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June 4, 2006
David Warsh, Proprietor


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On Re-inventing the Public Realm

As Harvard University gathers for its graduation ceremonies this week, an eight-member committee of its Faculty of Arts and Sciences and their dean are still wrestling with the question of what if anything to do about its errant economics professor Andrei Shleifer. He has announced that he intends to return from leave to teach next year, including “Psychology and Economics,” a popular undergraduate course.

The committee’s dilemma originates in the case for fraud the US government brought against the 45-year-old and finally won last year.

Shleifer was 15 when he immigrated to the US with his parents from the Soviet Union. Two years later he entered Harvard College.  He was 32 when, in 1993, after stints at the Massachusetts Institute of Technology, Princeton and the University of Chicago, he was named chief US adviser to the Russian government of Boris Yeltsin, heading a large Harvard team of development specialists and consultants

Less than four years later, he was discovered to have been starting a mutual fund business in Russia with his wife and deputy (and, through a Channel Island bank account, investing in various Russian securities as well), at the same time his contract with US government forbade such investments and called for him to be providing disinterested advice to the Russian regulators who granted him his license.

Last year, a US District Court judge in Boston found that Shleifer had committed multiple counts of fraud and that Harvard, which defended its team leader at every turn, had breached its contract with the government. The university agreed to return $26.5 million, or most of the money it had received from the US Agency for International Development.

Within the university, the debate about what to do about Shleifer seems to have centered so far on the distinction between civil and criminal code.

Why worry about it if the government didn’t have enough evidence to charge him with a crime?

Certainly it is true that criminal and civil law represent different perspectives on conduct.  Only the government can charge a crime. The accused is guilty if convicted.  The logic of the code, its very language, is that of misdeed, punishment and rehabilitation.

Civil law, on the other hand, governs relationships among private individuals and delineates their rights and obligations. Disputes over torts and contracts ordinarily lead to some kind of compensation for the aggrieved party. There is a sense that such disagreements are an inevitable part of doing business.  In most cases, there is not much shame.

And while government pursued a criminal investigation for a time — a grand jury was empanelled and heard a good deal of testimony — nothing came of it in the end. Thus Shleifer and Harvard are not said to have been convicted of anything, or to be guilty, or even to have done anything illegal. Instead they are described as having been found to have committed various frauds and breached their contract, respectively.  

Instead of crook, in other words, in the eyes of the law he’s a scoundrel.

Meanwhile, outgoing Harvard president Lawrence Summers, Shleifer’s fellow economist, long-time mentor and friend, hasn’t been charged with anything more serious than bad judgment.  While Deputy Treasury Secretary, Summers had broad oversight of US economic policy in Russia (though not line responsibility for Shleifer’s contract); he vacationed with Shleifer; stayed with his family while interviewing for the job at Harvard; failed to prevent the collapse of a promising mediation effort in the government lawsuit once he was named; and plumped for his friend’s continued employment before finally recusing himself at the request of the corporation.

Remarkably, Shleifer himself continues to deny he did anything wrong. He put it this way in a statement after the settlement: “An individual can fight the unlimited resources of the government for only so long. After eight long years, I have decided to end this now–without any admission of liability on my part.  I strongly believe I would have prevailed in the end, but my lawyers told me my legal fees would exceed the amount that I will be paying the government.”   For an example of the kind of misapprehension this fosters among his supporters, see the Wikipedia entry under his name.

What was he thinking?

It is, of course, entirely possible Shleifer himself really believed that he wasn’t covered by the rules governing conflict of interest because, though he was director of the project, he wasn’t an employee of the Harvard Institute for International Development and he hadn’t moved his household back to Russia. Having lived his first fifteen years in the Soviet Union, there must be a great deal of background knowledge and everyday ethical savvy that American citizens take for granted that he has yet to acquire.

Why Harvard’s administrators and their in-house lawyers joined him in that professed belief for eight long years is completely unexplained. In any event, it took a jury little more than two hours to disabuse them of that notion when the time finally came.

Now, ten months later, with the report of the Standing Committee on Professional Responsibilty in the offing, with a decision by the acting dean to follow, Harvard’s top officials finally must explain what they plan to do about Shleifer and why.

At least interim president Derek Bok and interim Faculty dean Jeremy Knowles have the advantage of knowing the background. It was Knowles who promoted Shleifer to an endowed chair in 2002 after Summers urged that his friend be retained, and it was Bok who stepped in as adviser to the Corporation after Summers stopped attending its deliberations on the matter.

Their dilemma may be complicated in two dimensions. First, when Yale University professor Florencio Lopez-de-Silanes (who just happened to have been Shleifer’s star pupil and frequent collaborator) was discovered to be double-billing Yale and the World Bank for expenses and demanding kickbacks from a research assistant as well, Yale fired him in January 2005 despite his tenure. “It’s a pretty sad situation,” President Richard Levin (an economist as well), told The Yale Daily News. “He’s done great work and he’s a very dynamic guy, but he just got himself into trouble.” He quickly found employment at the Ecole Normale Supérieure, in Paris.

Second, however promising Lopez-de-Silanes might have been at Yale (the World Economic Forum in Davos named him one of the 100 Global Leaders in 2003), the magnitude of his star was nowhere near that of Andrei Shleifer. Shleifer is a winner of the John Bates Clark Medal, more rare than a Nobel Prize (if much less significant) since it is awarded only every second year. He edits the Journal of Economic Perspectives for the American Economics Association. And he is a prolific producer of interesting new methods and ideas, active on several related salients of the forward edge of economics.

As interesting as the psychologizing, therefore, and maybe more important, is the effort going on behind the scenes to say clearly why what Shleifer did was not culpable or illegal so much as just plain wrong.

This was, after all, an epic moment. The Soviet Union had collapsed; the great long and brutal utopian experiment of communism had failed. The government of the United States was reaching out to the new government of Russia, promising to convey the accumulated wisdom of more than two centuries of the rule of law, constitutional government and market economics.

And who do the Americans send to help? A 31-year-old Russian expatriate — deemed a leading authority on corruption, no less! — who immediately begins semi-publicly flouting American law and communist sensibility to line his own pocket, and who, after he is caught, persuades the great Harvard University to maintain his innocence. Does this sound like material for a Frank Capra movie or a John Adams opera?

The Shleifer problem is symptomatic of confusion over a distinction that goes much deeper than that between the civil and criminal law — between the ethical systems that govern the private and the public realms. The locus classicus here, at least in Western civilization, is to be found in Plato, I suppose.

In modern times, it is evident enough in Adam Smith, though the force of his argument about the architecture of the whole is diminished because so much of The Wealth of Nations took the form of criticism of the foolish and counterproductive undertakings of governments. The most provocative statement in recent years is to be found in a little book by the great Jane Jacobs, Systems of Survival: A Dialogue on the Moral Foundations of Commerce and Politics, an illuminating exploration of often-incommensurable moral codes that evolved to organize quite different sorts of activities.  

It is unrealistic to expect the Standing Committee on Professional Responsibility to untangle concerns of this magnitude. Nor can economists hope to do it alone. In recent decades they have greatly enlarged our understanding of the commercial realm — have reinvented the bazaar, in John McMillan’s phrase.  We must look to them now — and to political and legal philosophers, historians and classicists — to reinvent the civic realm.  For this purpose, Harvard’s failed Russia project offers a truly great teaching moment

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