yet, if I take a Percocet for pain after surgery, I am not an outlaw (I have permission from a registered, licensed physician).  Am I an “outlaw” when I exceed the speed limit or “roll through” a “stop” sign?  Are your sixteen-year-old children outlaws, if they see an R-rated film in the theater (or in your house, for that matter)?  Would law enforcement, the military, the National Guard, the Coast Guard or your bodyguard (including the not-so-Secret Service) be outlaws if they owned or carried guns?  When an American gives his 18-year-old son a glass of wine in a restaurant, are he and the son outlaws?  When a Frenchman gives his 18-year-old son a glass of wine in a restaurant, they are not outlaws.  In France, there is no age requirement to drink wine—outlaw in the U.S., law-abiding citizen in France.  Obviously, Statement B uses “outlaw” in two ways.  This use is intentional and is to good effect on those who are disposed to agree with it.  Let’s scrutinize these claims further. Statement A, while true, is silly.  It builds and knocks down the straw man argument that guns are evil because they can kill people.  Nobody believes that argument.  Substitute “strawberries” for “guns” in it.  The result, “Strawberries don’t kill people; people kill people” is comical (to me, anyway).  Or, use “poisons” or “cars” or try “Yorkshire Terriers” or “Bad breath and acne” or, well, anything in that sentence.  The best reply to Statement A is, “So what?”  It can be read as supporting gun control as easily as protesting it.  Should we monitor and proscribe the usage of guns by people, then, instead of guns?  After all, monitoring and proscribing behavior or the use of objects by people is not new.  We have traffic laws and manufacturing standards for cars.  We have building codes.  Even law enforcement behavior is monitored and proscribed.  In fact, virtually every other aspect of human behavior is monitored and proscribed by the societies in which we live.  In some societies, raping, killing or beating disobedient wives are accepted; yet, oral or written expressions of discontent with authorities or institutions are not. Statement B was constructed to exploit the connotation of “outlaws” as “evil people” in the service of resisting firearms regulation.  It’s meaningless because the middle term is undistributed (by changing its meaning, you change the term).  For example,

All trees have leaves.  This plant has leaves.  Therefore, this plant is a tree.

All criminals have guns.  I have a gun.  Therefore, I am a criminal.

Or, Statement B is a tautology.

If owning guns violates the law and all violators of the law are outlaws, then all gun owners are outlaws (i. e., violators of the law).

To get an idea where you stand on gun control, try this short quiz: Why is gun regulation bad?  (Choose all that apply) a)    It violates the second amendment to the Constitution of the United States. b)    Being shot is so unlikely that I don’t need to know who probably didn’t shoot me.  Neither do the cops.  32,000 deaths is only 0.01% of the U. S. population.  That one of them is mine is too improbable to care about.  I wouldn’t care about anyone else’s even if the probability were 0.1%–maybe at 1%.  Now, if I lived in El Salvador, I might feel differently about this issue and get myself a gun, even if I had to register it. c)     I want to be able to defend myself against attack, but I don’t want the gun I used traced back to me. d)    I want to be able to shoot someone who looks like he’s going to rob or hurt me, and I don’t want the gun I used traced back to me. e)    It makes it too easy for law enforcement to arrest and convict me for a crime I committed while using a gun.  It’s like hide-and-seek with breadcrumbs for the seeker, which is unfair to the hider. f)     It would make it too easy for law enforcement to find out that I bought a gun for my cousin, who can’t buy his own gun because he’s a convicted felon, so he could defend himself from his competitors, witnesses of his crimes, or other enemies.  If they catch him and he keeps his mouth shut, they may not catch me. g)    The (federal, state, local, circle all that apply) government would know exactly how much and what kinds of firepower I’ve accumulated in the event that I need to participate in or lead an armed insurrection against it.  They could use this knowledge to make their overthrow more challenging (and cost more lives) by reducing my advantage from the element of surprise. h)    The cops could be prepared to defend themselves against or anticipate my possession of firearms when they come to my house.  I would have no advantage in case I wanted to resist whatever purpose I thought they might be there to achieve or in case I want to scare the hell out them so they’ll shoot me and I can sue the department. i)     I don’t want the cops to know and find the guy who murdered my daughter while attempting to shoot someone else.  Why punish incompetence?  It was just an accident. j)      Just in case I’m able to shoot 26 other students at my school without being identified by -witnesses (eye-, ear-, tongue- or finger-, your choice), I can leave my gun behind and go about my business as usual without fear of arrest or reprisal. k)    All of the above. l)     None of the above. m)  Some reason not listed above.  Please provide it here:_____________________________________________________________ __________________________________________________________________.

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May 9, 2013 · 12:19 pm