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Shleifer to Leave Harvard?

What will happen if one of the brightest and most beguiling economists in the world turns out to be a world-class scoundrel, too?

Andrei Shleifer's stature as an economist is common knowledge. Among the Harvard professor's more striking accomplishments was a 1997 article, "The Limits to Arbitrage," in which he and his friend University of Chicago Business School professor Rob Vishny anticipated in some detail the kind of liquidity crisis that a year later would bring to its knees the giant hedge fund known as Long Term Capital Management -- only to be assured that it couldn't possibly happen, by those to whom it soon did.

In books like "The Grabbing Hand: Government Pathologies and their Cures" and "Without a Map: Political Tactics and Economic Reform in Russia," he set a high standard for disentangling the problems of communism and capitalism and bringing them into comparative perspective, thereby illuminating various pathways to transition. And in a series of original papers on corporate governance, he comprehensively surveyed possibilities for managerial misconduct, its remedies (and opportunities) in stock markets, and so influenced the worldwide takeover debate.

In 1999, he won the John Bates Clark medal in 1999, an award presented every two years to the leading economist under 40. Last year he was named editor of the Journal of Economic Perspectives, the American Economic Association's flagship organ for general-interest explication of the latest research.

And lest there were any question of resting on his laurels, Shleifer was everywhere at meetings of the AEA earlier this month, presenting or discussing papers on behavioral finance, sovereign debt, law and transition, the regulation of labor, investor protection and the new comparative economics, of which he is a founding father.

A friend says, "He can do Chicago, he can do MIT, he can do the real world stuff -- there are not many others like him.'' Pretty remarkable for a young man who grew up in the Soviet Union, arrived in Rochester, New York, only in 1976 and was swept off to Harvard College two years later, speaking (he jokes) little more than the English he had learned watching Charlie's Angels.

The trouble is that Shleifer is also a defendant in a high-stakes lawsuit that could cost Harvard University more than $100 million. The US government charges that he misbehaved as leader of the university's US government-sponsored mission to Moscow in the mid-1990s -- specifically, that he quietly began buying Russian securities almost immediately after his appointment, despite strict contract prohibitions against such conflicts of interest.

Worse, the government asserts that while he and his deputy, Jonathan Hay, were advising the Russian government on how to set up its markets and create a Securities and Exchange Commission, their Significant Others (wife and then-girlfriend-now wife, respectively) illegitimately obtained from the Russian government the first license to operate a mutual fund there.

Harvard recently settled for an undisclosed sum with a Maine financial services firm that had sued the university and its team, claiming it had been improperly elbowed aside in the race for that permission.

All the while, the government says, employees of the Harvard project were raising red flags about their bosses' conduct. They were ignored in Cambridge. And when one bold consultant flew home to raise the issue with Shleifer directly, the economist ordered her fired.

After whistleblowers finally succeeded in raising the issue with the government directly in 1997, the US Agency for International Development fired Harvard from its contract. Thereupon the Russian government, angered by the loss of the services of its friends, spurned further US aid.

After a lengthy investigation, the US attorney in Boston filed suit in September 2000 on behalf of the government, seeking treble damages from Harvard for its failure to keep tabs on its employees. The government asserts the whole value of the $34.8 million contract was lost. Harvard contends that its team did a great job.

The case is being argued before Judge Douglas Woodlock in US District Court in Boston. Both sides have asked him to rule in their favor on the basis of the reams of testimony that has been given. He has the option of deciding all the case or some of it, and sending the rest to a jury.

The essence of Shleifer's defense, and that of Harvard, has been to portray the episode as a series of misunderstandings of fine points of law. Never has it risen to the level of the reply that Shleifer gave to a Moscow colleague who raised objections at the time -- that in Russia, "above suspicion" was difficult to achieve. And whatever the verdict, the mass of evidence that has been accumulated reflects remarkably poorly on the Harvard mission.

Quite apart from what is decided about the case itself, there is a relatively simple way to address the problem of Shleifer's standing in the economics profession. He should go back to where he came from -- return, that is, to the Graduate School of Business at the University of Chicago. Certainly it is hard to imagine that he will continue to teach at Harvard.

The Chronicle of Higher Education subscriber-only "Daily Report" reported last week that Shleifer was actively negotiating with New York University's Stern School of Business. Citing "a source familiar with the negotiations," the Chronicle said that the Stern school had offered nearly $500,000 in salary.

Shleifer, the report continued, had been "spending time in the business school's finance department over the last several months, giving lectures and talking to faculty members." Shleifer is on leave from Harvard for the academic year.

New York University has made some impressive hires recently; luring theorist Thomas Sargent from Stanford, strategist Adam Brandenburger from Harvard Business School, development economist William Easterly from the World Bank, historian Niall Ferguson from Oxford, among others. Its newly-created Center for Experimental Social Science already includes a number of talented researchers and is expected to grow substantially.

Then again, greatly as NYU's economics department and business school have risen in the relative standings in recent years, the atmosphere around Washington Square is still that of a boomtown. NYU's big bang could become a big bust; its fancy new faculty leave for still-greener pastures as quickly as they arrive. Students will have their doubts about the training ethic there.

A better solution, at least for economics, would be for Shleifer to return to the Graduate School of Business at Chicago. That was where he was before he accepted Harvard's offer. He made his name there. It is his spiritual home. At Chicago, he could continue to exercise a significant influence on the profession, train top-notch students, stay in touch with the latest developments -- and benefit from the university's reputation for enforcing probity among its faculty.

Why leave Harvard at all? He may be bored. Besides, there's a monitoring problem. The Harvard economics department is so eager for him to stay that it may be only too willing to turn a blind eye to his transgressions, for in combination with professors John Campbell and Jeremy Stein and others, not to mention those at the Harvard Business School, he gives them an unassailable claim to being the best finance section in the world.

Then, too, Shleifer's oldest friend in economics is Lawrence Summers -- who, first as Undersecretary of Treasury for International Affairs, then as Deputy Secretary, was to all intents and purposes his ultimate boss during the period of the alleged transgressions, even though they were separated by several layers of governmental hierarchy.

Maybe Shleifer simply didn't understand what it meant to supply impartial advice with no conflict of interest under American rules. But in that case, what was Larry Summers thinking, then and now? Today he is president of the university. Harvard's continuing contention that its team leaders did nothing wrong requires some explaining far beyond what it has offered in its briefs.

For even if Shleifer's alleged indiscretions arose from a relatively understandable itch to get rich -- remember, he was a college junior when Ronald Reagan was elected president -- Harvard's dogged defense of its Russia Project has transformed the matter into something completely different -- the legal equivalent, perhaps, of George Armstrong Custer's choice of the Little Big Horn as the place to plant his flag. Already Summers' reputation has been damaged by the scandal. What happens if the judge decides against Harvard?

A great deal remains to be seen.