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March 5, 2006
David Warsh, Proprietor


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Gangsta-nomics

Clarifying the impact of Harvard University’s Russia scandal and the Andrei Shleifer/Lawrence Summers affair on the economics profession (generally) and on Harvard (in particular) will take years. The outlines of one mechanism, however, already can be discerned. Tracing its workings through offers clues to what may be the controversy’s ultimate resolution.

Just as opening the St. Lawrence River to the Great Lakes produced both great economic benefits (the North American Midwest could export grains, iron ore, machinery to the world on ocean-going ships) and some undesirable side effects as well (the introduction into the lake system of lamprey eels and zebra mussels), so sending a team of Harvard University experts to advise the Russian government of Boris Yeltsin in the 1990s improved markets in the former Soviet republic, but at the cost of importing to Harvard certain unattractive Russian folkways.

The most obvious of these is the tendency to view anti-Semitism as a powerful explanatory variable in the resignation of Harvard president Lawrence Summers.

Anti-Semitism was a puissant force at Harvard and most other American universities well into the 1950s, but has diminished dramatically in the past half-century, along with most other social concomitants of religious conviction/association. In Russia, it remains virulent. Harvard economic professor Shleifer, who grew up in Russia, often has been the victim of prejudice there. It has not harmed him in the US, nor his co-religionist Summers, especially in this instance.

Yet as Boston Globe columnist Alex Beam noted last week, Harvard professors Alan Dershowitz (law), Ruth Wisse (literature) and former lecturer Martin Peretz were quick to cite Summers’ strong defense of Israel as a factor in what Dershowitz termed an “academic coup d’etat… by the die-hard left of the Faculty of Arts and Sciences.”  “The question I’m being asked,” Wisse told Beam, (before praeteritio-otically dismissing it), “is, ‘Was anti-Semitism the driving engine of the coup?’”

The traveler furthest down this road was Professor Edward Glaeser (economics), Shleifer’s former pupil, long-standing friend and dogged defender, who told The Harvard Crimson that the act of circulating among the Harvard faculty an article in Institutional Investor by investigative reporter David McClintick was “a potent piece of hate creationÑnot quite ‘The Protocols of the Elders of Zion,’ but it’s in that camp.””

So far-fetched was that comparison that Glaeser spent the week apologizing to all and sundry — especially after an article in The New York Times acknowledged the generally high regard in which the McClintick article is held by asking rhetorically, in its headline, “Did an Exposé Help Sink Harvard’s President?”

The article describes in detail the circumstances in which Shleifer, his deputy and their wives made prohibited investments while running a Harvard team under contract to the US Agency for International Development to advise the Russian government on how to build a market economy — and Harvard’s lengthy and expensive defense of their conduct in court. Shleifer and Summers have been close friends since they met at Harvard College in 1979.

In an email, Glaeser wrote, “I was attempting to explain how my model of the political economy of hatred can help to explain the use of the story by Summers’ enemies. And clearly I did a terrible job of this and I feel awful about it.  This type of extreme language is the last thing I meant to spread — my goal has always been moderation, not stirring up hatred on my own.”

“I am guilty of both colossal stupidity in my dealings with the reporter and an overly aggressive attempt to claim that my research was relevant, but in no way to do I intend to make such a ridiculously extreme statement.”

So much, then, for anti-Semitism as a theory of the Shleifer/Summers case. (Not surprisingly, the notion still has currency in Russia.)

Another element of imported Soviet style that can be observed at Harvard, especially in its economics department, is a certain comic braggadocio. For fifty years, the Soviet Union was famous for its boasts of having more of whatever was deemed most important in its rivalry with the West — more eggs, more pensions, more missiles. There were its claims, too, to having invented “it” first, it being almost any item in which the West had established technological superiority, electricity, automobiles, nylons stockings, you name it.

“The Marketplace for Perceptions,” the cover story in the current issue of Harvard’s alumni magazine, makes much of the rise of a new sub-discipline of behavioral economics. “Like all revolutions in thought, this one began with anomalies, strange facts, odd observations that the prevailing wisdom could not explain,” writes Craig Lambert, deputy editor of the magazine: “perverse facts [that] are a direct affront to the standard model of the human actor — Economic Man.”

Yet in the 25 years since psychologists Daniel Kahneman of Princeton and Amos Tversky of Stanford had published a study of various ways in which alternative choices could be framed (“Prospect Theory, An Analysis of Decision under Risk”), behavioral economics had established “a history of upending the neoclassical theories that dominated the discipline for so long.”

Today, behavioral economics “explains why we procrastinate, buy, borrow and grab chocolate on the spur of the moment,” according to the magazine. Also, why shares of the same company trade at different prices in different cities, why shelf space in a supermarket is important, and how personal loyalties can be exploited for financial gain. In other words, writes Lambert, “Behavioral economicsÉ is the hybrid offspring of economics and psychology.”  And while behavioral economists teach at Stanford, Berkeley, Chicago, Princeton, MIT and elsewhere, “the sub-fields’s greatest concentration of scholars is at Harvard.”

And who would that be?  The article is illustrated by photographs of a number of Harvard faculty members who are undisputed up-and-comers in the field: David Laibson, Nava Ashraf, Iris Bohnet and Sendil Mullainithan. But the figurative chairman of the board of behavioral economics turns out to be none other than Andrei Shleifer, who has “already made path-breaking contributions to the literatures of behavioral finance, political economy, and law and economics.”

Harvard president Larry Summers identifies himself as a behavioral economist as well. Both he and Shleifer were winners of the John Bates Clark Medal, awarded every two years by the American Economic Association to the economist deemed to have made the most significant contribution to the field before the age of forty.

(Altogether unmentioned in the article is Thomas Schelling, who last year shared the Nobel Prize for brilliant work he did in behavioral economics, identifying strategies of social commitment and individual self-control, over nearly half a century at what is now Harvard’s John F. Kennedy School of Government. In retirement, Schelling has moved to the University of Maryland.)

Whether Harvard’s concentration of behavioral economists is the greatest on the planet remains to be seen, but it clearly is the most personally ambitious.For example,  President Summers and Shleifer appeared in Laibson’s class four years ago to announce to his excited students that their professor had been awarded tenure.

Laibson, in turn, has been a loyal Shleifer supporter, telling the Crimson at the height of the controversy of Summers’ support of his embattled friend, “By any measure, he is on a Nobel Prize-winning trajectory. We are very lucky to have Shleifer as a colleague. And that view is shared by everyone in our department.”

It is this sense of mutual admiration that gives the impression that “The Marketplace of Perceptions” in the alumni magazine was something ordered up to coincide with recruiting season. (The brightest students entering graduate programs in economics this year are in the throes of choosing, during the next two or three weeks, among competing offers from a handful of institutions.) Or, then again, perhaps as a way of buttressing the economists’ position within the university.

In fact, Harvard magazine has distinguished itself in the last couple of years itself by offering independent and forthright coverage of much of the controversy surrounding Summers’ presidency. Its treatment of the ultimately successful US government suit, on the other hand, has been consistently muted, if only because of the university’s lawyers involved.

The McClintick piece itself may be thought of as having been outsourced to Institutional Investor, since McClintick is one of the 40-odd “incorporators” of the alumni magazine who are invited twice a year to lunch. But even in the current issue of Harvard, the news of the Institutional Investor expose is treated in gingerly fashion, under the un-sensational headline, “HIID Dénoument,” accompanied by a photo of its notebook-like cover, “How Harvard Lost Russia.” Shleifer’s $2 million fine for fraud is neither mentioned nor cross-referenced in the article about behavioral economics, nor is the estimated $40 million he cost the university.

Whatever subversion of the alumni magazine’s claims to “impartial perspectives” has taken place (that being the publisher’s boast in a letter bound into front of the latest issue), of greater concern to he university, surely, is the growing reputation of the Quarterly Journal of Economics for self-dealing. The QJE is the oldest professional journal of economics in the English language. It is owned and edited by Harvard’s Department of Economics, much as the Journal of Political Economy is owned and operated by the University of Chicago. (The third major general interest journal, the American Economic Review, is published by a professional society, the American Economic Association.) Shleifer editied the QJE for a decade, from 1989 until 1999.

The authority of a scientific journal rests on its reputation for intellectual integrity — that is, in the words of John Ziman, a celebrated student of science, on the concern of its editors with “the plausibility and relevance of the arguments advanced in a paper, without deference to the identity of the author or his corporate backing,”. Otherwise a journal is just a social club, accrediting persons instead of ideas, or, less politely, a gang.

Yet a recent paper by Stephen Wu, an assistant professor of economics at Hamilton College, found that nearly half the pages published in the QJE between 2000 and 2003 (47 percent) came from authors affiliated with one of five elite institutions — Harvard, MIT, Chicago, Princeton and Stanford.  The same five schools accounted for 29 percent of the pages of the JPE and 22 percent of the AER during the same period.

Perhaps the cleverest economists in all of economics were already concentrated at those institutions, Wu wrote, in which case the distribution was warranted. But that didn’t explain the great disparity between the QJE and the other two journals — nor did it shed light on why the trend of concentration, which had declined between 1950 and 1989 in both the QJE and the JPE, had been reversed.  

During Shleifer’s tenure at the QJE, the four top institution’s share of its pages more than doubled, to 43 percent from 19 percent. Conversations with leading theorists elsewhere have found open scorn for the QJE‘s policies during his reign. It would require a reportorial effort of the scale and depth in which The Wall Street Journal specializes to clarify these issues and pin them down. But, just for example, among the ten articles in the current issue of the QJE are papers co-authored by two of the journal’s three editors, Harvard professors Glaser and Robert Barro, and a third article by Shleifer as well.  Shleifer, meanwhile, has moved on to edit the Journal of Economic Perspectives for the American Economic Association, a position of, if anything, even greater power.

Thus Shleifer’s hold on Harvard’s economics department is easy enough to explain, in terms of intellect, promise and power. His hold on the university itself is a different matter. Why did Harvard bind itself so sharply to Shleifer in settlement negotiations in 2002 as to cause them to collapse? Why did it defend his conduct in Russia until the bitter end — a jury trial that disposed of its arguments in barely two hours?  Why has it never disclosed the portion of his legal bills it agreed to pay?

What is most worrisome is the possibility that the Russian custom of kompromat is somehow involved.

The use of compromising material is so common in Russia as to constitute an everyday defense among powerful persons, one that springs readily to mind. Save an incriminating letter, hire a spy, buy files from the KGB, or, if necessary, forge them. Distribute them if necessary to smear an opponent. In the United States, the usefulness of the custom was sufficiently unfamiliar that economist Schelling got some mileage a number of years ago out of inventing a dominating example.

Suppose you’d been successfully held to ransom. What could you do to persuade your kidnapper to let you go, knowing that you could subsequently identify him, rather than simply kill you to assure your silence? Give him some kompromat. Tell him a secret about yourself so dark that it would be unthinkable to you to put him in a position in which he would be tempted to tell it.

What might serve as kompromat sufficient to worry Harvard University?  What might explain what The Wall Street Journal has reported to have been Shleifer’s insistence at the time — that Harvard not only agree to pay his legal bills, but indemnify him as well for any damages he might be forced to pay as a result of the government’s lawsuit?  Harvard had sent the 31-year-old professor to advise the leaders of his former homeland, with no more supervision than the procedures of its Institute for International Development, many of which he ignored with impunity. What might the professor say if he felt betrayed?

In the mid-1990s, Harvard Management Company, which invests the university’s endowment, was moving deeper into direct equity investments in rapidly liberalizing Russia. Shleifer was leading the US mission to Moscow. In Washington, Summers was Deputy Secretary of the Treasury, overseeing all US economic policy in Russia.

In the wings, preparing to invest in the illicit start-up mutual fund engineered by Shleifer’s wife, was Harvard alum Peter Aldrich, a Boston real estate magnate who had first met Shleifer at a dinner party a few years before at the home of Harvard Professor Martin Feldstein.

When government attorneys put Harvard Management’s CEO Jack Meyer under oath in the course of their suit against Harvard, they learned that the wild rumors at the time — that Harvard had invested ten percent of its nest-egg in Russia — were just that, wild rumors.

Meyer testified that no more than 1.8 percent of Harvard’s endowment — some $200 million of a portfolio then worth around $11 billion — had been invested in Russia in the years before USAID fired Shleifer for investing his own money, and a declining amount after that.

True, said Meyer, he and other Harvard Management employees occasionally had talked to Shleifer and members of his team. But no tips had been exchanged, no phone calls made, no influence brought to bear.

There is a counter-argument, of course.  Suppose that the arrogant (now notoriously arrogant) Larry Summers saw his close friend being attacked, at a time when the fates of nations seemed to hang in the balance. Suppose that he simply decided to stick by Shleifer in the beginning. For the very arrogant, a wise man notes, attacks on one’s friends produces a response in which loyalty is indistinguishable from amour-propre.

Suppose that, by the time that he came under consideration for the Harvard presidency, the efforts of the various Harvard officials assigned to investigate had so obfuscated the issue that Summers simply didn’t understand the government charges. Suppose he just didn’t think that what Shleifer did was wrong. In that case, he had no business being Harvard’s president.

The Economics Department views itself as self-reliant, independent of the need to ask for resources to pursue its duties, pretty much beyond the reach of the university. The forward trajectories of such a group of partners are powerful cement.  There are homes, schools, families, businesses, friends to be considered.  There is not much the administration can do about a tenured professor who misbehaves. Not much, but not nothing.

It seems unlikely that these questions about Harvard’s involvement in Russia in the 1990s — and the involvement of the financial industry in Boston in turn — will ever be answered satisfactorily. The government suit is settled.  Summers has resigned, in favor of former president Derek Bok, effective July 1.

But the very ambiguity of the situation in which Harvard found itself in the Federal District Court in March 2002, when, having elected a new president, it declined to cop a plea, is one more reason why neither Larry Summers nor Andrei Shleifer is likely to remain at Harvard for more than a year or two.

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