Book Review: ECONned

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.


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.


  • Hubert says:

    reg “conspiracy”

    I would submit that players in a system may conspire without talking about it explicitely.
    I am thinking about a very big overleveraged player with overrated credit looking to draw money from that corrupt rating as long as it may. It is setting up a London sub to exploit that with unregulated swaps in the range of 500 bn – most of it a binary bet on the financial system which failure would be accelerated by this swaps.

    Do Goldman and AIG have to sign a contract about it so one can call it a conspiracy ? Aren´t the incentives clear enough to conspire against taxpayers ?

    Aren´t there more of these lootings coming? All the smart guys need are a few dumb and/or corrupt decisionmakers in TBTF institutions. And there are so many of them …..

  • najdorf says:

    I mostly agree with you about the errors of the the econ and banking professions, but I’ll quibble with your quibble. As a smart, rational, risk-averse, ethical guy it’s easy to assume that the people you disagree with in econ/banking are just stupid. How else could they do such a bad job? But the difference between a stupid cowboy banker and a fraudulent cowboy banker, after his actions cause the company to blow up, is retiring to the Hamptons with his cashed-out options or doing 10 years in federal prison. There are pretty strong incentives for looking stupid. For instance, there’s no way that Dick Fuld and Ken Lewis can possibly be as stupid as they appear in any of the interviews they’ve done with investigators/examiners. People that stupid don’t get promoted over all the smarter people lower in their organizations. I’m not saying they’re geniuses or that the cream must rise to the top, but there’s no prize for being the smartest, most talkative retired CEO of a damaged company.

    In a related sense, it may not be stupid to take huge risks with other people’s money in order to make multiples of the expected risk-averse salary for 5-10-20 years until you lose it all. Unethical yes, individually irrational no. Notice that most smart people with all their wealth tied up in one business didn’t take crazy risks. Top guys at Countrywide, Fannie/Freddie, AIG, Bear Stearns, and Lehman got plenty of cash out of the company at high levels.

  • Lurker says:

    Don’t know if this was sloppy writing or sloppy thinking on your part, Dave, but this is a very poor choice of grouping:

    “(I.e., gambling, prostitution, arson, assassins, etc.)”

    The first two are unquestionably Property Rights, a.k.a. Human Rights.

    The third, if performed under proper care, and ONLY on property that the arsonist HAD A RIGHT TO BURN, is also a Property Right.

    The fourth, “assassins,” is clearly a violation of someone else’s Property Rights, and therefore doesn’t belong with the first two items, or even with the conditional acceptance of the third item.

  • Monetarius says:

    Why David do you say that Yved Smith is a woman? I do not knowm but Yves is a man’s name although it is pronounced as in “Eve”.

  • Carlomagno says:

    “It is not yet proven that democracy is the best form of government.”

    Eh? I’m wondering what your definition of “best” is in this context. Also, would you care to suggest “better” alternatives, preferably forms of government that have actually been tried in practice rather than intellectual pipe dreams?

    • Carlomagno, No, I don’t have a better solution. But looking across cultures, it seems the best forms of government for given culture does vary. Some groups can tolerate more freedom, some less so. One size does not fit all. As it is, the US itself is not a pure democracy, and even as a representative democracy it has its quirks. Because we allow the government to have wide influence over the economy, then there are many supplicants that then gain power over legislators/administrators that is seemingly greater than the power of the franchise. We really don’t have a democracy; we have a hodgepodge — and maybe that is for the best.

      But, I think we would be well-served to start a discussion of what a government is for. Promoting the general welfare is good, but in my view, government should be primarily negative, restricting certain broad classes of unethical behavior, promoting public health, and external defense. What structure would conduce best to do that I do not know — it could be democracy, aristocracy (in some ways that is what we have, with corporate interests in place of barons), monarchy, or something totally new. In the age of the internet, pure democracy is more possible, but would it be any good? Probably not.

  • Ted K says:

    Of course, Mr. Merkel probably does not see proprietary trading as a form of gambling. Nor probably ever had a covetous thought on those grounds. Quite admirable.

    Mr. Merkel might also tell us nothing is “free” but that 6%-7% on the book recommendations is PASSED ON to the Amazon customer. I would guess much the same as he would argue taxes are PASSED ON to the customer.

  • matt says:

    “Eh? I’m wondering what your definition of “best” is in this context. Also, would you care to suggest “better” alternatives, preferably forms of government that have actually been tried in practice rather than intellectual pipe dreams?”

    Please review the history of Singapore, a country with relatively high GDP per capita. Singapore experienced a very high rate of economic growth under a British-appointed governor (i.e., it was not a democracy). While Singapore has general elections today, it proved that the foundation for economic prosperity is built on private property rights and free-market capitalism.

    The United States used to have an ideal system. The government existed to enforce contracts, protect private property rights, and provide service ensure the former two items (via defense, for example). This system began to falter with (1) increasingly broad interpretation of the commerce clause, (2) empire building, and (3) Federal entry in the “prosperity business.”

    Democracy, as I have seen it in the United States, is really just way to engender tyranny of an organized majority. It is a way for those who covet others’ property to legally force it away from them with a majority vote. Democracy is unsustainable for this very reason – the people will vote themselves goods and services until neither the aggregate confiscation via taxation nor the pledged revenue of foreseeable future generations is enough to cover entitlements of the people.

  • giovanni says:

    …. I derive my views on ethics and law from the Ten Commandments (Exodus 20, Deuteronomy 5) and Jesus’ view of the Law (Matthew 5-7, as an example). I have not hidden in my writings that I am a Calvinist of the old school; I even list my church affiliation on the rightbar of my homepage, which, if one clicks on it, will reveal a lot about what I believe…
    Everything belongs to God, even you and me. We aren’t free to do what we want, ….
    That’s the lens that I view right and wrong through. …
    The fact is that until 30 years ago there was a higher percentage of people in the american elite that tool into account these kind of ethics and logic, by virtue of its background

    Today tha core financial and media and also governement elite in the USA comes from a totally differente culture, a very old one and distinctive one whose intricate laws and traditions are not much known because are buried in 24 volumes (some editions 30). Benanke, Greenspan, Bob Rubin, Larry Summers, Dick Fuld, Blankein, Greenberg, and most of the folks at the Treasury, FED, Wall Street, financial media and also at the White House come from the tradition that vows with the “Kol Nidre” to NOT keep the promises made to God each year. A good inshight on the ethics and culture of the new american ruling class can be obtained from the work of professor Israel Shahak …

    It helps a lot to understand the origin of the global financial crisis, exactly because it shows the background of the new US elite

    …by the way, I am loosely cristian, down here in Europe trading futures, and my grandfather was linked to the folks above……

  • Lurker says:

    But what if you first earned what you burned? Then who do you steal from????

    “Arson is a form of theft, and banned by the eighth commandment”

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