Baaaad Incentives!

Via Tyler Cowen, see this post on bank CEOs absconding with shareholders' wealth. I have been pointing out this sort of thing in papers, blog posts, and comments for some time. Contra some Austrian theorists who think that the business cycle is characterized by "mistakes" followed by "regrets" on the part of entrepreneurs, what we see in these actual cycles is "theft" followed by "skedaddling." Of course, the marks have regrets later -- they were the marks after all. But there is just no need to account for "systematic errors" on the part of entrepreneurs.


  1. Could you give us an example, then, of Austrians who have denied that theft or skedaddling exists? I'd be very surprised if you did, but I think your wild inference is just the result of an epistemological 'snap', as it were, and so you're inclined to question everything your momma ever told you.

    If you give some quotes, then I'll agree that they've made some mistakes.

  2. "Could you give us an example, then, of Austrians who have denied that theft or skedaddling exists?"

    Well, if I had ever said there were Austrians who denied this, I might feel some interest in responding to your demand. But I think your comment is just the result of you being a bloody ass, and so you're inclined to be one in your blog posts as well as your daily life.

  3. Then why include Austrians at all in this?

    The way you constructed your sentence would make it superfluous to include Austrians if you had not intended to say that they had got it wrong, or denied it altogether, or were missing something. But I don't expect theorists to come up with every logical possibility.

  4. OK, Mr. Schnaaps, since you've stopped being impertinent, I will answer you more seriously: the question is what chiefly characterizes the cylce: is it strategic behavior that fits the circumstances for most of the major players, or is it waves of errors? Carilli and Dempster choose the former in their paper on ABC and the Prisoner's Dilemma (as did Garrison and I in our 2003 ABC paper); Murphy rejects the Prisoner's Dilemma explanation in a recent paper, claiming entrepreneurs will later regret their boom-time decisions. So its not an issue of denying "that theft or skedaddling exists" -- I am pretty sure Bob is familiar with the existence of each. It is a matter of what gets emphasis in explaining the cycle.

  5. Gene,

    Have you ever read Kindleberger's Manias, Panics, and Crashes?

  6. Here in Ireland many of the bankers and property developers who gained during the boom have been found to have large losses themselves. It seems to be that they believed in their businesses as much as their investors.

    I think whether "theft and skedaddling" occurs depends on the level of the entrepreneurs involved and their experience.

    Anthony Evans has a good post on this over at the Filter, though I can't find it.

  7. Current, I've probably overstated my case -- I actually believe that each cycle and each region will have its own characteristics. Our models are ideal types that always apply more or less. Steve Horwitz and I just published a paper to this effect in a book series Roger Kopple edits.

  8. I found Evans' post...

    I look forward to your paper

  9. Current, it is out in a book called _What Is So Austrian About Austrian Ecoomics?_

    (If you can't get your hands on a copy, e-mail me and I while send you our final draft.)

  10. I think we have to be very careful when talking about "large losses" for "bankers and property developers."

    1. Ask, did they really come out on the short end of the net flows to and from them personally over time? An asset they hold may now have a paper value less than it did at some point in the past, maybe even lower than at the point of ownership. But in itself that doesn't mean they're worse off than if they hadn't done what they did.

    2. It's possible for crooks to commit crimes poorly.

    3. Crooks can believe in their businesses!

    4. In the United States at least, "going broke" is not the same category of experience for "bankers and property developers" as it is for store clerks and construction workers. The former have political, social (class) and financial cushions the latter simply don't. When any negative consequences of your actions flow downstream while the bulk of the positive ones accrue to you, you can afford to "believe in" all sorts of things.


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