Many of you have heard of the blog Naked Capitalism, and its pseudonymous writer, Yves Smith.  Well, she has written what I regard as an ambitious book, ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism.  It is ambitious for several reasons:

• It tries to be comprehensive about all aspects of the crisis.
• It digs deeper than most, analyzing flaws in economic and financial theories that underpinned the errors of the crisis.
• It looks at the political angle of how laws and regulations were subverted, while alleging conspiracy probably too much, when ordinary greed in the open and stupidity could cover the causes of the crisis.

There is a tension between capitalism and democracy.  We don’t like to talk about it, but it is there.  Property rights are human rights, and should be protected.  Governments often determine that certain contracts are not valid on public policy grounds.  (I.e., gambling, prostitution, arson, assassins, etc.)

Democracies also do not like rivals for power.  If business gets too big, to the point where it is influencing the decisions of the government, democracy fights back.  I write this as one who would err on the side of property rights rather than democracy.  Property rights are a direct descendant of the eighth commandment, “You shall not steal,” whereas the form of government of any nation is a thing of relative indifference.  Many nations have different ways of ruling themselves.  It is not yet proven that democracy is the best form of government.  Personally, I think it is more prone to corruption than most governmental forms.  But it has the advantage of motivating the people.

I draw the line when businesses use political power to exclude rivals.  It is one thing to be really clever, and dominate your market, like Google.  It is another to have a natural monopoly like the old AT&T, before technology obsoleted them.  But it stinks to have a system where major financials, who have nothing of patentable value, hold the nation hostage, saying “Bail us out or the financial system fails.”

I argued against the bailouts, as did Yves, but the government caved under the asymmetry of “Heads we win, Tails you lose.”  It came up tails for all of us.

Yves digs deeper than many critics.  She questions the assumptions of the economics profession,with its gloss of pseudo-science.  She pokes at the questionable assumptions underlying much of finance theory.   She looks at those who got it right regarding the crisis, and were marginalized as a result.  Where I differ is that there isn’t necessarily a conspiracy behind unwillingness to listen to discordant theories.  Academic guilds ignore researchers who question their closely held beliefs, regardless of the truth of the matter.  They know that it couldn’t be true, and the outsider doesn’t really understand their discipline.  I do not charge them with ill intentions, but stupidity.

What I really appreciated about the book was its willingness to challenge academic economics and finance.  She did it well, but left little in her wake as to what to look to as a substitute.  The willingness of economics to engage in pretend games with high level math is ridiculous.  If we restarted economics from scratch today, whether mathematical or not, it would not look like much of the sterile games that are played in leading economic journals.  Ask the question: how many benefit outside the economics profession from what is written in economic journals.  Answer: precious few.

I have many more things to say about this book, but this review is long enough as it is.  Let me say that there are few books that I have marked up as much as this one.

Quibbles

I do not go in for conspiracy theories.  Usually, most evil can be performed outside of darkness; people still don’t notice for the most part.

Yves should have spent more time on the enablers of the crisis — yield hogs.  You can’t buy protection on a company that you think will die, unless there is a yield hog out there that wants extra income that they think they are getting for free.  AIG was the largest of them, but by no means the only one.

She complains a bit much about “free markets.”  Aside from trading with the enemy, why should trade be constrained?  Why should I try to take away the property rights of my neighbor?  Beyond that, suppose you are right.  Where would you draw the lines?  It is one thing to criticize, and quite another to propose new policy.  Personally, I make an effort that when I suggest that something be demolished, that I recommend something else to take its place.  It is easy to be a critic, but hard to be a builder.

Who would benefit from this book:

Most people would benefit from the book, if they read it realizing that the things that happened do not require that parties conspired to make this happen.  Those who would especially benefit include economics and finance professors; they need the criticism.

If you want to buy the book, you can buy it here: ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism.

Full disclosure: The publisher sent me the book for free.  I spent several hours reading it in full.  If you enter Amazon through my site and buy anything, I get a small commission (6-7% typically).  But, your costs don’t rise versus going to Amazon directly.  I have avoided doing a “tip jar” because I would rather people benefit from the books I review, while allowing Amazon to pay me indirectly.