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June 1, 2008
David Warsh, Proprietor


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A Normal Professor

Perhaps, now that Harvard’s Russia scandal is receding into the past, Andrei Shleifer, 47, will take it easy. He has a steady stream of students, presides over a growing literature in comparative economics, and has developed an interesting sideline in the economics of persuasion. His wife, Nancy Zimmerman, runs a hedge fund that has seen explosive growth, today managing more than $3 billion for institutional clients; together the pair, through their start-ups, may have amassed net worth of $40 million or more. (A columnist for Portfolio magazine’s website  subsequently estimated that the figure may be closer to $1 bullion.) Their children are growing, his energetic parents live nearby, he superintends a steady stream of visitors to his villa in the south of France, and he keeps a hand in with developments in Russia.

 

For example, when Anders Aslund, of Washington’s Peterson institute for International Economics, was in Cambridge, Mass. last winter, to celebrate the publication of How Capitalism Was Built: The Transformation of Central and Eastern Europe, Russia, and Central Asia and Russia’s Capitalist Revolution: Why Market Reform Succeeded and Democracy Failed, Shleifer, the author of A Normal Country: Russia After Communism, threw a party for him at his spacious home on unpaved Bracebridge Road in suburban Newton.

 

But if Shleifer has slowed down, he hasn’t shown it yet. He just returned from giving three seminars in three days in Chicago. University of Chicago professor Steven Levitt , for one, marveled at the enthusiasm with which Shleifer presented a series of new ideas. Given the uphill battle that publishing requires, the lags, the referees, the harshness of the inevitable criticism:  “Usually when people have such rich outside options, they take them. It’s refreshing to see the passion with which Andrei pursues academic research.”

 

EP readers know Shleifer mainly through this weekly’s extensive coverage of the tumult that broke around him in the spring of 1997, when the US Agency for International Development, after a brief investigation, fired the Harvard University for International Development from its contract to advise the government of Boris Yeltsin, having discovered that its team leader, Shleifer, and his wife, were running a private investment office out of Harvard’s Moscow office. Thus they don’t have much of a picture of the man – the sort of thing a proper profile would provide. It’s no longer my job to provide that profile. But I can sketch the outlines of what fuller picture of Shleifer might look like in the aftermath of the scandal, with a view to turning the page.

 

First, a reminder of the outlines of the story. A kid, newly emigrated with his family from Russia, turns up at Harvard, still learning English, and is assigned J. Bradford Delong as a roommate. (Today DeLong is professor of economics at the University of California at Berkeley, where, among many other pursuits, he maintains a popular blog.) A year later, he is adopted as research assistant by MIT assistant professor Lawrence Summers, and begins a meteoric rise. He earns his PhD at MIT, demonstrating the advantages of an innocent eye with a remarkable thesis titled “The Business Cycle and the Stock Market.” He spends a year teaching at Princeton (where he acquires a disciple in  Edward Glaeser, then an undergraduate, today a Harvard professor), then goes on to Chicago. He meets and marries Zimmerman. Five years out of graduate school, Andrei Shleifer returns to Harvard and goes to Russia as head of Harvard team advising President Boris Yeltsin on behalf of the US government.

 

In 1997, he is discovered to be investing in Russia, along with his wife, deputy, deputy’s girlfriend, and their in-laws. He and Harvard are fired by the State Department, the project collapses, and its failure used to discredit both Yeltsin and US ambitions in Russia. He maintains that he was within his rights. In 1999, Shleifer wins the John Bates Clark Medal, awarded every two years to the most influential economist under forty. And, in 2000, the US Department of Justice abandons its criminal investigation of him and instead files a huge civil suit.  Harvard and Shleifer dig in their heels and begin a protracted battle. Summers, soon after president of Harvard University, stands by his protégé throughout.

 

In 2005, the government finally wins its case, including the return of $25.2 million from Harvard. Shleifer capitulates, paying $2 million in fines. Harvard deprives him of his endowed chair. The Russia case is closed.  But not before, in 2006, his handling of it helps cost Shleifer’s old friend Summers the presidency of Harvard.

 

So what’s changed?

 

First of all, Shleifer’s defenders, at least those who followed the case, now acknowledge he shouldn’t have been investing in Russia while officially advising its government. Moreover, most recognize the negative effect when a Russian expatriate with close links to the US Treasury Department (and, in anti-Semitic Russia, a Jew), is seen to be running a family business out of his USAID-financed Harvard office in Moscow.  A little more attention has been paid to the role of wife may have played in egging him on. Shleifer’s long-promised defense of his actions has not materialized.

 

Meanwhile, healing forces have gone to work within Harvard. The university’s endowment, nearly 2 percent of which was invested in special situations in Russia in the mid-1990s, has become less aggressive. Harvard has given up the Investing in Russia conference it sponsored for many years. Other authors, historians and government scholars, including some at Harvard, have joined in the telling of the story of Russia’s transition. The economics department, eager to be known as the world’s foremost in order to attract the brightest students, remains in bad odor within the university.

 

Then, too, Shleifer is giving up the editorship of the Journal of Economic Perspectives, after serving two three-year terms. (Term limits were adopted after founding editor Joseph Stiglitz served three.) As one of three flagship journals of the American Economic Association, the JEP is intended “to fill a gap between the general interest press and most other academic economics journals,” according to its marching orders. Its editor thus has great power to reward friends and punish enemies, and the appointment of such an embattled figure in 2003 was viewed with alarm by some senior figures in the profession (though none was willing to do so publicly). David Autor, of the Massachusetts Institute of Technology, takes over in December.

 

You would have thought that ten years of backroom battles with Harvard lawyers and the government attorneys would have cost Shleifer dearly in terms of scholarship. But there is little evidence of the disturbance in his CV.  Between 1997 and 2005, he published more than fifty papers dealing with finance, behavioral and organizational economics, including “The Limits of Arbitrage,” a famous paper in 1997 considered to have anticipated the circumstances in which Long Term Capital Management foundered the next year. There is, of course, no telling how much greater would have been his influence in such diverse fields had he been able to concentrate single-mindedly on his research, test it more extensively against the evidence, and build bridges to the work of those outside his various networks. But there is no doubt that he has produced a substantial body of work. “Certain people have the inner strength necessary to produce remarkable work in adversity,” says his friend and fellow Harvard professor Claudia Goldin.

 

One arena in which Shleifer works is what is routinely described as the new comparative economics.  Traditionally, comparative economics strived to bring capitalist and socialist economies into close comparison, searching out the mechanisms through which markets and central planning achieved their results, gauging the efficiency of each in gaining its ends. Shleifer and several authors (Simeon Djankov, of the World Bank; Glaeser, of Harvard; Rafael LaPorta, of Dartmouth; and Florencio Lopez-de-Silanes, of the University of Amsterdam) wrote in a blueprint for the new field, “By the time socialism collapsed in Eastern Europe and the Soviet Union, this question [the comparison of socialism and capitalism] lost much of its appeal.  Socialism produced misery and inefficiency, not to mention mass murder by several communist dictators who practiced it.  Capitalism, in contrast, typically produced growth and wealth. If capitalism is triumphant, is comparative economy dead?”

 

Hardly, the authors say.  The entrants to the new field has simply shifted their interests,  they explain, to the various public and private institutions that make capitalist economies work in widely differing ways: selecting leaders, securing property rights, redistributing wealth, resolving disputes, governing firms, allocating credit an so on. Central to the field is an analytic organizing device the authors call the Institutional Possibility Frontier, similar in many ways to the familiar production possibility frontier of present-day macroeconomics. One axis describes the social losses arising from forces of disorder, culminating in a Hobbesian war of each against each; the other, the losses arising from dictatorship.  Along the long frontier between them lie the various policies that can reduce disorder without increasing the absolute power of the state:  an independent judiciary, regulatory authorities, a competitive press, and so on. How the “new” comparative economics eventually will map into other fields in which somewhat similar work is unfolding, including the “new” political economy and organizational economics, remains to be seen.

 

Shleifer’s friendship with his mentor remains intact. Summers attended the party for Aslund, but in general has gone in the opposite direction from Shleifer, speaking out on higher education, gingerly scrutinizing his own failures and, rather than returning to intensive academic research (from which he had been absent for more than fifteen years), serving as a co-editor of Brookings Papers on Economic Activity, an influential policy journal, writing a column for the Financial Times, and otherwise seeking to re-fashion his role as that of a hard-headed conscience of global capitalism. Summers remains a Harvard economics professor; he joined the D.E. Shaw Group, a global money management firm, as a part-time managing director, as well.

 

Finally, more attention is being paid to Shleifer as an exponent – and an exemplar – of behavioral finance. It was in 1994 that, along with Josef Lakonishok, of the University of Illinois; and Robert Vishny, of the University of Chicago, he co-founded LSV Asset Management, a Chicago firm equity investments for large institutional investors, including universities. LSV’s proprietary models exploit, among other things, discoveries of judgmental biases (notably the “value-glamour anomaly”) that Shleifer and frequent collaborator Vishny had made (and published!) in the course of studying patterns of investor behavior.  Earlier this year, the firm was managing $66 billion in equity portfolios; Shleifer sold his share in the firm for a large but undisclosed sum several years ago.

 

(Nor is Shleifer by any means alone among economists who are both smart and rich. Richard Thaler, of the University of Chicago, co-founded Fuller & Thaler Asset Management some years ago (“Investors make mental mistakes. Fuller and Thaler’s objective is to exploit them.”) The Workshop in Behavioral Economics of the National Bureau of Economic Research was founded in 1991 by Thaler and Robert Shiller, of Yale University, with seed money from the Russell Sage Foundation; since 2001, Bracebridge; Fuller and Thaler; and LSV have paid the bills.)

 

So big house, big furniture, big paintings; a brilliant intellect, a formidable academic politician; a hard bargainer:  here EP seeks to turn the page on the man himself.  So close the book on Andrei’s Shleifer’s role at the center of Harvard’s Russia scandal. He has become, as he might say, a normal professor, or, perhaps, as another MIT-trained economist put it the other day, a normal Harvard professor. You can’t help but wonder how different the story might have been if someone in the Harvard administration had taken the matter in hand in 1997 – or even 2000, when the office of the US attorney in Boston made its final proffer.

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