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November 5, 2006
David Warsh, Proprietor


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The Light Gray Curse

So Harvard University has taken away Andrei Shleifer’s endowed chair and its privileges — stripped him of his epaulets, in effect. Any day now, the Becker Center on Chicago Price Theory at the University of Chicago, too, will have to do the same, remove the Whipple V.N. Jones Professorship from in front of Shleifer’s name on its website.  Then the 45-year-old Harvard economics professor will be the only professorial director of that newly formed center without a chair (Ronald Coase, Milton Friedman, George Shultz and Richard O. Ryan, the agribusiness magnate who founded it, are the others). Some day, too, Shleifer may remove himself from Harvard, perhaps to Chicago, where he belonged all along; possibly to the Hoover Institution at Stanford University, where Shultz and Friedman hang their hats; or even to London. Then again, he may remain in Cambridge, Mass. But that’s a story for another day.

The question for today has to do with estimating the damage that began accruing — to Harvard University in particular, to the economics profession in general — when, in 1997, while leading a Harvard team advising the government of Russia on behalf of the government of the United States, Shleifer was caught red-handed lining his own pockets with various investments in Russia.

To learn about Harvard’s recent attempt to deal with its self-inflicted wounds, read on.

Instead of doing the right thing in 1997, scolding its professor and copping a plea, Harvard then joined him in a bristling defense.  The university insisted that in leading its mission to Moscow Shleifer had done nothing wrong by speculating in Russian bonds, investing in a Russian private equity firm, strong-arming a well-established competitor and obtaining for his wife, his sidekick and the sidekick’s girlfriend the first license to sell mutual funds in Russia — from the very regulators to whom he was being paid to give disinterested advice.

Elementary ethical common sense, not to mention government contracts and Harvard’s own rules, required Shleifer to refrain from investing the country he was he was advising.

If, at any point along the way, the university, its department of economics and its errant professor had simply acknowledged that they understood the logic behind this simple ethical precept, expressing appropriate embarrassment and regret, the episode quickly would have faded into the background.

Nine years later, however, after a humiliating trial in US District Court in Boston, Harvard was found to have breached its contract, and was ordered to return $26.5 million, almost all the money it collected and spent. Shleifer and his protégé/deputy, Jonathan Hay, were found to have committed two kinds of fraud, and Shleifer was fined $2 million, as much as the US attorney could extract from him, having no way to tap whatever offshore wealth he possessed.

And a year after that, Shleifer’s friend and mentor Lawrence Summers was gone from the Harvard presidency. Summers’ obtuseness on the Shleifer matter is understood within the university to have been a precipitating factor in the Harvard Corporation’s decision to compel his resignation. “When the president responded in a manifestly untruthful way to questions that were asked about the Shleifer case, [at a crucial meeting of the faculty], it had a devastating effect on the views of people who were to that point uncommitted, people who, like me, were strong supporters of his agenda,” professor Robert Putnam, a political scientist, later told Sara Ivry of The New York Times

The backstory helps understand the situation. In 1992, with the Soviet Union disintegrating, Congress authorized aid for the newly elected Russian government of Boris Yeltsin, but not too much of it. The Freedom for Russia and the Emerging Eurasian Democracies and Open-Market Support Act, signed into law by President George H.W. Bush in October, authorized up to $350 million for a mission to advise the newly forming Russian government on how to lay the groundwork for a market economy. The US Agency for International Development selected Harvard, and in 1992 Harvard chose the 32-year-old Shleifer, having hired him from Chicago the year before. Cheering him on at every step was Summers, who had befriended him a dozen years before, when Summers was an assistant professor and Shleifer a brash sophomore.

What had commended him for the job in Russia? The fact that, for one thing,  he spoke the language like a native, having grown up in the Soviet Union before emigrating to the United States with his parents when he was sixteen. That he had learned economics at Harvard College and the Massachusetts Institute of Technology, and taught it at the University of Chicago. That he had turned out to be something of a prodigy, making highly original contributions to the comparative analysis of the legal institutions and financial markets that underpin market economies. That he was an expert on corruption, no less. Above all, that he was an enthusiastic student of applied power. (His wife liked to call him “Boss.”)  Summers, who at the time was chief economist for the World Bank, first sent him to Russia in 1991.

Shleifer took the helm of Harvard’s Moscow office in December 1992 — about the same time that Summers became Assistant Secretary of the Treasury for International Affairs in the new Clinton administration.  A little more than four years later, USAID shut down the Harvard project, after its inspector general discovered Shleifer to be investing in Russia, with his wife, her father, his deputy and the deputy’s girlfriend. Just how rich they hoped to become is still not clear — maybe a lot, maybe a little, but definitely some, in contravention of their contract. By that time, Summers had risen to the number-two job at Treasury, under Robert Rubin. And though, to his credit, he never tried to derail Justice Department probe of the matter, it is clear that Summers freely deprecated the government’s complaint against his friend from behind the scenes.

The case against Shleifer had nothing to do with inside information. (It is sure sign of a red herring when someone tells you he was not guilty of a transgression that was never alleged.) It had to do with the self-dealing and the abuse of a position of trust. The only way to understand this is to put yourself in the place of a Russian citizen looking forward to a better deal from the new system.  When the American team arrives, it is led by an expatriate crook, flouting the rules of the country he represents, until his subordinates turn him in. (It doesn’t help that Summers, his mentor, has oversight of all US economic policy towards Russia.)

In somewhat similar circumstances, the State Department turned down Boris Jordan, another ambitious young Russian hoping to go to Moscow for the US Foreign Service. To Shleifer, however, Harvard said, Go right ahead!  The Russian story is like something out of fiction, except that it happened.

(Here, then, is the real scandal:  it turns out that Shleifer was boasting of his investments in a Russian private equity fund to his economist friends as early as October 1994, at a party at the home of then department chairman Dale Jorgenson. This is according to David McClintock, who wrote up an authoritative version of the Shleifer story earlier this year for Institutional Investor magazine.  Martin Feldstein phoned Shleifer afterwards, seeking an introduction. In the end he decided not to invest, McClintick wrote.)

So much, then, for the advice Shleifer was receiving from his colleagues in the economics department. Once USAID blew its whistle, however, there was another opportunity when Harvard’s administration could have investigated, discovered for itself the wrongdoing, taken its professor to the woodshed, negotiated an agreement with the US Attorney in Boston to make the government whole, and been done with the matter at relatively little cost in cash or reputation. Sheifer was, after all, just a kid who had grown up in former the Soviet Union, hardly a finishing school for good behavior. Even before taking over the Russia Project, he had shown a willingness to bend the rules.

But he was also a likeable guy, bright and quick, intellectually fearless, full of excitement at the possibilities of his new world. It is easy to imagine a time when a stern talking to from someone he trusted — his friend Summers, for example; or chemist Jeremy Knowles, who served as Dean of the Faculty of Arts and Sciences from 1991 until 2002; or Harvard Provost Harvey Fineberg — would have put the whole matter on a different track.

Why wasn’t it done?  The mechanics remain a riddle. The cast of characters comprises a veritable Who’s Who: Jorgenson, who was chair of the economics department when the scandal broke; FAS Dean Knowles; Albert Carnesale, who was provost when the scandal broke (retired as chancellor of the University of California at Lost Angeles, he is back at Harvard’s Kennedy School part-time);t Fineberg, who took over as provost just after the initial flurry of news reports (he is president of the Institute of Medicine of the National Academy of Sciences today); Deputy Treasury Secretary Summers, who may have been consulted through back channels before being elected Harvard president in 2001;  Harvard professor and ethicist Dennis Thompson, a friend of Harvard President Neil Rudenstine and the head of a committee that devised the plan to disband the  intermediary organization that Shleifer wrecked, the Harvard Institute for International Development; and, of course, Rudenstine himself. The principle faculty whistle-blower was Jeffrey Sachs, who was quickly ridden off the case. (He moved to Columbia in 2002.)

The broad outlines of why Harvard felt it was important to be nice to Shleifer are clear enough. He is a central figure in present-day technical economics; like Summers, Feldstein and Jorgenson, a winner of the John Bates Clark Medal, given every two years to the economist considered to be the profession’s best thinker under forty. Sometimes it is said that Shleifer’s line of research is potentially of Nobel quality. Maybe so, maybe not. But they give a Nobel every year. Shleifer’s real attraction is as chairman of the board of an especially broad line of recent advances, as Larry Summers was chairman of the board of another. (A less flattering term for the role is Godfather.) Between them, the pair would command the presence and subsequent loyalty of a steady stream of the very best graduate students for another fifteen years — including the brainiest young economists from Russia. Indeed, the parade through Littauer Hall of steller faculty and students from the former Soviet Union during the last few years has been remarkable.

Add to this the fact that the Harvard Management Company was investing aggressively in Russia in the mid-’90s — as much as 1.8 percent of the university’s endowment in the year before USAID fired Harvard. Did Shleifer possess some bit of kompromat, or potentially compromising material, that might have led Massachusetts Hall to prefer to join its defense to his until the very end?  The possibility is widely discussed in Eastern Europe, where such stratagems are common. It is, of course, virtually impossible to know.

In any event, in the highly competitive environment of modern economics, the cost of doing the right thing has gone up. As if to illustrate this principle, Yale University last year fired tenured professor Florencio López-de-Silanes, Shleifer’s protégé and frequent collaborator, after he was discovered to be double-billing his expenses to theWorld Bank and the university’s Center for Corporate Governance. But, then, López-de-Silanes is a follower in his field, not a leader.

The result today is that Harvard economics’ considerable luster is bedimmed by a light gray curse. (There are other problems, too; the department’s stewardship of its Quarterly Journal of Economics has come under fire in the profession for intellectual self-dealing. Shleifer edited for a decade, and helped choose the current editors, Robert Barro, Lawrence Katz and Edward Glaeser.) On the issue of Shleifer’s standing, the department is deeply riven.

Some, including Claudia Goldin, David Laibson, Katz and Glaeser have been outspoken in defense of his academic stature. Others, including Jorgenson (now a high-ranking university professor) and N. Gregory Mankiw (the former George W. Bush adviser who teaches Harvard’s introductory economics course), have grumbled over the years about the university’s administration, the government and the press, but only behind the scenes. A sizeable faction of the 71-member department, perhaps even a slight majority, deplore the Russia scandal in varying degrees, but prefer not to speak out. In general, the situation seems to have changed only a little from what it was when then-president Summers described it in his deposition in 2002: “…[M]embers of the department, the economics department, expressed and have on repeated occasions expressed the view that Andrei was in some way or other being screwed….”

Undergraduates — a record 965 of them taking Mankiw’s introductory course, or nearly 20 percent of the college enrollment — are cowed. For the most part, so is The Harvard Crimson. Shleifer’s defenders at MIT, where he trained, and the Graduate School of Business of the University of Chicago, where he taught, remain silent. Meanwhile, he remains a powerful dispenser of favors as the editor of the Journal of Economic Perspectives, the outreach journal of the American Economic Association.

Thus the light gray curse extends beyond Harvard to the economics profession itself. Friends say that Shleifer will explain himself some day, perhaps in a larger context. Possibly he will take on the very concept of disinterestedness and, perhaps, the principle of transparency as well. Alternatively, he could argue that sometimes agents must do things considered bad in one culture in order to buttress their credibility in another, in order ultimately to do good — a “Mission Impossible” defense whose outlines were sketched here last spring. When, a couple of years ago, Shleifer received a prize at the University of Munich, Tim Besley of the London School of Economics said in his laudation, “There is… a healthy disregard for convention in Andrei’s work — a trait that I associate with his mentor Larry Summers.  Andrei is willing to challenge accepted wisdom on any topic and many of his contributions take on entrenched views.” Whatever the case, a clear and forthright discussion of the issues would seem to be the price of remaining in Cambridge far into the future.

It is in this context that Harvard’s decision to take away his named chair is understood. At first glance, it looks fairly deft. Interim Dean Knowles (who presumed Shleifer in innocent in 1997 and promoted him to the Jones chair in 2002) last month simply took the named professorship away. He may have done more. Who knows? Knowles declined to reveal his actions, to release report of the faculty Committee on Professional Conduct or the names of its three ad hoc faculty consultants. He left it to The Boston Globe to “discover” the rescission by checking the university website. Shleifer shrugged.  He told the Globe, “I was a professor of economics last week, and I am a professor of economics this week.” Yet it seems that no penalty like it has ever been applied. It is enough to place a virtual asterisk wherever his name appears — at the University of Chicago’s Becker Center, for example.  

Then Harvard quietly applied the same punishment to another faculty miscreant.  It took back another chair — the Ernest E. Monrad Professorship, previously belonging to economist Martin Weitzman. (This time it was The Harvard Crimson that nailed down the facts.) Weitzman is no less bright a contributor than Shleifer, and, though 64, remains very active in his field. A new book, “Income, Wealth and the Maximum Principle,” is an unusually accessible explication of the mathematical underpinnings of capital theory, hence a guide for serious students of sustainability and “green” accounting. A new working paper — “Risk, Uncertainty and Asset Pricing ‘Puzzles’” — is stirring a lively controversy over the deepest assumptions that underlie conventional econometric models of expectations.

It was, however, Weitzman who found his way into the news last year when he drove his truck into a pasture to pick up horseflops — and was promptly penned in by the farmer who owned the land, with whom he had been feuding for years. Trapped, Weitzman offered $20, then $40 for the manure, but the farmer called the sheriff, the sheriff charged Weitzman with theft, and Weitzman eventually agreed in Essex County Court to pay $900 to settle the case ($600 for the farmer, $300 for the town Boy Scouts) — but not before the story spread around the world, providing fodder for many bad puns.

Among the faculty, there were intimations that donor dissatisfaction was at the root of the recission, but Monrad, a jovial and tolerant Boston money manager, says that he expressed no displeasure, publicly or privately. Nor, apparently, did Dean Knowles consult the faculty’s Committee on Professional Conduct before repossessing Weitzman’s honorific title. A spokesman for the Faculty of Arts and Sciences said Friday that the dean was under no obligation to explain his decisions.

There is, indeed, a common thread running through both incidents: a rather startling arrogance; in each case a Harvard professor acted as though he were entitled to take whatever he wanted, regardless of the law. Granted, there is not much moral equivalence between a $900 quarrel in a small town, on the one hand, and, on the other, an unrepentant betrayal of an adoptive country, an alma mater, hundreds of employees and a raft of friends (which also cost Harvard well over $30 million and much reputational capital). Applying the same penalty to the perpetrator of a misdemeanor as to a man who smuggled Soviet-style values into the highest levels of government and education in the United States might seem to send no more weighty a message to the Harvard faculty than, Don’t get our name in the newspapers by breaking the law. But perhaps it is too early to say.

Small gestures, cunningly contrived, can have big effects. The price of not doing the right thing is going up as well.

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