Black: The Best Econ Books I’ve Read Recently

BY Business Desk  March 12, 2010 at 12:17 PM EDT

Bill Black: I recommend looking at three books. Two of them focus on the interplay of economics and politics. James Galbraith is a professor of economics at the LBJ School of Public Affairs at the University of Texas at Austin. He wrote The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too. Tom Frank, a historian, authored The Wrecking Crew: How Conservatives Rule. Both make the point that George W. Bush’s administration’s economic policies were not based on market capitalism and small government. They describe the nation’s descent into a system of crony capitalism that resembled Suharto’s Indonesia. The books demonstrate that any attempt to explain the American economy, and the very large and expanding role of the federal government in that economy under an administration that purported to be dedicated to smaller government and raw competition, without a deep understanding of politics and power will fail.

Neither book focuses on the ongoing financial crisis, but both are essential to understanding how the United States destroyed an often effective financial regulatory system that largely prevented cheaters from prospering. The federal government became an ally of the cheaters and created a Gresham’s dynamic in which the most ethical business and professional leaders were driven from the markets. The catastrophic results surround us.

While the first two books would make Bush Republicans gnash their teeth, reading the third book I recommend may send progressives to their dentists for teeth guards.

Moral Markets: The Critical Role of Values in the Economy, edited by Paul J. Zak, is a wonderful book with terrible timing. Its primary thesis is that markets not only benefit from human’s innate (i.e., evolutionary) moral standards (such as fairness and reciprocity), but also that well-functioning markets tend to reinforce these moral standards.

It is an edited volume with the work of scholars from many different fields that overcame most of the inherent problems of such a volume (loss of cohesion) by getting the authors together periodically to discuss their research findings. It is generally a triumphal book about markets — that had the misfortune to come out just as the markets self-destructed. That is a shame because the book is a treasure trove of very useful research findings that are important to framing policies that could make markets work better.

It strongly makes, for example, the point that homo economicus (the purely rational, self-interested human postulated by theoclassical economics — the one you’d never want your brother or sister to marry) is “a sociopath.” Indeed, the book implies that the modern U.S. business school (and economics department) is a fraud factory that self-selects for the least altruistic students and then proceeds to make them even more selfish. The book is a disappointment for a white-collar criminologist because it ignores our (extremely relevant) literature on immoral markets, but that’s a nearly universal flaw of economists.

The one flaw that I didn’t expect is that the book did not exploit the wonderful opportunity offered by having Michael Jensen do the forward. Michael Jensen is the most interesting scholar on the issue of markets and morality. He is the intellectual father of modern executive compensation (decrying the era in which he famously said that CEOs were “paid like bureaucrats”). Michael Jensen has now turned on his creation. He argues (as do we white-collar criminologists and, far more famously, Bebchuk and Fried in their classic Pay Without Performance) that compensation is not paid on the basis of performance and that it drives accounting “control frauds” (our terminology, not his) and has led to a Gresham’s dynamic that has caused a profound loss of morality in our largest market participants. Bizarrely, Jensen’s forward to a book on “Moral Markets” does not mention these points (the body of the book also does not contain Jensen’s remarkable mea culpa).

Moral Markets can be read with Galbraith and Frank’s books as showing us the costs of crony capitalism. Effectively regulated financial markets that prevent cheaters from prospering (the perverse Gresham’s dynamic) can aid economic growth and reinforce our better angels. Crony capitalism rewards the cheaters and drives honest business leaders out of the markets — it degrades the morality of our business leaders, professionals, and politicians.

William K. Black is associate professor of economics and law at the University of Missouri, Kansas City, and author of The Best Way to Rob a Bank is to Own One.

Disclosure: Dr. Black is a former colleague of Dr. Galbraith at the LBJ School of Public Affairs, has co-authored several articles with him, and is in the process of co-authoring a book about the financial crisis with him. Dr. Black’s spouse, Professor June Carbone, appeared at conferences that were associated with the project that led to the book Moral Markets. She is not an author in the book. Her travel expenses to the conferences were paid for by the foundation that took the lead in funding the book project. She has no financial interest in the book.