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Economic Gangsters

TRANSCRIPT

By Raymond Fisman | November 5, 2008

Introduction

DEVIN STEWART: We're here today with Raymond Fisman, who is a professor at Columbia University Business School.

By the way, by way of introductions, I'm Devin Stewart from the Carnegie Council. Welcome.

We have a little treat, to hear from Raymond Fisman about his fairly new book, Economic Gangsters. Thank you very much for coming.

Raymond got his PhD from Harvard University in economics. He is also a researcher at the Social Enterprise Program at Columbia University.

Economic Gangsters looks at some unorthodox issues in economic development. A recent conversation that I had with Seth Kaplan about his book Fixing Fragile States reminded me of some of the issues that Raymond looks at in Economic Gangsters, some of these softer, more narrative issues that are specific to the complexities of various situations—rather than sort of blanket, overall economic-development strategies, looking at the very specific, almost random or chaotic elements that make up a particular story.

So Raymond is going to tell us many of the stories that he came across in his research on economic gangsterism. I think he's using the word "gangsters" somewhat playfully. He starts with a discussion about Al Capone and his background as an accountant. There is an economic incentive, I think is how you put it, for violence.

So how do we get that incentive out? How do we take out the corruption? How do we take out the violence in economic affairs?

Raymond is going to talk for about 15 or 20 minutes and tell some stories and teach through storytelling. Thank you very much, Ray.

Remarks

RAYMOND FISMAN: First of all, thanks for having me. It's actually wonderful to have a manageable group. I'm used to teaching a combination of seminars and lecture courses, one each a year. Let me tell you, I so look forward to the one day a week when I'm sitting around a table like this rather than holding forth with 60 or 80 people in the audience.

I actually will make reference off the bat to the introduction and this notion that a lot of failed attempts at development can be traced back to things like social cohesion, which really is quite distinct from what I'm going to talk about, which is mostly narrow economic incentives. The reason I start with that is that I'm not going to try to sell you a unicausal view on why poor countries are poor, why America is rich, why Argentina has stayed poor, why Africa remains stagnant. There are lots of explanations floating around here. The one that I'm going to focus on, at least initially, is economic incentives. We will broaden it a little to talk about some of the psychology behind gangsterism, or why people do bad things.

I'm going to start out just very briefly with a broad-brush history of economic development in the last half century or so, just to give some flavor of why we are looking at violence and corruption as they feed into the poverty of nations.

If you go back 50, 60 years, it's a time of great hope, for those of you who are not development economists. We are coming to the end of colonial rule in a lot of countries. There is this great hope that comes with independence, in many parts of the world. If you went back and looked at countries and their level of development around that time and tried to pick who the winners would be—take the two Ks, Korea and Kenya—where are you going to place your money? They are both coming out of rather tumultuous times, both effectively coming out of times of civil conflict. One has very rich soil for coffee, for example. Korea, on the other hand, has higher literacy rates. In terms of income per capita, they are identical.

You then fast-forward to the present. Korea is practically as rich as we are, rapidly catching up (the last few months notwithstanding), whereas the average Kenyan is no richer now than he was in 1964.

So you ask the question, why? You hear some of the narratives around why Kenya remained poor—certainly from Kenyans—and there is this constant theme of the corruption that was passed from the colonizers on to those who replaced them. That's the corruption. This constant theme of ethnic tensions, strife, warring factions—that's the violence.

If you read through these narratives, again it almost seems like violence and corruption are inseparable from these questions of development. It very much feeds into this institutionalist view that has come to dominate discourse in development economics.

But what I want to talk about for my allotted 15 or 20 minutes—the book is somewhat episodic, if you want to put it that way. It is a collection of stories, in a sense. There are many themes that we can pick up on. But what I want to focus on—and I'll describe it through a single story—is this notion of the economics of why people do bad things, thinking about crimes of calculation as distinct from crimes of passion.

The point that I want to make is, you can almost take as self-evident that if we want to do something about these problems, it is very useful to understand the root cause. I'm going to put forth the following claim and tell a story about it. It is not always obvious whether something is a crime of passion or a crime of calculation.

The example that I'm going to give, the story that I'm going to tell—by the way, Al Capone was an accountant before he became a mobster. So this is a man who is clearly well schooled in adding up columns of costs and benefits and seeing which way the inequality sign goes. This is what we have in mind in terms of economic gangsterism. This is the calculating side to why people do bad things.

I'm going to pick up on an example where, if you take it at face value, it sounds like superstition, passions, rather than logic and rationality at work. That's the killing of witches. I'm not talking about what happened in Salem several centuries ago, though we could talk about that. It turns out there are fairly similar themes there. What I'm going to talk about is witch killing in the modern era—i.e., today. It may surprise you, though; The New York Times actually had a story on the witch killing of children a couple of years ago. I'm going to talk about the accusations of predominantly old women of having committed sorcery and then hunted down as witches.

We are going to focus on the country of Tanzania, one of the poorest nations on what is by far the poorest continent on earth. We are going to, further, focus in on the region of Meatu, as one of the poorest districts in one of the poorest countries in what is by far the poorest continent on earth.

In Meatu, there are veritable witch epidemics now and again—certainly any time there is a bad crop year. Witches are the scapegoat of first resort. There are lots of women who are accused of bringing on drought and crop failure through casting their spells. But it's not just about crop failure. It's really anything bad that happens. You lose your job—another economic calamity—you blame a witch. You do poorly on your school grades; you blame a witch. Your favorite sports team loses; you blame a witch.

We all have this inborn, I would say, need to look for scapegoats. It's never my fault. It is my mother-in-law's fault. It is my wife's fault. I have a nine-month-old daughter, and I'm sure as soon as she can talk she will be blaming things on me. There is this need for a scapegoat.

But in Meatu, they usually blame a witch. These witches are not random folks in Meatu. As I said, true to the stereotype, these usually are old women.

These are also very intimate crimes. You are not pointing the finger at someone's grandmother down the street. You are pointing the finger at your own grandmother or your own aunt, someone within your immediate family.

When you accuse someone of sorcery, witchcraft, you have to do something about it. You either have to kill them or you have to run them out of town. Otherwise, they'll just keep casting their spells; bad luck will continue. So very often these old women are hacked to death by machetes or sent into exile, where, really, their long-term prospects aren't much better. You have this old woman roaming the Tanzanian countryside. The prospects aren't good.

If you review the facts, you have people in Meatu hacking to death their grandmothers with some regularity, blaming things on them that, from the perspective of modern rationality, modern logic, cannot possibly have anything to do with these poor old women. I'm going to claim—and we are certainly not the first to claim this, but providing some evidence (because we do like to think of this as an evidence-based enterprise)—that this is largely motivated by economics. I should say, you can always come up with an economic explanation for things.

Something that was not mentioned in my bio is that I used to run a dating service. I ran a dating service for research purposes. I'm not kidding. That was all about the rational approach to dating, how people make rational cost/benefit tradeoffs in picking a partner. You can look that up on my Website. I wrote a Slate column about it in 2007, which was the most popular Slate column for the entire year, for 2007— mystifying to me. You just mention sex or dating, and all of a sudden it goes viral, so to speak.

So you can tell a rational story about anything. But here I will claim that there is a very sensible, plausible, and falsifiable, or provable, story around witch killing in Meatu.

Remember, these are the poorest of the poor—the poorest district in one of the poorest countries in the poorest continent on earth. These are people who, even in good times, are sort of on the brink of survival. So even in better times, they are surviving hand to mouth. Now you give them a push over the edge, so to speak. The crops fail, you lose your job, there is some economic misfortune. What are you going to do? Again, before this happened, you already had trouble feeding the family. Now what? You have, say, 20 percent less in income. Each person could eat 20 percent fewer calories. That doesn't work, because then you would all just die a slow death together, because there is some limit below which humans cannot fall in their caloric consumption. So your other option is—say you have a family of five—to just pick one person, draw straws. Someone has to go.

Our sense of fairness would probably dictate that you do exactly that; you draw straws. That seems somehow to accord well with our notion of justice. But then think about this from a group survival perspective. If you want to think about it in social evolutionary terms, you want to maximize the probability that the family survives. Who are you going to knock off? You want the person who is the greatest consumer of household resources relative to that which they produce. That would be an old person. It has to be grandma or grandpa.

We don't have a economic great story for why it's grandma. These are patrilineal, patriarchal communities, so the men have much more political power. So it does turn out that it's grandma, not grandpa.

But you need to get rid of an old person, so that's what you do.

Why do we care about all this? Why do we care about distinguishing between superstition and economics? The way that the Tanzanian government has tried to deal with this is to go and explain to the people of Meatu about their anachronistic beliefs and outmoded ways. You go in with your PowerPoint charts and your two-by-two matrices and you explain that this just doesn't make sense. This has not been successful.

You might say that these are very deeply rooted superstitions. You also might say that it's not so much that these people want to believe in witches; they have to. This is a survival mechanism in times of scarcity.

If you think about it from an economic cost/benefit tradeoff, you start thinking of things like, well, you need to make grandma more valuable. Suppose your only objective is to put an end to witch killing. What are you going to do? You, the development agency, will send a monthly check to elderly people in the community as long as they are alive. Then, of course, there's no incentive—you wouldn't want to, if you like, kill the goose that lays the monthly golden egg.

It's not clear that this is optimal development policy. Remember, what is at the root of this problem is that impoverished people are then, by virtue of a negative shock to incomes, put in an untenable position. So you want to do something about that untenable position. You want to do something to smooth out their income stream.

That's the type of thing that we discuss in some detail in the book. It follows exactly this reasoning of thinking about what the root cause of a problem is. Once we have identified the root cause, what can we infer? What are the implications for the development policy that comes out of that?

I should say that there is a role for psychology in this, just as in thinking about genocide in Rwanda as being some combination of deep-seated ethnic tensions along with the trigger which may have come from the collapse in coffee prices. We are not saying everything is the result. We don't have this monomania for economics.

If you take the example I just went through, there is this superficial narrative that is overlaid on the economic problem that is a crucial justification for people doing these bad things. We don't want to totally discount the psychological elements to this. But again, if we want to get to the root of this problem, it seems like economics is largely to blame. More broadly, if we want to understand root causes and effects, we have to think more systematically about looking beyond the superficial stories we hear. So we like to tell stories, but we also like to get to the mechanisms underlying them.

I'm happy to take questions at this point. I can keep talking indefinitely.

Discussion

DEVIN STEWART: That's great. I read your dating article. I'm a daily reader of Slate. It was a fantastic article. I have cited it many times to prove my own theories.

Do you want to tell us briefly about that article?

RAYMOND FISMAN:
I'll happily say a few things about it.

First of all, it is a nice way of drawing out another of the themes in this book, which is exactly how difficult it is to study corruption. I would say that there is an affinity between studying corruption and studying dating.

What is that affinity? Any thoughts on the similarities between the scholarly pursuit of corruption and the scholarly pursuit of romance? Some people probably lie. How about, everyone lies all the time, both to others and to themselves?

You in the green sweater, what are you looking for in a woman?

PARTICIPANT: I was looking for someone who thought I was funny, who laughed at my jokes.

RAYMOND FISMAN: Okay. I will say—and this is always the danger of going through anecdotethat's not totally removed from what I'm after here. I would say, 80 percent of the time you throw that question out there, the first thing that comes up is "smart." Men are looking for smart women. And I will always ask a man rather than a woman. "I'm looking for a smart woman."

That means, at least based on the data that we looked at running a speed-dating game, which admittedly is a five-minute version of love and romance—we find that people, based on the choices they make, are going after beautiful women rather than very smart women.

These same people are asked before they go into this dating game, "What are you looking for in a partner?"

They are also asked, "What do you think the average person of your gender is looking for in a partner?"

They all say, "I am looking for a smart woman, but all those other men out there are just looking for a beautiful one."

So there is an adding-up constraint here. You show people the averages of each of these things, and you find that everyone cares more about intelligence than the average. The average cares less about good looks than the average. The average cares more about intelligence than the average. That just can't be true. So people are either lying to me, the experimenter, in these surveys or they are lying to themselves.

Corruption has exactly the same feel to it. Imagine going out and running a survey where you ask people, "How much did you pay in bribes last year?" There are reasons to believe they would lie, that they would overestimate or underestimate. It depends on who is conducting the survey. It depends on the political allegiances of the survey respondent. I want to overthrow the government, so I want to paint a very negative picture of them. The surveyor is a World Bank employee. I want to let them know exactly how hard my life is here in Mozambique, so I tell them about all the problems I have. A World Bank employee in Mozambique is kind of viewed as this piñata stumbling through the country, and everyone is going to try to make as much fall out of it as possible.

So first of all, there is this affinity in terms of the cheap-talk problem. But what that means in both cases is that you have to look at ways of determining what holds value, both in a corruption sense (what's the value of connections?) and a dating sense (what am I looking for in a partner?), by looking at real choices that people make rather than listening to what they say.

These are two very strong examples of the cheap-talk problem that economists love to trash and talk about.

QUESTION:
I have a question regarding the first part of your exposé. You have been telling us about all the bad things that you have been saying. Could you tell us, from your experience, of something good that happened after corruption was discovered?

RAYMOND FISMAN: You mean where revelations around corruption have led to regime change?

QUESTIONER: Yes.

RAYMOND FISMAN: This is actually a tricky issue. One of the uncomfortable facts, particularly around Indonesia—this is a theme we discuss, at least in passing, in the book. I'll come back to your question in a minute.

One part of the book is focused on Indonesia. In Indonesia there is this uncomfortable reality, which is that there was highly equitable, long-term growth of 6 percent per year for three decades under one of the most corrupt dictators on the planet. So 6 percent growth for three decades under Suharto.

You can say they would have gotten 8 percent if he hadn't been stealing so much. You can say maybe there would have been more equitable distribution of the fruits of economic development. But that's a little unfair to our friend Suharto. The fact is, they did pretty well. You have to tell me a pretty compelling counterfactual about how they would have done better with a different system.

So there are different kinds of corruption. One concern that your question immediately triggers is, suppose—everyone knew that the Suharto regime was taking its 10 percent or 25 percent. Yet when the regime fell, it seems to have been replaced by a chaotic system that is not necessarily serving the people of Indonesia well.

I merely want to mention that as a concern that we have here.

I also would say that another concern I have with this question is that there is this notion out there—and then I really will answer your question—that transparency is sufficient. You say, "We expose the problem—public institutions, democracy, pressure from the media some—it somehow solves the problem." But we need some combination of knowing the facts and being able to act on them. We need some form of empowerment.

Now here I actually answer your question. I answer it with a specific example of a study done by a couple of World Bankers, Ritva Reinikka and Jakob Svensson, who did exactly this kind of empowerment-through-information experiment. They did it first in Uganda. The experiment in the power of information is as follows.

They started publishing in Uganda newspapers how much in school funds that were transferred from the central government to local school districts actually made it to the local school district. So 1 minus that fraction is the leakage rate. The median leakage rate was 100 percent. In more than 50 percent of cases, 100 percent of school funds were stolen.

I actually think the more interesting part of what Svensson and Reinikka did was to then look at what the impact was of making this information public on the leakage rate in future years. They found that in places where people read more newspapers, you got a bigger bang for your exposé buck. So here was a case where information actually had an impact.

They then ran the same trial—and this really highlights both the positives and negatives of trying to understand the world through randomized trials—they tried the same thing in Tanzania. It had no effect whatsoever. The story they tell is that the people of Tanzania were powerless to actually hold—this was some years ago—Tanzanian bureaucrats accountable for this.

So we need a combination of information and the ability to act on that information. I feel like that message is often lost in what is another very popular theme in the policy world, and that is the role of transparency.

DEVIN STEWART: Ray, I have a few questions, and I also want to get the audience involved a bit more as well.

Everyone here wants to know about New York parking meters. I know you are going to tell us about it. We want to know about our local environment here.

The other thing is, you have a chapter called "No Water, No Peace." I was in China last month and this theme came up, which is that scarcity eats away at ethics; it corrodes. You might want to just talk a bit about that interaction as well.

RAYMOND FISMAN:
I'll start with the parking stuff. But I'll also try to put this second issue in a larger and more immediate context. This is something a lot of people are wondering about right now in Corporate America. We are now facing greater scarcity in Corporate America. What is that going to do to the honor with which our business leaders conduct themselves?

But first the matter of parking meters. I'm actually going to try to put that in a broader context as well. I think there is this question out there—irrespective of economic incentives—leave that aside for the time being—we have the sense that different societies have evolved, if that's the right word, into different means of transacting. What I mean by that is, you just know in some places that you have to pay bribes and in others you don't.

I'm going to stick with the Mozambique-America example, or Mozambique-Canada, because these are the places where I have lived most of my professional life. I was sent to Mozambique by the World Bank some years ago for a tour of duty, so to speak.

So think about an expat in Mozambique. We know they have to pay bribes to the traffic cops when they get stopped, and they do. You take that same person, bring him back to Massachusetts. He's driving down the Taconic Parkway and he's pulled over by a state trooper. You are not going to try to slip the guy a fifty. You just will not do that.

You hear people say ridiculous things like, "Oh, I'd hand him my driver's license with a $50 bill slipped behind. That way it's ambiguous." That is not ambiguous. This will not lead to a good outcome for you. So just for future reference, if you are stopped on the Taconic Parkway, do not try this approach.

The idea here is that we have evolved into, if I can refer to them this way, two equilibria. There is the pay-bribe/extract-bribe equilibrium. There is the pay-fine/demand-fine-and-don't-take-bribe equilibrium. These two ways of transacting are mutually consistent. Making mistakes is very costly. If you try to bribe an honest policeman, clearly that's going to create problems. If you try to shake down an honest driver for a bribe, clearly that's going to create problems for you, the policeman. That actually is both sets of inconsistent preferences.

So you evolve into these two different ways of doing things. They reinforce one another. Again think about the corrupt way of transacting. What is the first rationalization that comes to mind for doing anything we know isn't quite right? Everyone else is doing it. That again is consistent with this evolution of two different equilibria, two different ways of conducting oneself. Once everyone around me is doing something, there is no psychic cost to doing it.

That's all by way of setup for why it's entirely possible that otherwise identical groups of people evolve these different ways of transacting.

I was looking behind me for a whiteboard of some sort. If I had one, I would start making a bunch of dots on it as a scatterplot that I think illustrates this point. But I will just describe it in words.

World Bank did a survey for a couple of years where they asked business owners, "Do you pay bribes to get government contracts?" In the scatterplot at the country level of the responses to this question, the distribution is all way up high—most companies in a country say yes—or way down low. Again, there is no middle, because it's very costly to be in a society where you don't know whether you have to pay bribes or you don't.

Now, how much of this do we take with us when we leave Mozambique, we leave America? That's largely what the parking violation study is about. If we want to understand how much of this culture of legal compliance we carry with us, what we want to do is bring people from around the world together to one place where they face similar legal constraints, or lack thereof, and see whether they behave, quote, honorably or dishonorably.

This is the world inhabited by diplomats in any city around the world—not businesspeople. If I'm a businessperson in Switzerland and I double-park and I get a ticket, I have to pay it. I don't have legal immunity.

DEVIN STEWART: Ray has this amazing table, "The Parking Hall of Shame."

RAYMOND FISMAN:
Yes, I'll come to that in one second. You can look at the flouting of any law, whether these diplomats go out and get drunk and disorderly—and there are some wonderful cases of that among the Russian diplomatic community in New York.

But what we look at is a very clearly observable and recordable version of this, which is, do people double-park? Do people park in front of hydrants? Do people break parking laws of Manhattan and then fail to pay the fines?

The punch line is, there are big differences. The Swedes, despite their immunity from any sort of punishment for this, have zero unpaid violations in the history of Swedish missions to the United Nations. The same for Denmark. The same for Norway.

You then move to the other end, the other extreme, the Nigerians, diplomats from Cameroon, diplomats from Italy, diplomats from Greece—very high levels of violations relative to their peers in less corrupt
countries.

So there is a little bit of this that we carry with us when we go from the United States to Mozambique, from Canada to Mozambique, from Sweden to Mozambique. There is a little bit a Mozambiquan transacting that we bring with us from there when we move here.

The other question was about whether ethics are forgotten in difficult times. I think there are a few immediate takes that one can have on this.

Raymond Fisman discusses China and the race to the bottom in international trade.

First of all, if you think about the global search for business opportunities, this is one thing that certainly has us worried. Suppose opportunities are drying up somewhat in America and everyone is going to China to try to seek out profits in the frontiers of the economic development. We now have a bunch of firms chasing after the same scarce resource—that is, the right to produce aspirin in Guangzhou or the right to chop down trees in Indonesia. Think about how much more power this now hands to the bureaucrat who controls this scarce resource. So this is the converse of one commonly proposed anticorruption intervention, which is to create competition among bureaucrats to prevent each one from having this market power that he can use to extract bribes from businesses.

So I think that's one concern we have.

The other is simply the fact that if you view ethics as something of a luxury, something where, if we have relatively high profits, we can indulge ourselves in honorable behavior, and now these profits dissipate, simply to stay in business we have to lower our standards. There is this race to the bottom.

I think the other, perhaps related concern in the realm of races to the bottom—I don't think I'm picking on any particular nation to say that Chinese companies will do business with anyone, anywhere. They have certainly revealed that to be the case. That's another sort of shift in the global competitive landscape that I think has a lot of people worried—the fact that they have no problem drilling for oil in Chad or, far worse, sending arms shipments to Zimbabwe, with some narrow legalistic rationale. I think that has a lot of people worried.

DEVIN STEWART: Well said, Ray. Thank you. Questions?

QUESTION:
I have a couple of comments to make. I'm not sure I remember them all, because as you go through I have reactions and then you go on to something else at least as fascinating.

It has been my observation in the New York market that it's very hard for a businessman to actually make a go of a relatively new business without some corruption taking part between the supplier and the customer. I don't necessarily mean the end consumer. I mean between two businesses, perhaps by the manufacturer, who is buying material with which to manufacture his products, et cetera. There is a lot of this that goes on, whether it's shortchanging someone or adding up the figures wrong or something else. I think there is a great deal of this that goes on in everyday business practice among small businesspeople, as well as large.

I also find that when the stakes go up, that makes the game that much more deadly. I don't think that in prosperous times there is more ethical behavior. I think, in point of fact, when the stakes are higher, as they are in times that are relatively affluent, that makes the stakes that much more attractive—that is, the end stake—and therefore there is more corruption, more willingness to cut a corner to do that.

I think also there is a difference in corruption between an individual and government, on that level, and between individuals.

I would like to know what you think and what the practice is, if these are valid observations and your reaction.

RAYMOND FISMAN:
There are a number of points you have raised. I'll actually start with the last one. We could easily talk for two hours just about the definition of corruption. If you look at Transparency International's Website, their updated definition is something about abusing—it is no longer about public office, but something about some kind of vested office, an office vested with some responsibility, for personal gain. A narrower, more traditional definition would be the illegal use of public office—so then you necessarily have a public servant involved—for private gain.

What do I think of these, whether it's between two private individuals or government and a private individual? Is it corruption? It's the same concepts at work, the same ways of ferreting out what's going on, the same concerns about what the broader impacts on society are. Whether they are corruption is a narrow definitional issue.

Raymond Fisman reports on the lessened incentive to cheat when people are paid in tokens rather than dollars.

On the question that there is some corruption built into day-to-day business in any realm, I suppose the one thing I would say about that is, yes, there are daily rationalizations that we make of things that we know aren't quite right. I think it's really interesting to think about how we can change the terms in which these things are presented, provide people frameworks to think about these problems that may shift whether they add up the figures incorrectly or not.

I'm actually going to give a couple of examples of this from the psychology literature. I'll give three examples. I think one is less interesting than the other two, and I'm actually going to give it for that reason.

You have people play games in a lab, where there actually is some opportunity to cheat. It's something like solving math problems. Then, when you are told to put your pencil down, there is no one actually in the room to make sure you complied with the instruction. There is a hidden camera overhead or some such thing. How can we get people to comply with the instruction where it's only their conscience that can enforce the rules?

Here are a couple of things, one much more interesting than the other.

If the task is recalling the Ten Commandments, people cheat a lot less. I just do not think this is interesting. If I bring you into a lab and have you undertake the task of recalling the Ten Commandments, you know that this has to be an experiment that somehow relates to ethics. Where I necessarily conclude from that that if I put the Ten Commandments up in call centers, people would behave more honorably in doing their telemarketing—that seems like a real stretch.

The more interesting one, and I'm sure one that is more surprising to you: If you tell people that they will be paid in tokens and they receive a set of tokens that they then take to a banker of some sort, which is translated into dollars, they cheat far less than if someone just comes around and pays them in dollars. This is so weird.

The reason they set this experiment up was as kind of a metaphor for the pen-stealing problem. If there were dollar bills littering the desks at your office, you wouldn't think of walking past and stuffing your pockets with dollar bills. Yet people certainly think nothing of walking home with pockets stuffed with pens and stationery.

So something about removing the act from the actual dollars involved behind it does seem an interesting—from an economist's perspective, these are clearly identical things. If you have tokens where the exchange rate is one token equals one dollar, why should people cheat less or more? It's not obvious to people in the token experiment that this is about people cheating more with tokens rather than dollars.

That's the type of thing that we can think about that may or may not affect people's willingness to engage in deceitful behavior.

I will add one other thing, an experiment that I did recently, which is, to some extent, on the power of ideas and getting people to behave more or less honorably.

Raymond Fisman reports on altruism experiments that show a wide gulf between philosophers
and economists on the question of efficiency versus equity.

We ran an experiment at Yale Law School a few years ago. It was an experiment on altruism, where you have a pie to divide between you, yourself, and another subject in the lab. The exchange rate that dictates the translation of your dollars into this other person's dollars varied. Sometimes you get a dollar and you can transform that into $10 for the other person. Sometimes each dollar is only worth 10 cents for the other person. So the cost of giving shifts around.

An efficiency-minded person—if the cost of giving is cheap, then you give everything. If the cost of giving is expensive, you keep everything. Someone who is very equity-minded will be the opposite. If I want us to each end up with about the same amount, when the cost of giving is expensive, then in order to have us both end up with about the same about, I have to give this other guy practically everything.

That's just the setup. The interesting part of this is that students at Yale Law School are randomized into their first-year classes. They take contracts and torts. They will take it with a philosopher or an economist. The economists will emphasize notions of efficiency—the gains from trade, for example—in teaching contracts, whereas the philosophers will tend to emphasize more things like labor-capital relations and a fair division of the pie.

So they are randomized into these classes. They are indoctrinated for a semester by economists or philosophers. At the end of the semester, they play this game. First of all, the people taught by economists are just more selfish. They just keep the whole pie for themselves, no matter what the price given. But then there is actually a stronger effect of pushing them towards efficiency. Economists, while we might give lip-service to—you can pick whatever your social welfare function is; we have no reason to think that efficiency is better than equity—we have a mania for efficiency. The people taught by economists overwhelmingly were more likely to pick efficient allocations rather than equitable allocations.

So there are all these ideas floating around out there about how we might impact people's behavior, impact their altruism, impact their notions of fairness, impact their willingness to cheat. I think this is really very much a field in its infancy that has yet to coalesce into a set of principles that we can take into an exec-ed course and tell the CEO of GE, "This is what you should do with your HR policies." But this is the direction that things are headed.

Sorry, that was again a long answer.

DEVIN STEWART: That's very encouraging, Ray, because that's exactly the mission of this institution, to affect the way international relations are taught and bring ethics back in the classroom.

RAYMOND FISMAN: It certainly makes you think hard about what you are teaching people. There are ethics embedded in whatever you do. What drives me crazy is when faculty say, "Well, I'm just teaching the facts."

What's funny about this—and then I'll be quiet—is, when you talk to economists about it, they take efficiency as a fact rather than an ideology. There is a specific notion of justice that is embedded in this notion that they take as fact rather than ideology.

DEVIN STEWART:
Absolutely. In fact, we were just having this conversation over lunch today with colleagues from the diplomatic missions here.

We are going to have one more question and then I want to wrap up, to let you mingle with Ray. He has a lot of interesting stories.

QUESTION: Two quick questions.

Did you meet your wife before or after you had run the dating service and learned some of the inside tricks?

RAYMOND FISMAN:
There will be, truly, a very quick answer to that. Ask the second question and I will take them together.

QUESTIONER:
The title of your book brought immediately to mind the drug trade and the corruption, the economic incentives there. What would you think about legalizing drugs and having market prices and market access as a way to eliminate corruption?

RAYMOND FISMAN: That's a great question.

On the first one, I guess I would say that speed dating—maybe you have already inferred this much from watching me talk for an hour—would not exactly be my forte. So, no, I didn't meet my wife through research. And I certainly didn't learn anything from this research that helped me in finding a partner.

On the second question, which I can answer in a less socially awkward manner, I hope, there is a huge literature in economics on what the impact of legalizing it might be, drawing on lessons from Prohibition, on differential extent of enforcement around this country. It is not obvious—and maybe that's why the evidence is ambiguous—that this will actually reduce the level of crime, violence, things that we wish to discourage. First of all, if you believe that these things are social ills in and of themselves—there is a reason why it was problematic in Amsterdam when addicts from around Europe came there to take advantage of a very active heroin trade. These were people who then went off and stole bicycles and shoplifted in order to feed their habit.

I think the other, less obvious concern is, think about the economic gangsters involved in the drug trade, from the perspective of comparative advantage, barriers to entry. The barrier to entry to this business is the ability to work effectively in an illicit trade. There are lots of illicit trades out there. If drugs are legalized, what I would expect would happen is that the Pablo Escobars of the world would get out of that line of work and get into arms trading, human trafficking. Of course, they are already into these things. They would shift the balance of their business into these things.

It's not obvious that that would lead to a safer, less corrupt world.

DEVIN STEWART: Ray, on tokens, just to clarify, people exchanging tokens are more or less likely to cheat than using dollars?

RAYMOND FISMAN:
Less likely to cheat. If it's in direct dollars, you see what you are stealing very viscerally.

DEVIN STEWART: Ray, thank you so much for coming by.

I just want to emphasize how important this book is. It's a lot of fun. I encourage you to get a copy. We have copies for sale. It's kind of like the new Freakonomics book for gangsters. Ray is the OG, the original gangster.

RAYMOND FISMAN: You're telling them to buy one copy. I would say, buy many. They are very good Christmas presents. Certainly my mother-in-law thinks so.

DEVIN STEWART: They are a perfect size for the Christmas stocking. It's very good. In fact, I saw it recently at the local Barnes & Noble, and it was nearly sold out.

RAYMOND FISMAN: That's my mother-in-law at work. (Laughter)

DEVIN STEWART: It really speaks to something that John Ruggie spoke about here last week, when he came by to speak in this forum, which is the importance of incentives. You can ask people to be ethical, but you need to embed an incentive structure based on a code of ethics. That really hit home in your stories, Ray.

Thanks so much again for coming by.

RAYMOND FISMAN: Thank you.


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