Beware of Nobel Laureates Bearing Snake Oil

Suze Orman writes for an audience in search of investment advice and financial security, and her great success can be measured in numerous bestsellers. An Orman book sells really well because it properly makes simple what is simple: the common-sense path to financial health.

Unsurprisingly, Orman doesn’t much excite economists, whose profession seems intent on turning human action into that which is bland and utterly incomprehensible. Economists “find her investment advice simplistic,” write George A. Akerlof and Robert J. Shiller, adding that “Our economist friends cannot stand [Orman’s] mommy-knows-best/I-told-you-to-do-that voice.”

Yet their book Phishing for Phools: The Economics of Manipulation and Deception uses that voice incessantly. The authors assert on page one, without even a hint of self-awareness, that people “do not do what is really good for them; they do not choose what they really want.” Wow, if true, why did these self-proclaimed seers wait so long to gift us with a book readable by the common man?

To Akerlof (Nobel prize in economics, 2001) and Shiller (Nobel prize in economics, 2013), the “Phools” are us. Their book is meant to tell us what they see clearly and we don’t. And when they’re not around, readers should do as they’re told by the government regulators who, if the authors are to be believed, similarly possess a hotline to the future.

Don’t count on their being around much, by the way. It took them five years to write this (short) book instructing us on what’s good for us. Even more striking when we consider how long Phishing for Phools took to write is that it’s so terribly unoriginal. There are many examples of this, but the commentariat monotonously blames the 2007 to 2009 banking crack-up on now public Wall Street investment banks, as opposed to the supposedly more risk-averse partnerships from the past.

Akerlof and Shiller weigh in with their explanation, which is both incorrect and unoriginal:

Back in 1970 all of the capital of the enterprise belonged to partners. In 1999 Goldman [Sachs] had gone public. No longer did most partners have to tremble at the thought of a lawsuit that would make them liable for most of their personal fortunes.

Rarely have so few words been so full of misinformation.

Point one: As anyone who has ever worked at Goldman (I worked there from 1997 to 2001) could have told the authors, one of the first lessons that partners pass on to new employees, pre and post-IPO, is that investment banks have a rather ephemeral quality to them. Most Wall Street partnerships have historically failed. To drive the message home, partners would ask each new employee to look at a deal tombstone from the 1950s that Goldman led. On it were underwriting partnerships that had long since disappeared from a financial landscape defined by company-killing competition.

So this notion of stability in Wall Street partnerships before the advent of public shares is laughable.

Second, it ignores the long-known but unspoken knowledge within and outside of Goldman Sachs that the partnership itself was bailed out not just in 2008, but also in 1994. Back then, Goldman’s partnership had to sell a portion of the company to Japanese investors after the investment bank was quietly saved by the feds. Put bluntly, the private partnership nearly died five years before it went public.

Third, implicit in their explanation of the sources of the 2007 to 2009 crisis is that bankers and investment bankers were swinging for the fences with money not their own thanks to their shares being “public.” But, once again, if the authors had bothered to ask employees of Goldman, Bear Stearns or Lehman Brothers about their compensation, they would have found that bonuses comprising the majority of employee pay have long come in the form of restricted stock in the companies paying the bonuses. Employees of Bear and Lehman owned over a third of each company; Goldman partners and employees arguably more. That’s of course why some Goldman partners are insolvent to this day, not to mention the troubled financial situations of top employees at the former Bear and Lehman.

Further attempting to explain the financial crisis, Akerlof and Shiller oddly bring avocados into the discussion. They write that an “avocado-buying (security-buying) public failed to understand phishing equilibrium” and therefore couldn’t distinguish between good and bad mortgages. We were apparently duped by the ratings agencies who slapped AAA on seemingly anything that moved.

Okay, except that the crisis wasn’t about the individual investor losing his life savings on dodgy mortgages in the proverbial portfolio. In fact it was the most sophisticated institutional investors on earth who were buying up the mortgages. Indeed, as evidenced by the demand among clients of Goldman Sachs for synthetic exposure to the mortgage market thanks to demand well outpacing supply, the small investor didn’t have much access in the first place. In that case, does anyone seriously believe—as Akerlof and Shiller apparently do—that ratings agencies staffed by analysts who couldn’t get jobs on Wall Street tricked those who could into buying that which was full of rotten avocadoes?

The authors say they write “as admirers of the free-market system, but hoping to help people better find their way in it.” But the term “free markets” means allowing people to freely choose what’s best for them as individuals. Free markets presume in theory and reveal in reality abundant competition by producers desperately trying to serve a consumer gifted with all this choice.

Really they aren’t big admirers of the free market. As they see it, we’re all “vulnerable” to the entreaties of rapacious capitalists who are eager to “phish” us through fraudulent marketing techniques. Apparently we dupes have been “exploited by marketers for decades,” and that’s why we need Akerlof and Shiller. Supposedly if we read them we’ll know how to protect ourselves from the greedy.

If false marketing were truly the source of corporate profits, why wouldn’t there be more advertising moguls in the Forbes 400? If a sale is as simple as fleecing us Phools, why don’t the marketing budgets of corporations dwarf everything else by a mile? Why is it that marketing and PR expenses are the first to be cut during economic downturns? If they are exercises in fraudulent trickery, wouldn’t their budgets increase amid sales declines? Coca-Cola is a pretty big company, so when dopey consumers rejected New Coke in 1984, was this a failure of marketing?

It’s a question that would not occur to our authors, who declare that in “almost the richest country the world has ever known, too many lives are led in quiet desperation” thanks to the cruelty of rapacious market forces defined by capitalism. If that’s true, why are poor immigrants from every corner of the earth so eager to be a part of our capitalist-induced desperation? Again, this is not something that rich, wholly insulated market skeptics like our authors would ever ask.

Instead they present anecdotes. “Mollie in Vegas” has a gambling problem. Mollie knows that “she is drawn [to the slots] by compulsion,” and this anecdote signals the alleged horrors of market forces. According to the authors, along with a 2012 book by a professor at MIT, “the new machines are addictive by design.”

Well, in fact most of us visit Las Vegas to gamble and then we leave. Whether we Phools go to Vegas aware of the odds or not, the fact that so many return year after year suggests that the slots and other forms of gambling aren’t as addictive as this book alleges. If they were, those who visit once could never afford to go back. Or they’d never leave in the first place.

Most of us who visit Vegas do so knowing we’re generally going to lose at slots. We go there prepared to lose a set amount. Many of us go with frequency. We handle it all. But according to Akerlof and Shiller, without regulators we’d all have become addicted to slots back in the 19th century: “Slot machines were ruining so many people’s lives they had to be outlawed, or least regulated, along with gambling more generally.” See, we would all be powerless before Phishers were it not for the angels who regulate the Phishers.

Clearly there’s something noble about those who prefer to take their pay from taxpayers, and who pursue a life focused on saving us from ourselves. Or could it be that regulators generally don’t rate jobs in the private sector, let alone rate the ability to raise the capital necessary to compete for business? The latter seems more likely. In any case they apparently live lives free of temptation. And this is most fortunate for, as the authors write, “free markets produce continual temptation.”

Recall that in the old Soviet Union, government-created markets were full of pent up demand, but nothing to buy. There was no temptation, at least on the government-sponsored shelves. More to the point, the shelves in countries defined by an absence of markets were empty. That’s why citizens of the former countrywide prison were like coiled springs in search of Western plenty when they got to shop outside of the USSR.

Comically, Akerlof and Shiller complain that “There are thousands more phishes in the supermarket, embodied in all the different products on the shelves, each with its own marketing experts and advertising campaign.” The horror! Hopefully they didn’t pay anyone to market their book? More seriously, we produce so that we can consume. It’s only natural for producers to market their goods simply because they desire the means to acquire the goods produced by others. If commerce were all about phishing as the authors presume, we wouldn’t produce in the first place. Eventually some of us would get wise and tell others. Have the authors heard of Consumer Reports?

Another of their complaints is that “free markets have also invented many more needs for us.” Yes, another blinding glimpse of the obvious. Before the automobile, what we wanted was faster horses. Before the Internet, we were just happy if stores were open on Sundays, or even late at night. Producers engage in commerce because they want what we have. This is good. Steve Jobs died worth billions for fulfilling previously unknown wants, Jeff Bezos is worth tens of billions for doing the same. Thomas Edison thankfully invented the light bulb despite broad investor skepticism about his idea.

Behind every capitalistic door they see a self-interested individual looking to swindle us. But most of us appreciate—and many around the world would give anything to be able to share—the “quiet desperation” of stores being open on Sundays, diners and restaurants open 24 hours, cars, computers, and apartments getting better and better thanks to competition for our business.

Not only that, our gyms get nicer with better equipment year after year. Yet to Akerlof and Shiller, even gyms are out to get us. Since we “do not do what is really good” for us, gyms take advantage of our optimism by convincing us to buy workout plans that we don’t need.

Business owners who read Phishing for Phools will marvel at the business environment constructed by these two economists. While in the real world, store owners strive mightily to win and maintain business, these eminences are here to point out that all that’s happening is we’re being bamboozled into emptying our pockets. Readers are solemnly told of the “predatory” food retailer that is Cinnabon (apparently the ExxonMobil of the 21st century): “They carefully placed the outlets, with placards and mottos, in the track of people who would be vulnerable to that smell.”

Yes, businesses want to win our business. How tawdry, think Akerlof and Shiller. They believe that “modern economics inherently fails to grapple with deception and trickery.” Actually, it deals with both quite well. As consumers we know this. We take our business elsewhere if our needs are not met, or if we feel scammed. We also know this by virtue of the fact that we get up and go to work every day. We’re working so that we can buy—if it were all a swindle, we wouldn’t work in the first place.

To call Phishing for Phools a bad economics book is to give it way too much credit. It states the obvious all the while revealing confusion: That markets are always inventing new needs for us isn’t a bug in the capitalist way of doing things, it’s a feature.

Any mildly sentient reader will come away from this limp attempt to besmirch the profit motive with the sense that it’s the economics profession that’s fraudulent. Considering one of its authors is married to Federal Reserve Chairman Janet Yellen, that same reader may never again have a full night’s sleep until Yellen is long gone from the Fed.