As I've posted elsewhere: the optimum amount of fraud is, in fact, zero, but the optimum amount of defense against fraud is less than the amount it would take to actually reduce fraud to zero.
I think this actually is a problem with the original phrasing, though: it's literally wrong inasmuch as is takes some level of stochastic fraudulent conduct as a given, but particularly since most people are honest dealers in a high-trust society, it's not clear that this is a precondition one necessarily has to grant. It's descriptively accurate, but seemingly in a kind of contingent way - the reason you can have high trust society at all is basically because most people rely on a cooperative heuristics in their day to day lives rather than actively trying to maximize individual returns like the sociopathic paragons implied by the idea of homo economicus (this is, I think, an important thing that virtue ethics gets basically right about how humans operationalize ethical precepts and a reason that it's worth taking seriously even though it can sometimes seem easy to dismiss).
If the propensity to commit fraud is more a matter of individual deviance (most people in finance aren't Madoff, most people who know the well-off aren't going to be Anna Sorokin), than of spontaneously-arising and uniformly-distributed stochastic tendency, coupled with some set of designing mutable incentive structures for average Joes to avoid pathological incentive failure states (i.e., basically don't put otherwise-basically-normal people in situations where their livelihood depends on pitching PPI instruments) you can conceivably get the rate of fraud pretty damn close to zero by just incapacitating the fraudsters.
TL;DR: at one point in time you could probably argue that, given the costs of quarantine, "the optimal rate of smallpox is not zero." But, like, actually the optimal rate of smallpox pretty clearly is zero--the statement that it isn't is actually smuggling in a lot of empirical assumptions that aren't necessarily static.
Depends on the costs and accuracy of identifying individuals with high propensity to commit fraud (presently, probably pretty high / impractical, although you could try things like screening for oppositional defiant disorder as a precursor to antisocial personality disorder if this ends up having predictive power for propensity to commot fraud) and the QALYs lost by imprisoning / euthanizing / aborting / otherwise incapaciting them (eg in some hypothetical future having a Culture drone just follow them everywhere and restrain their behavior) versus the size of the peace dividend implied by doing so. Under present conditions the book’s thesis is probably right — my point is just that the claim states as a categorical universal what’s actually a claim that’s highly contingent on the state of a given Pareto frontier. Just like the optimal amount of smallpox might be non-zero if you don’t have vaccines, but the correct response to that situation is to develop vaccines rather than adopt thr maxim that “the optimal amount of smallpox is nonzero.”
> basically don't put otherwise-basically-normal people in situations where their livelihood depends on pitching PPI instruments
Unfortunately the material world puts a lot of us in that situation all the damn time.
I completely agree with a lot of your analysis. I think the use of the word “optimal “ is throwing up a lot of dust. The equilibrium between cost of prevention and cost of acceptance is genuine (look at all those baby penguins hurling themselves into the acean) but optimal as a descriptive brings Baggage…maybe
Could be that I don’t properly understand the word as used here. To me it implies “ideal”
the issue isn't the semantics, but the pointer-chasing. The Prisoner's Dilemma appears paradoxical because what's optimal for the *individual* is not optimal for the *equilibrium*.
I think this falls out of the assumption that the peace dividend is much higher than enforcement costs in a world in which fraud is very uncommon. Keep yourself off the slippery slope for cheap by coming down like a ton of bricks on uncommon deviations
Part of the idea is that the rarer something is, the more value there is *and* the cheaper it can be to endorce by driving it down to “zero” from “uncommon” (think about how much more value there is preventing the first Covid-19 case than the 100th).
See, e.g., the discussion of the first-offender model in the Caplan excerpt here:
In what sense is the optimum amount of fraud zero if the optimum amount of defense against fraud is less than it would take to actually achieve zero fraud?
But "ceteris paribus" doesn't hold, since current conditions control the amount of fraud seen. It's like saying "Ceteris paribus, would it be better if my dice rolled seven every time?" and the answer is "yes" in the same way, but also it's not a physical answer, but a wishful one.
I disagree. For fraud to be zero we need people who will always follow the authorities, with no risk taking drive. That would be very sad society.
For example, the doctor who was prescribing amphetamines online for ADHD is now charged with fraud. While he clearly acted in grey area, I don't think he believe that he was committing fraud. He probably thought that the authorities will accept his interpretation.
To have zero fraud, we also need zero people operating in grey area.
The example would be doctors who prescribe Ozempic for weight loss even thought it is not licenced yet for this condition. Would it be fraud to do withing Medicare or other insurance system? Who knows, I think it is good to prescribe it for weight loss and so far no doctor has been charged for fraud but such possibility certainly exist. The only way to avoid it, would be never prescribe medicines outside their licenced indications. That would be world where all decisions are made top-down.
Not all circumvention of legislation is fraud. Fraud is defined as intentional deception to secure unfair or unlawful gain, or to deprive a victim of a legal right. If the person does not believe they are committing fraud, or believes that they're skirting the law to get the best result for their patient, and isn't self-deceptive about the reason, then they are not a fraudster. They could be prosecuted under fraud because the legal system is agnostic about their intentions and "I believed I was doing the right thing" can be used as a defense by both fraudsters and legitimate gray area risk-takers, but that goes back to the question of how much effort should be taken to prevent fraud, not what the optimum amount of fraud is. It's still zero.
Is the common definition of fraud inherently more precise than the legal one? People try to narrowly define such human expressions such as intention but ultimately human psychology is more complex and resists neat definitions.
Was that doctor who was prosecuted acting solely with the desire to help people and not trying to earn more money? Who knows but people are complex.
Scott's story about whales included in the taxonomy of fish was really nice and then it turns out it was all wrong because there is no fish in the taxonomy at all. And yet, we all know what fish is and use the word every day.
This was a frustration of mine with the review. As presented, Davies' language is sloppy, and the review neither addresses this nor does anything to clean up the sloppy language for the readers of the review. Otherwise, I thought the review did a good job of balancing interesting examples with top-level summary.
I wonder if normal people understand the degree to which "'product demo' which is just a kludged-together sequence of smoke and mirrors" is completely normalized, perhaps even lionized, in tech. One of the war stories the old-timers at my work love to tell is how 10 years ago as a scrappy startup they landed our first big logo and contract with a pitch deck and product demo for Big Established Corporation that promised all sorts of things we hadn't built yet. Of course then we went and built it. Funny thing, the old-timers at my previous job at a different startup had almost the exact same story to tell. All exciting products in tech seem to start with an over-optimistic product demo.
Part of the difference between this and Theranos could be degree of uncertainty around whether the product would actually work. Writing a bunch of code isn't the same as developing a new technology.
It’s true, but also worth being clear that while it’s a spectrum, there is a big difference between A) giving a demo that you know to be doable and saying to your customer “this is what we can sell you”, and B) actively lying about the maturity and capability of your tech to customers, investors, and regulators.
It’s possible to be wrong in case A and fail to deliver, but usually the way this pans out is you say “this is in beta” and they say “ok let’s pay based on delivery milestones” and then stop paying when you miss milestones. In other words the outright fraud over years case is quite uncommon.
It's less about whether what you are saying is doable but more about whether what you are saying is accurate. Frank is a fraud event though there was nothing impossible about their claims, the problem is that in regards to specific questions they deliberately fabricated data. In particular you will get in trouble to lying to Banks, investors, and the SEC or lying about health care claims. Note Elizabeth Holmes was not found guilty of lying to the customers only of lying to investors.
I worked once for a online-language-teaching firm that claimed to have a working "correction" function for written tasks. Of course they did not. MS would have bought them if they were near. They cheated by having ONE sentence in their presentation that seemingly was corrected fine. NO other sentence would! - The people selling it were not happy about the con, but just fine Jim&Jane teachers. The professor who thought of that scam and sold it to the DAAD was and is a respected German professor at top-university LMU. Die Welt will betrogen sein. "They want to be BSed, they get BSed"
I have heard that when big rich companies need a custom software developed, they often order it from multiple suppliers, compare the products and choose the best one, but pay for the development of all (and then pay extra to the winner). Because time is more important for them than money, so they would rather pay five developer teams so that at least one of them is guaranteed to develop the product on time, than pay one team and risk that the product is not made on time or is full of bugs.
Of course, there are software development companies specialized for scamming these big rich companies. They enter the competition with the intention to lose (and get paid anyway) and produce the cheapest shitty version that seems like they were at least trying. Like, the application has all the required dialogs, but nothing is optimized, and all calculations return wrong results; some guy in India probably made it in an afternoon. The supplier bills hundreds of man-days; the tester from the big company clicks a few buttons and writes a report for their superior that the application is full of bugs; the supplier gets paid but rejected... which is exactly what they aimed for. (They never have to fix the application, because it is not used.)
Considering that only one application is selected and everyone else is rejected, participating and being rejected is not consider a red flag in this business. So the supplier can continue doing this to other companies for years.
"A ‘corporate drone’ would be someone whose only purpose was to fertilize the corporate queen and I can’t think of a single company that’s managed that way."
One thing I'll take away from this review is a better understanding of the Drones Club of which many P G Wodehouse characters are members. I'd never quite understood the name because I'd never understood apiology well enough to understand the difference between a drone and a worker. (For which I can probably blame the people who misuse terms like "corporate drone").
It's not quite the same thing, but I've heard two people independently talk about corruption at a company in my geographical area, where the top executives are apparently having sex with each other and sustainably looting the company. And yet it apparently isn't the worst-managed company in the field.
> Having bitcoin trapped in escrow can be a problem when the price of bitcoin is volatile, and to make up for this volatility, sellers who used escrow frequently had to charge higher prices.
This was probably just an excuse, as Silk Road 1 offered hedging to eliminate volatility as a concern. (Which interestingly, turned out to be a spectacularly bad idea and led to huge losses from bad trading + MtGox account hacking/seizure, but inasmuch as DPR1 ate the losses and it was secret until after MtGox's collapse, couldn't've mattered.)
> They don't, technically speaking, have something that could be considered a "product" yet, but they do have a really cool idea for something that they claim might one day become a multi-billion dollar company, even though the thing that they're suggesting has never been done before.
This is not really what happened with Theranos. The original idea for Theranos as described in _Bad Blood_ was completely reasonable (along the lines of a WiFi-enabled bandage, and there's likely a bunch of stuff on the market now like it). The microfluidic blood testing came later as a pivot (this is part of why Theranos was so *old*). Where Theranos starts going off the rails into the 'snowball' is when the bloodtesting kept not panning out while social proof kept accumulating and sophisticated investors declined to invest and unsophisticated non-biotech whales ignored the red flags (like not even being allowed to do a blood test themselves - the reason why Google Ventures passed on Theranos). You only need one Rupert Murdoch whale to make a casual decision and rack up a very large total capitalization.
The FTX description also seems wrong. The problem with Alameda Research wasn't that the hedge fund turned out to be a ponzi and had paid out all its investments to prior investors in Alameda. (Did they even *have* external investors at the terms quoted at such length? I was under the impression Alameda itself didn't even have external investors at the time of collapse and it was exclusively owned, like the most-successful hedge funds tend to be, by its employees/partners, like SBF.) If it had been, that would've been those sophisticated investors' problem and no one else's. It's not Alameda's investors who are suffering all the grief from FTX, it's everyone else. In this post's typology, the Alameda/FTX thing is (at least) a threefer: a confused stew of long firm (insolvency of both firms but continuing to do business long afterwards), control fraud (commingling funds, corporate structure), and market crime (special non-liquidation and margin call/negative balance privileges). FTX depositors weren't the primary beneficiaries, but the Alameda/FTX principals like SBF and their counterparties like everyone they paid advertising to and better traders who were using FTX to enthusiastically screw over FTX & Alameda's incompetent traders.
Can confirm both that wifi-enabled bandages exist - a friend of mine uses one for glucose monitoring - and that Alameda's initial japan arb _worked_ and was over by the time FTX started. What they got into trouble with was buying other ponzis. With (loans taken out from) exchange customer money.
Nah, they were "in trouble" from the start. SBF was always recklessly incompetent, so it was only ever going to end badly, the only question was, how big would he be allowed to get before the inevitable. See e.g.:
My understanding from obsessively reading everything I could during FTX's implosion, is that Alameda was originally created by SBF and Caroline as the vehicle to exploit the Japan/America Bitcoin price discrepancy, and per your comment, didn't take outside investment initially. However, once the price of bitcoin equalized between America and Japan through their arbitrage, they had by that time gained a lot of attention by other investors, and they started to take on investment funds and Alameda became a hedge fund specializing in cryptocurrency.
SBF realized that Alameda could benefit from having it's own cryptocurrency, and created FTX. Once that got some traction and started taking up all of his time, he handed off control of Alameda to Caroline to lead as CEO, and SBF focused on FTX full time.
The problems began when Alameda started getting eaten alive by other hedge funds. It turns out, a few years at Jane Street isn't a guarantee you can survive in the quant world, and there are a lot of extremely smart people working in other hedge funds who compete with you, even in crypto. So Alameda started losing a lot of money. FTX on the other hand, wasn't really making much money, but they had an enormous amount of user assets. And SBF used those assets to prop up Alameda, without telling the users that their crypto assets weren't kept separate in any way, but actually were all just dumped into one giant pool, and when you went to withdraw or add crypto assets, SBF and friends would just add or subtract from that pool as needed, occasionally converting between different cryptocurrencies as needed to make users whole. That was a problem in itself - but the bigger problem was the users certainly didn't know their money was being used to backstop Alameda, and they were essentially exposed to a very badly run cryptocurrency hedge fund.
When Binance's CEO starting having beef with SBF, he publicly sold off a large portion (I think eventially all) of Binance's FTT holdings (FTT is FTX's coin), which led to a large sell off of FTT, which led to a liquidation crisis at FTX. They had to pause withdrawals, which led to their death spiral of increased withdrawals and within days FTX was insolvent.
Clearly the correct heuristic is to fund Harvard undergrad dropouts (Bill Gates, Mark Zuckerberg, Edwin Land - co-founder of Polaroid) and Stanford PhD dropouts (Elon Musk, Larry Page, Sergey Brin, Andy Bechtolsheim).
> A big part of the fun of Lying For Money is reading stories with details that would be too outlandish to be considered plausible, except for the fact that they actually happened.
I love books that are heavy on examples of clever (or not-clever-but-still-interesting/entertaining) events. Similarly, Bruce Schneier's recent *A Hacker's Mind* has similar buckets-o-examples for hacking, from ATM jackpotting to the congressional filibuster. Same with lots of books about large tech companies, since they describe the galaxy-brained strategies used on different projects (e.g. Amazon's mass in-person tests for Alexa; Google's IPO and fiber tactics).
Where are more good books, like LFM or AHM, that contain lots of wacky situations involving a decently-high level of intelligence?
(I've tried e.g. trivia books and true-crime-compilation books, but most trivia does not describe clever/intellectually-interesting events, and most true-crimes are depressing and also not-clever.)
The modal true crime TV episode involves a person who murders his or her spouse for the $125,000 life insurance payout and then quickly blows it in Vegas.
The modal true crime case sadly involves a 15-25 year old woman who is abducted raped and killed by a random man who cannot be identified for one reason or another.
You might really enjoy https://darknetdiaries.com/ -- a podcast on the "dark sides of the Internet" featuring true stories of fraud, crimes, or the prevention thereof.
One of my favorite episodes that is also related to the topics in this review: "Money Maker" is an Interview with Frank Bourassa, who counterfeited and sold about $250 million in fake US 20 dollar bills: https://darknetdiaries.com/episode/102/
I found Ross Anderson's "Security Engineering" absolutely mesmerizing with its description of various (successful) attempts to bypass payment mechanisms.
Favorite description: Do you get your electricity from a coin-operated power meter? A quick application of an arc-welder will bypass that annoying shut-off switch; free electricity forever!
one of my favorite related quotes goes something like "If you are smart and hard-working enough to get away with long-term financial fraud, you are likely also smart and hard-working enough to make a good living running a legitimate business" , paraphrasing from Patrick McKenzie
>The English language has an irregular verb to describe the problematic effects of performance contracts, depending on how much sympathy you feel for the person at the sharp end. I respond to incentives / You game the system / He is a crook.
The fact that fraud is more common in high trust societies is not at all shocking to me. I live in a very progressive community, and was on a number of charity volunteering listservs at the time COVID first hit. All of a sudden, these listservs started getting more and more people emailing them with barely believable sob stories about how first their husband lost his job, then their kids had to undergo expensive emergency surgery, meanwhile they accidentally dropped all their groceries that they bought with their last dollars into a pit, etc, and could you please send me money at this sketchy location. Many people on the listservs ate it up and I saw individuals claiming that they gave hundreds of dollars to these people each time, just like that. When others on the listservs started pointing out that the story is untraceable, there's no record of the person existing, and all the other red flags, the donors were shocked, and most eventually came to the conclusion that "well, the scammers must have really needed the money anyway in order to go to such lengths to get it, even if their story didn't check out fully".
That was a great review. I'm going to buy the book.
I spent a of time trying to get my students to understand that every new regulation offers the opportunity for at least one new fraud. More regulations ALWAYS means more new frauds.
Two quibbles, not sure if the review can still be edited?
The SEC did not exist in 1922, so it could not have changed the rules governing Mr. Saunders' short squeeze. Maybe the New York Stock Exchange? I don't know if the error is in the book or the review.
After the first book review of this season dropped and I missed the opportunity to comment on it (It was long, I was busy, some stuff came up) and the comments were so great that Scott promised a "best of" post about them, I thought "there should be a way of regulating how long people have to read a post before the comments section gets flooded -- maybe it could be locked for the first 8 or 12 hours, that way people would need to come back later, which would incentivize the more insightful comments".
I made time to read this one all the way through so as not to get left out again, and at time of writing there are only single-digit comments. Having read it, however, I realize that I could have just committed the fraud of writing this comment having pretended to have read it, thus capturing the incentives just fine. I probably could have figured that out from the title if I'd been thinking ahead.
Sometimes I happen to be free when these things come out and I read them quickly in one go. If I wanted to comment I would do so straight away whilst the post is still fresh on my mind. Often after such a locking period I'd be too busy again and wouldn't actually get to comment...
As I also pointed out on Ozy's post, the claim that "long firm" is unrelated to both "long" and "firm" is inaccurate. It does seem to be true that the "long" in "long firm" is unrelated to the usual word "long", but that doesn't seem to be the case for "firm"; that seems to be just the usual word "firm". Sure, it comes from "firma", signature... but so does the usual word "firm"! I really doubt that the word "firm" there is some separate derivation.
I think you must be right. Also the word "firma" for signature is Italian/Spanish (it's also meant "business" in various languages for hundreds of years).
It seems extremely unlikely that the word “long” here refers to some long obsolete Anglo Saxon word. I would expect it is originally slang of some kind and maybe analogous to “long game”.
Apparently, the phrase "the old firm" might instead derive from the adjective, as in "old, firm friends". Which apparently has the same Indo-European root as "dharma".
I don't see what the negative externality is for insider trading. Or for what Clarence Saunders did.
SBF's business model wasn't to get money from (eventually just stealing from) EAs (he was instead giving money to them). It was to get it from crypto enthusiasts.
Debatable if short squeezes are bad. As for insider trading, if market participants think some people trading on insider information, transaction costs go up and a higher tax on economic activity is levied, reducing overall investment and activity
I don't see how there's a "tax" on economic activity. Some people might exit the market, but there's no requirement that that the market be full of people with little information.
The victims are “people with all the publicly available information”, not “people who didn’t do enough research”. Information that isn’t publicly available could be collected and provided as a service, but paying for that service would be a tax on trading. As it is, companies (pay the cost to) reveal that information for free, and the law requires them to tell the truth and is mostly enforced, and therefore people mostly trust the reports without paying to verify them.
In normal financial trades there is going to be variation in how much traders know even if we're restricting things to publicly available information. And the laws requiring that companies are honest in the information they release are entirely separable from laws on insider trading.
Absent insider trading, whether you're the genius or the sucker is a function of putting in the work, reading publicly available disclosures and doing maths.
If insider trading isn't illegal, if you're not an insider you're a sucker, which means "some people might exit the market" only it's not just some people, it's probably like 99% of the liquidity (I had originally written capital, not as sure about that) on the stock exchange. (Off-market investment would be largely unchanged, that's the all-insider domain already)
I would have assumed people would pay investment managers to invest for them in the legal-insider-trading world. It wouldn’t remove the liquidity from the market, but it would introduce principal-agent problems, reduce the diversity of investor research, and impose higher costs on investors.
I don't think any of this is true at all. As others have pointed out, many many markets have existed without rules about insider trading and without any apparent issues. The reality is that under the current regime most inside information doesn't get disclosed at all, so prices are less accurate. With insider trading it would pretty much be the same as now but with more accurate prices. All the pension funds holding Microsoft for dividends aren't going to dump them because someone somewhere might have insider information about the stock some day.
That’s true. But the purpose of both insider trading and mandatory disclosure laws, working together, is to ensure a theoretically level playing field where seeking inside information won’t provide a benefit. Being better informed based on public information is pro-social, and both types of law work together to encourage it. Trying to get access to inside information (or paying for a service which provides it) would be anti-social, and the laws discourage it.
Edit: I’d differ from Thor Odinson’s position, I’d just expect subscription services to start collecting inside information.
Why is it anti-social to seek inside information? Why is it valuable to have a "level playing field" as if this were a competitive game rather than a means of allocating capital?
The laws are at least somewhat ambivalent. Employee stock purchase plans are generally encouraged, and all employees have some degree of insider information (though not at the level that e.g. the CFO has!).
It might be easier to see with used cars. How much are you willing to pay for a car when an insider might know something important is broken and you don't? Now consider how that lowers the price for a car that's actually good, too.
For market makers, this is about short-term uncertainty. How will the price move today? The spread will be higher when they think counter-parties are sophisticated.
Higher volumes and lower transaction costs happen when there's less uncertainty about what things will be worth.
The question isn't whether the market persists, it's whether prices are different than they might be. That's the "tax" when there is one. When people decide not to buy something due to a reputation of low quality, that means there's lower demand for it and it's harder to sell. (Though, maybe it doesn't matter for meme stocks?)
The article you linked to says this was solved for used cars by reducing the risk of getting a low quality car. Inspections and certification will do that. There's a cost to them, but this can be worth it. The book review talks about cases when it cost less to take a risk instead.
The negative externality for insider trading is that retail investors don't want to get owned by insider traders selling them stuff that's actually crap, and retail investors have a lot of money that we would like circulating in the stock market instead of put into other investments.
Retail investors not wanting to lose money is not an "externality", nor is it a public good for their money to be in the stock market rather than "other investments".
A stock being "crap" would seem related to normal rules about whether public information about a company is honest. But let's imagine the insider believes the stock to be overvalued because he works for the company and management decided on (but haven't publicly announced) a hare-brained scheme that they think is brilliant but would actually be a disaster. In a world where insider trades are actually impossible, can the retail investor still wind up saddled with that overvalued stock? Of course, it's publicly listed. Whoever's selling it will just be an "outsider" unwilling to discount the price of the stock in order to offload it.
On average, insider trading benefits wealthier people and disadvantages less wealthy people (because each unit of insider trading profit probably goes to someone who already has some insider trading profit). So diminishing returns means that insider trading directly lowers a country’s average standard of living.
That sounds like a very post hoc justification to me. I have a hard time imagining that anyone starting from the question of "what can we do to reduce wealth concentration?" would settle on the answer "ban insider trading". If you asked me to make a list of all the possible government policies that could be used to reduce wealth concentration, that would be really far down on my list.
I think I can answer these a little more clearly. First, remember that insider trading is only illegal in a few specific clubs - the public stock exchanges. It doesn't have to be an absolute negative externality; it's just the rules of these clubs that happened to get written into law. These particular clubs decided that they wanted rules that reduce trading friction, which includes banning insider trading. I don't think it's any more complex than that: rules against insider trading are one of a number of viable options that market participants could use to maximize the effectiveness of the market as a price discovery mechanism. Remember, that's one of the main services that the NYSE provides to its users: you can buy a bit of a company from anyone, anywhere. But if you buy it through the NYSE, you get the additional benefit of knowing what the last guy paid for a bit of the same company, and that's valuable information to you. Other possible mechanisms for achieving the same thing would include supporting more intrusive intelligence services (consultants who'd investigate for insider trading); but it seems like most stock exchanges regard having insider trading rules as the cheapest way of achieving the wide dissemination of information.
With what Clarence Saunders did, the answer seems more obvious: By accepting services of high value from another individual, he made himself beholden to that individual, meaning that his judgment is potentially no longer influenced solely by the law that he knows, but also by his self-interest as a consumer of services. It makes him more likely to be open to pressure from [whatever that rich dude's name is].
It's not merely the rules of a private club, there are laws handed down by governments above those clubs. With Clarence Saunders it's a different story as it does appear to have been the Exchange itself that intervened without some state actor forcing it to.
I suspect we simply pretend it is because leveling the playing field democratizes capitalism (qua asset-ownership). If the Average Joe can't buy stock, can't buy a house on credit, and can't save money in a stable currency, how is he supposed to retire? Therefore, the SEC and Fannie Mae.
The optimal level of insider trading is non zero but note that lots of "insider trading" is legal in the US (and other markets). What is illegal is specifically trading with material non public information and what is enforced is egregious cases of that.
While we may believe in caveat emptor, most people also believe there are limits to what trades can be done in good faith and insider trading is similar to selling an exhausted mine or buying a field that has oil underneath.
"(Once you find a way to illegally dump your waste, you can scale the operation up, as toxic waste disposal is a thing that many companies will pay for.) It might not look like the archetypal "market crime," but Davies argues that it deserves to be categorized as such:" This doesn't do a great job of justifying why dumping toxic waste ought to be considered a market crime. It seems closest to a Long Firm, if anything. In other words, if you're a company specializing in waste disposal, you accept the liability of disposing waste at the same time that you accept the payment from the waste creator, and then you decline to deal with liability.
I would have said “counterfeit, but committed against the state/the environment”. You (legally) agree to take the waste, then the law requires you to deal with it, but you defraud the state/the environmental oversight body by pretending to deal with it. In a Long Firm, you escape your liabilities by disappearing, or by holding the liabilities in a company which goes bankrupt. In a waste disposal fraud, the scam company continues to exist, and keeps providing its counterfeit service.
I agree that “But it is a kind of fraud (and one which often involves other frauds in counterfeiting safety certification), and as a kind of fraud, it is essentially a market crime” isn’t a great argument. The other market crimes described all involved manipulating prices of a known product. Waste disposal fraud involves charging a fair price for what the client expects, but delivering a different product.
None of the other market frauds appear to have victims apart from investors. While that’s still bad, it’s not as bad as illegal dumping. It feels like bad argument on the book’s part to lump waste disposal fraud with other market fraud, and then present this as evidence that market fraud in general causes significant harm (“ If anything, the inclusion of this category of corporate violence under this heading ought to disabuse the reader of any sense that market crimes are ‘technical’ or ‘victimless’”).
I agree that I'd probably just call it long firm in the parlance used here, but I do think there's at least a colorable argument for the placement used in the book.
Toxic waste disposal that complies with regulation is very, very expensive. If some shady firm is able to undercut "real" disposal firms by just yeeting the waste into a river, their clients are likely to "hear no evil and see no evil" in exactly the same way that the bank didn't look too closely at how their employees were selling that PPI. Here it's a bit different because the malefactors are contractors rather than employees, but I think that's why the author put it where he did--the people with control just weren't going to investigate how they got those great results cheaply.
One of my all-time favorite footnotes came in a book which made a passing reference to the war of 1914 to 1918 as World War Two. The footnote read, "World War One took place in 1756-63."
I'm inclined to agree. The Seven Years War / French-Indian War(in the Americas) / War of the Pragmatic Sanction (/ a few other names depending on which part of it your country fought in) was more global than what is conventionally referred to as WW1, though significantly less so than WW2 - the part outside Europe was almost entirely English colonies against French colonies, but WW1's non-European part was also all just colonies
The Ottoman Empire was also only sort-of 'outside Europe'. 'Europe' is not clearly defined and you can find a lot of historians who will argue that the Ottomans were more European than Asian.
This. I count the Ottomans as European, even if many of their territories are not. Istanbul is clearly in Europe, geographically, and Anatolia as a whole is fuzzy.
China I thought was only involved insofar as Europeans had trading ports there? Brazil and Siam being involved is genuinely news to me, Siam makes sense on thinking about it but Brazil is a true surprise.
I recently ran across the TV version of "Going Postal". It was great to see Charles Dance as Vetinari; I think he was one of the best parts of "Game of Thrones".
If the Seven Years War was World War I, then I'd say that the Great War of 1914-1919 was World War IV, with the Wars of American Revolution (1775-1783) and the Great French War (1792-1815) as WW2 and WW3 respectively.
"For example, nowadays we tend to frown upon price fixing and collusion: we expect different vendors within a market to compete against each other."
This is something I've never understood about libertarian economics. Firms are supposed to compete with each other to lower prices; this is central to the functioning of a market economy. But if Firm A lowers its price, Firm B will lower its prices as well, meaning they'll both end up with the same market share and lower profit margins than when they started. And firms know that this is going to happen, because they've read economics textbooks.
So why would anyone do it? Wouldn't we expect price-fixing and collusion to be the norm in a truly free-market society? And once you've introduced ethics - "companies have an ethical obligation to keep bidding lower and lower on price until their margins have been sliced razor-thin" - why not just say that firms should keep prices low simply because it's good for consumers?
Even if the relative market share of each firm doesn't change, the *size* of the market can. If Firm A lowers its prices, it can sell more units even if Firm B also lowers prices to match, because there will be some people willing to buy at the new lower price that wouldn't have bought at the original price. Under some circumstances - such as Firm A sitting on a bunch of unsold inventory - it is in Firm A's interest to lower prices just to sell more units, even if it can't actually increase its market share that way.
This is true when the price is above the “monopoly price”, where the total profit to the sellers is maximised. Past a certain point, decreasing the price actually reduces your profits, because the lost profits from selling more cheaply outweigh the benefits of selling more units.
Prices for standard goods like bread, which is easy to start selling, often fall below this down to pretty much exactly the cost of producing it plus the smallest profit margin anyone will accept. Otherwise, new people would enter the market selling at the lower price, until there were no more people willing to pay the higher price (modulo differences in perceived quality).
This breaks down if it’s hard to enter the market.
As the review itself says, economists mostly *do not* say that "companies have an ethical obligation to keep bidding lower and lower on price until their margins have been sliced razor-thin". This isn't something that's said very often by almost any group, but the review classes it as an "emotional appeal".
On the widget competition point, you do need to account for other parties such as:
1) Firm C, which is in the whatchamacallit business and is eyeing entry into the widget business
2) Firm D, which could import widgets from its overseas partners
3) Customer Z, who is thinking of spending their money on Firm E's thingamujiggs rather than the increasingly pricey widgets of Firm A or Firm B.
4) Governments A (national) and B (state), which might remove rules that keep competition lower than it would be otherwise.
Where I come from, one of the current classic cases of high margins right now is the airline business, which is protected from 2) and 4) – Australia literally has a law preventing foreign airlines from flying domestic routes. The irony is that airline businesses are nevertheless famously chronically unprofitable over long time-spans.
Sorry, sloppy writing; thanks for picking up the error. Should be "protected *from* 2) and 4)". And 4) should read "which might remove rules". I'll change them now.
Interestingly, it feels like the death of Tiger + Virgin’s bankruptcy have had the combined effect of allowing higher prices and worse service. 50% of domestic flights seem to get cancelled rn.
Not all firms are equal. Suppose Alice at Firm A invents a machine that can stamp out widgets for less than a dollar of fuel and maintenance per widget, while Bob at Firm B is assembling widgets by hand for $1.50 worth of labor. If Alice sells widgets for $1.40 each, she captures the entire market - at least until Bob makes some equivalent investment in efficiency - and can put those extra forty cents toward amortizing costs of building that machine, or saving up for the next one.
I mean, at a first glance, the timeline of the change of heart seems to correlate pretty well with the rise of workers' unions. (As for the obvious objection that proscribing all collusion seems like an overkill - maybe there was no viable closer Schelling point.)
(And of course espousing "free market" ideas signals commitment to firms' well-being rather than actual freedom in any meaningful literal sense, and the case of unions have long been a good demonstration of this.)
How and why would worker's unions cause firms to lower prices? Isn't it the opposite? They increase costs for firms and encourage the firms to sell higher quality goods at higher prices?
Unions are workers colluding to raise the price of work (among others). This lowers the firms' profit margins, far more than what competition with other commodity producers could. I'm proposing (half in jest, but the more I think of it, the more "yeah, this checks out" it sounds) that capitalists had no way to counter this on the market alone, and "no collusion ever" was the only social norm they could reasonably push and coordinate around. Hence, cartels had to go.
Fixed prices are an unstable equilibrium. The stable equilibrium is cost of producing + the accepted rate of return on the capital at risk.
If 2 parties are fixing prices higher than that theoretically a third party should enter the market, undercut them both and then still get better than average returns.
If there are many business in the market anyone can defect on the price fixing agreement to get a short term boost.
Even if there is some barrier to market, like there are only two rail way lines between A and B, that doesn't make the market stable. A third party is unlikely to build a whole new rail way but customers might switch to trucks, or send less things between A and B if the prices are fixed high enough
If Firm A and Firm B have established prices above the minimum profit, a theoretical Firm C can open and jump into the gap they've left, at which point A and B are both forced down and also lose market share to C.
I think this depends on whether you think barriers to entry are a function of the government or the market.
If taxi company A and B collude to charge $5/min they profit maximize until Uber finds a way around the medallion system and charges $2/min. So in that case absent a regulatory barrier to entry the market is competitive.
Whether you think this is the exception or the rule probably correlates pretty strongly with how libertarian you are.
Other people have pointed out that 1. It encourages companies to lower their costs so they A can lower prices when B can't, and 2. There's always the possibility of C entering the market if profit margins are too high. But I want to point out that Smith also advocated competition because, as employment went higher, corporate profits would be reduced by the bidding up of wages as well. The the point wasn't just to get prices low; it was reduce corporate profits to a minimum, distributing them both to consumers as lower prices but also workers as higher wages.
Done. Longer&wittier is better for me/ACX readership. That said, the "more concise review" is very fine, "tilted towards an audience of accountants" (with less time) thus picking other examples of fraud vs. anti-fraud (e.g. double-entry bookkeeping), but getting the main message right, and telling more about the (high!) expertise of the author. The end is kinda unfortunately abrupt. Probably enforced by the editor-in-chief. Original text probably longer+better. Why substacks will be the medium of the future, not e-papers. - Both reviews made me like the book, both will not make me buy the book. But then: https://www.richardhanania.com/p/the-case-against-most-books
Mark, thanks for taking the time and for your generous and interesting comments.
"The end is kinda unfortunately abrupt. Probably enforced by the editor-in-chief." Don't get me started. This was originally written for print, where the end of the main story came at "We continue to trust each other in normal commercial dealings because, mostly, that’s the road to prosperity."
The last two subsections were originally break-out boxes, but were just slapped on the end of the electronic version. Amazingly common in web versions of print stories, and impossible to get changed ... Damn, you got me started.
Me dumb. You are the author, oops. It IS a very fine piece - perfect, if those boxes stayed out. And it must hurt to see it abused that way. Jeeez ... Hope you get your newsletter started soon :) Substack has no break-out boxes, but then: who ever liked those even in print?
I read about Alves do Reis on Wikipedia, and discovered an interesting twist: His counterfeit currency scheme actually required both high trust and low trust. Everyone believed that he was a legitimate agent of the national bank, and also everyone believed that the bank had sent him to *secretly* print extra money for shady but technically legal reasons.
That's not always that unusual. "Yes, I'm a crook, but someone else is going to be the one that gets robbed" is a common enough element of con artist pitches. At least some of Bernie Madoff's investors looked at his returns over time and concluded that he probably had been lying about *how* he was making money for clients, but they didn't withdraw their money because they assumed that he actually was making that money (through illegal methods) instead of lying about *whether* he was making money at all.
"Psst, buddy, the White House sent me to tell you to mint a $1,000,000,000,000 coin. Let me know when you're done, so I can take it to the Federal Reserve."
I believe this was a factor in the pyramid schemes that crashed the Albanian economy in 1997. Albanians were sophisticated enough to recognise a pyramid scheme when they saw one, but assumed the schemes were covering some underlying profitable crime like drug-smuggling and invested anyway.
> How did the Albanians get their sophistication in pyramid schemes?
It's a pretty simple scam, you don't need to be especially sophisticated to spot it. But I should have said that the alternative explanation is that the Albanians *weren't* sophisticated enough (perhaps due to decades of communism), and thought the pyramid schemes as stated were legit.
> Why did the country went into civil-war, when those schemes faltered?
Because the schemes *weren't* backed by drug money, but were instead just bog-standard pyramid schemes. And like all pyramid schemes, they eventually collapsed, taking a big chunk of the wealth of the nation with them.
It really happens with all kinds of products throughout the retail business world.
Car warranties at dealerships, extended warranties at big box stores.
Those are HUGE profit centers. There was a long time from like 95-2005 at least where the only part of Best Buy that made money was the extend warranties. It was an extended warranty company masquerading as retailer.
> It seems to follow that the more centrally-planned an economy is, the more vulnerable it becomes to fraud, corruption, and exploitation by bad actors. (The extent to which various 20th century experiments in centrally planned economies support this conclusion is left as an exercise to the reader.)
I'm not sure I buy this. Vulnerability to fraud, specifically, seems like it would scale with chaos.
I could see an argument that certain styles of centrally-planned economies have fewer checks against fraud. But when I think "centrally-planned economy" I think "Soviet Union", and I don't really think of the fraud, corruption, and exploitation there as being directly related to the central planning, per se. There were a lot of other things going on there, too.
Fraud scales with cognitive intractability. One way to explain this is the "Chain of Trust" model proposed by the book, intractability increases the number of people you have to trust in order to make a decision : in a hunter-gatherer society the Chain of Trust is a single-dinner-table's worth of individuals, in a modern one it can reach a small country's worth (hundreds of thousands). There are no scammers in a hunter gatherer tribe, they are all busy starving.
More generally, the wisdom of software is "There are 2 ways to build programs : To make them so simple there is obviously no errors, or to make them so complex that there are no obvious errors." Replace "software" with "society" or "economic systems" or "law" and you have basically the same thing, the scammer/fraudster is a black hat hacker and their speciality is finding non-obvious bugs, logical inconsistencies, holes, undefined behaviours, and vague corners in social and economic protocols. Both the software hacker and the social hacker are masterminds of "Story-Punning", crafting a scenario that looks one way but isn't, or looks one way but is actually the other, or looks n different ways depending on how you look at it. The guy feeding the computer "-1" as a buffer size is story-punning (-1 looks like a valid buffer size - it's a number - but actually isn't), and the guy feeding a senior age victim a story about tech support is also story-punning (they look like tech support - they call you and talk about computers - but they actually aren't.). Complex systems - or equivalently frailer minds - allow more story-punning, because there are more data points and moving parts to weave your story through.
Centrally planned economies are astonishingly complex systems. Chaotic economies (like those countries with weak institutions and lax protocols) are also astonishingly complex systems. Both are heaven for corruption and fraud, because the relevant dimension fraud varies on is not complexity or centrality-distributedness, it's intractability, how much of the system can't fit within a human brain. You can have tractable systems that are either central or distributed (or any other 2 extremes of any spectrum), and you can have intractable systems that are both.
What do you see as causing the corruption in the Soviet Union? I always thought the central planning meant decision-makers with misaligned incentives we’re setting the targets. The central government sets high targets to look good, then everyone lies and/or sets high targets for their sub-units to look good to their bosses and avoid imprisonment.
I'd mostly put it down to autocratic government, including selection effects on the type of people likely to hold power, and the related lack of free press. The latter sort of meshes with central planning, in the more general sense that prices are one type of signal about how well a system is working. But prices are a noisy one-dimensional signal, so they're more like a warning light saying **something** is wrong, but won't generally tell you what exactly is the problem without investigation.
When I think of "corruption", I don't so much think of the misalignment that you're talking about. That occurs in America, too, and not just in government but also in the private sector. I suppose, to me, "corruption" indicates more of a direct personal benefit than simply "looking good at your job".
Would a randomly-chosen US politician would have done better economically than the actual Soviet leaders, under the same pressure? Or if (implausibly good) hackers permanently shut down the free press in the US, would Soviet-style corruption be the result?
The corruption I’m imagining is where a factory with enough leather for 40,000 shoes produces 60,000 shoes with too-thin soles, to meet a target. Managers would have a big personal benefit from this: they were frequently thrown in awful prisons if they didn’t meet their targets. And as in the PPI example, I don’t want to blame the factory managers for this: it’s the fault of the people who set the targets. But the factory managers are still acting corruptly.
This particular failure mode is less likely to persist in a free market. There, consumers would choose not to buy the thin-soled shoes. Sooner or later the company would inevitably go out of business, even if no overseer thinks to check for shoe sole thickness (unless people wanted the thin-soled shoes).
My impression is that such corruption was more common in the USSR than the US, and contributed to the weakening of the USSR’s economy.
Maybe that is another, even better, case for "zero fraud may be not a good thing" - cuz in modern societies zero fraud most likely means: NO TRUST. Not a tiny bit of it. And that is bad for everything. The CCCP was nothing but a zero-trust endeavor. Lenin liked the phrase: Dowjerjaj, no prowjerjaj - trust, but verify. ie: no trust. Where cheating was possible, it was done. A million times a day in tiny ways . When control+CCCR ended: in huge ways. "Zapzarap" (sth. disappeared "magically") was one of the first 10 words I learned in Russian.
I'll start with noting that governments are made up of agents that are seeking their own ends, who are put in place by 'principals' (either a voting public, like in the US, or a complex political/military apparatus like in China or USSR). This is true of both market economies and planned economies.
The big difference in planned economies is that government is in charge of _everything_. They run the companies, the regulators, the policymaking, the allocation of economic factors to production, everything.
This has two very important implications. One, it means the accountability to the principals is very diffuse. If you're accountable for everything, you're accountable for nothing. You get away with vague campaigns and marketing that convince enough people to put you or keep you in power. This greatly increases fraud/corruption at all levels.
Two. There is no space for markets. This means that you remove a few extremely important drivers for improving efficiency - revealed preferences of consumers, competition and incentives.
Which basically means that there's excessive 'waste', or, fraud/corruption. The people who want to produce something will buy off bureaucrats to let them allow the production for them and no one else. Or you will create public sector firms owned by government that are essentially vehicles for siphoning tax money into the hands of the politically connected.
Of course, both of these mechanisms exist in market economies. But without having experienced it first hand, it can be difficult to imagine the extent to which it can make a difference.
You can guess though, from the performance of centrally planned economies relative to market economies
Here's a psychological question: My brain seldom is able to follow any criminal scheme more complicated than "Murder your spouse for the insurance money." My IQ drops a like a brick when somebody tries to explain to me how to pull off a scam. I would make the world's worst criminal mastermind. Is this not uncommon?
Lots of people could run or resist scams effectively, but also lots of people couldn’t. Every scam out there has lots of people who don’t understand it, or else nobody would try it. Is that what you’re asking?
Another crime (in the article) that is easy to understand: create a limited-liability company, take a lot of debt, pay yourself a generous salary, then let the company collapse.
Or simply: tell people to give you money first in return for some product or service later. Deliver the product or service to the first customers, to build trust. Then collect lots of money from many people... and disappear with them (move to a different country, change your name, start a new life).
Sell smartphones on e-bay: first sell 100 of them to yourself and give yourself hundred 5-star ratings. Then sell 10000 more to other people, but send them literal bricks wrapped in paper. Live in some shitty country where police doesn't care about crimes done abroad. Change your name and do the same thing over and over again.
Factual note: The exit scam at the start of the book was not the Silk Road, but a later dark net market called Evolution. Silk Road is notable for being a market run by a true believer which did not have an exit scam, and with no signs there would have been one had the founder not gone to jail. https://gwern.net/dnm-survival
The opening segment of the book is first about a vendor on Evolution who did an exit scam, in part by getting people to not use Evolution's escrow service. Then Evolution itself pulled an exit scam.
So far this year's reviews seem a step above last year's.
Bit of a tangent: In Planecrash, Keltham makes no sense - we're told dath ilan is a high trust society, but Keltham is so paranoid about the exact wording of contracts and deals it surprises even the people of golarion, who's whole society is worshipping the god of tricky deals. This implies, as you point out here, that dath ilan should actually be an incredibly low trust society.
(Which we also see in other ways, like the norm against crying in front of other people).
1) Trust level is not the ONLY variable that influences how many precautions you take. Sometimes a precaution would be cost-effective but you didn't take it because you didn't think of it. Someone who is smarter and/or better-trained than you might take that precaution even if they are more trusting than you.
Someone from modern USA is probably going to be better at writing contracts than an Iron Age farmer. This does not imply that the Iron Age had higher trust levels.
2) Several of Keltham's precautions (though not all of them) guard against accidents, not just malice. For example, specifying that a certain number is not allowed to be negative could prevent unfortunate consequences that NO ONE intended. Keltham is a computer programmer and it makes perfect sense to me that he'd have lots of practice asking "what happens if this instruction is executed faithfully but ignoring intent while in an unexpected context?"
3) Keltham is not blindly applying dath ilan's ordinary standards. He knows that he is Trading With Aliens, which apparently is an entire genre of fiction on dath ilan, so he has access to ideas from a wide range of thinkers who were thinking specifically about Trade With Aliens and not just ordinary dath ilani contracts.
4) I don't think it is ever implied that Keltham is being more careful than a smart Cheliaxian would actually be. People are only surprised that he takes this level of caution because he isn't *aware* that he is dealing with people who like tricky deals, which implies that he's being more cautious than typical people in other countries (who don't worship the god of tricky deals), not more cautious that typical people in Cheliax specifically.
> 4) I don't think it is ever implied that Keltham is being more careful than a smart Cheliaxian would actually be. People are only surprised that he takes this level of caution because he isn't aware that he is dealing with people who like tricky deals, which implies that he's being more cautious than typical people in other countries (who don't worship the god of tricky deals), not more cautious that typical people in Cheliax specifically.
Weren't there a couple of contracts he negotiated, where afterwards Chelaxian humans or devils said something like, "Let's make sure no one else finds out that deals like this are possible?" This might not technically be him being more cautious, but rather standing on the shoulders of extremely cautious giants, but either way I think it counts.
If devils don't want people to know it's *possible*, that seems like it's clearly a case of my point #1; i.e. Keltham is being more clever than Golarion natives, not more cautious than them. The reason other people aren't already doing it is because they haven't thought of it, not because they think it's too much bother. (Otherwise, devils needn't be concerned about people learning of it.)
Also, the only specific example of that I can recall turns out to be something that Asmodeans can't use against each other anyway (trivial spoilers):
When negotiating with Lrilatha, Keltham asks her to promise she doesn't expect the contract to do anything she doesn't expect that Keltham expects. Lrilatha privately asks Carissa not to tell anyone about that idea.
Later in the story, Carissa tries asking someone for that clause, and the other party just laughs and says "no".
My analysis is that the other party can defeat this precaution if they're willing to admit that they're being tricky, which makes it useless for Asmodeans negotiating with each other, because they already know they're trying to trick each other. It works for Keltham because keeping Keltham ignorant of the fact that devils are tricky is more important to Lrilatha than any trick Lrilatha could've written into that particular contract.
As I recall, Keltham describes dath ilani education as constantly playing tricks on children. The result is, more or less, from what I understand, that they learn to always keep track of how they know what they think they know. They assign probabilities to beliefs, they track chains of attribution, and they're constantly on the lookout for someone trying to pull something on them. Which "just so happens" to lead to them being more likely to spot things that other people overlook, and to question assumptions that don't make sense, and otherwise engage in science.
It doesn't seem out of character that a dath ilani, dumped into a strange world that he has to learn about from scratch, would revert to his standard method of learning.
If you are interested in this category of books, you would probably like “Extreme Economies,” written by Richard Davies (same last name, funnily enough!). It’s about how people make markets work in very extreme situations where they cannot rely on normal market conveniences, like prisons, refugee camps, and the least civilized rainforest in the world.
The review mentions criminals building up trust as part of their scams, but it is worth pointing out that this is the defining characteristic of a long firm fraud: In the author's example, the perp doesn't simply borrow a load of bread and immediately hoof it off to Outer Mongolia! They borrow a batch, and then promptly pay for it, and repeat this process several times, with progressively larger amounts. Only once the suppliers have been lulled into a false sense of security, do the criminals vanish.
I had never heard of the claimed etymology of the phrase "long firm", but assumed it was simply short for something like "long (established) firm", to reflect the time needed to build up familiarity and trust in its dealings.
Another class of fraud which may have been mentioned is what might be called "skimming", where insignificant amounts are taken from each of numerous sources. The well-known classic example is the IT developer in the 1960s (?) who added to a banking application some code which would transfer half cent residues from customer accounts to his account.
I bet the etymology of long firm is just from the ordinary words long and firm, maybe it’s part of an originally longer phrase as you say. The etymology described in the article seems fake.
The book says that market frauds "are not technical or victimless, the entire market is the victim", but I'm not sure about that.
There is a strange assumption here that "The Market" is a single monolithic thing. It's not. Allow me an extreme counter-example : Let's say there is a market for criminal pedophiles* to have "fun" with 12 year old kids, If I pull a fast one on those pedophiles and (say) claim I have a 12 years old lolita ready for fun then run away like hell with the money, I have greatly damaged trust in that market, and yet, who the fuck cares about pedophiles and their human-traficky markets ?
That was an extreme example to illustrate what I mean (not all markets are born equal), but there is plenty of stories of real world fraud that when I hear my immediate reaction is grabbing a popcorn and being amused by it. Who did Elizabeth Holmes harm with her fraud except a bunch of filthy rich VCs ? If she wasn't a piece of shit who threatened employees and played on the progressive thirst for "Oh ma gaad a woman CEO YAAAAS QUEEEN", I would have been quite frankly on Team Elizabeth. Similarly for the recent story about the 30-under-30 girl who pulled a fast one on Goldman Sachs.
What's remotely sympathetic about Big Corpos ? Who gives a shit about lying to them or disrupting their markets or looting their property or doing any amount of things that would have been, in my book, henious crimes against flesh-and-blood humans, but are actually - again in my book - completely okay and virtuous if done against corporations.
I also advocate what we can call micro-control-fraud, which is (in the book's terminology) control fraud done on the scale of the individual worker, which is in simpler terms means "Lying to your boss and mis-representing the amount of work you do and benefit you bring to the company", which is - to borrow 4chan's word - Based, insanely based. There is a caveat here, I don't advocate doing this if it will harm your coworkers, such as when they have to do or fix the work you claim you are doing well. Please don't harm humans, humans are ok (not really, but as ok as anybody can be). Just harm corporations.
I hate the tendency of people to moralize and ethicalize practices against corporations. Corporations, like Nation States, are not objects of morality, unlike living things with brains or living things in general. They can (indeed, for the vast majority of them, they **should**) be harmed, stolen, frauded, lied to, scammed, etc... Insofar as any corporation is worthy of moral respect, it's only the amount of moral respect you should grant to its founder/manager.
* : Criminal to distinguish them from those who were born in the very sucky situation of finding themselves turned on by kids, but never harm kids.
> Who did Elizabeth Holmes harm with her fraud except a bunch of filthy rich VCs?
She harmed the entire biotech sector. Legitimate startups with real technology now (AIUI) find it much harder to raise money because of her. And hence she harmed anyone who could have been helped by those real technologies coming to market faster.
I take back that example. I still think that the vast majority of the financial sector and "consultants" are bullshit, and harming that market doesn't impact anyone.
I will accept the first part (I don't know enough about the financial sector to say, but I too have a sense that a lot of it is bullshit), but not the second. Some of the biggest market participants are pension funds, so harming the market harms ordinary retirees.
Goldman Sacha might be more harmful than the competitors who would replace them; I don’t know much about them. But if someone scams them, they’ll put up interest rates on their home loans, and ordinary people will suffer as well.
...you're proving the thing you're saying you're refuting. The entire pedophile market is the victim, just like the quote said.
"Who cares about them" is not a tenable benchmark. Scammers never care about their victims. We had a commenter on this site a while back saying old people deserve to get scammed when they start to lose their faculties. "Who gives a fuck about some no-nothing soccer mom and her no-future kids?" It's pure mob rule.
That's not fair. There is a hard red line between any human or indeed any living thing, and a corporation. One (usually) feels pain and is worthy of moral consideration, the other is not capable of that.
"What's remotely sympathetic about Big Corpos ? Who gives a shit about lying to them or disrupting their markets or looting their property or doing any amount of things that would have been, in my book, henious crimes against flesh-and-blood humans, but are actually - again in my book - completely okay and virtuous if done against corporations."
Who do you think make up Big Corpos, if not flesh and blood humans? When a corporation is looted and goes out of business, who will suffer more: the one CEO, or the thousands of ordinary employees? When the economy ceases functioning and nobody can get food at a reasonable price because the corporation that makes the food was defrauded and the one that transports the food was robbed, do you think it's the CEO of the big agro company who will go hungry, or the single mother working a low paying service job?
Wow. Have you considered that humans are currently living in the best of all times, and that corporations have a very big part to play in that, and what you're advocating is likely to lead to worse times for ordinary humans?
(1) I'm not convinced our days are the best of all times,
(2) I do believe it's a vastly better time than lots of other times,
(3) I think (2) is mostly because of science, tech, and some social innovations. Corporations are not among the social innovations that I think was necessary to achieve a good time. I believe they are harmful social innovations that dramatically lowered the quality of the good times.
In the 19th century, people were living better and more affluent lives than ever, yet horrible factory working conditions and slavery were a features of those times, when you remove horrible factory conditions and slavery, things get better, not worse. Just because something is a feature of good times, doesn't mean it's good.
Corporations are evil paper clip factories, where lots of smart people work with 10x the amount of dumb people in order to make an entity that is an idiot-savant, a specialized paper clip maximizer and nothing else. I hate them with passion.
> Who did Elizabeth Holmes harm with her fraud except a bunch of filthy rich VCs ?
Didn't at least one of her employees commit suicide because he couldn't deal with the guily of having become, in his view, gradually complicit? (I think this was long before the scandal came to light.)
I mean, markets and corporations are tools. So in your first example, that's a hammer that's being repeatedly used to harm children. If you break that hammer, no one will be sad.
However, say, Theranos - this was quite bad. That particular market was more like a natural-ish thing of infrastructure, say, a river, watering crops for a range of farmers (water = money from VCs, farmers = people with ideas, crops = products, and I will admit in this metaphor there were plenty of people trying to grow stupid, impossible or harmful crops like deadly nightshade or unicorn horns, but there were also plenty of people growing good stuff like wheat).
Elizabeth Holmes basically planted a bunch of blackberries right on the waterway, sucking up large amounts of funds. At the end of her scam, her blackberries matured, forming a nasty thicket that has choked the waterway. Everyone downstream of that (including people who would have grown actually useful crops) had their funding dry up suddenly, and because of that we've lost a lot of crops that could have been really helpful for many people.
It kind of depends, case-by-case. You don't sabotage the nuclear reactor because you're upset about what they're doing with the waste because then everyone would have no electricity and potentially be dealing with even more uncontrolled radiation release. Sure, the direct victim is the nuclear plant, but everyone will be feeling the consequences!
(When doing market fraud it's probably best to start small. Media piracy? You're going around picking locks. I think IP law is stupid so I don't get particularly mad about people picking locks)
As I said above, I take back the E. H. example, even ignoring the money she sucked (which I don't believe would have gone to better pursuits on average, it would have gone to shitty uber and tinder clones that startups tend to be these days), the biotech sector she hurt was legitimately a beneficial thing.
About the "You can't harm corporations because that will harm other people" argument, it's correct, but what should I do ? Almost every evil organization or giant social structure that humans invent harms more innocent people when it loses. Who did the fall of the Soviet Union harm ? Who was hurt the most from any war no matter who won ? What is the ratio of Nazis-to-innocents that were killed, raped, and forced to live in absolute misery for decades when Nazi Germany lost WW2 ?
>IP law is stupid
Stupid is the understatement of the century, it's a unique mix of stupid, evil, and pathetic, contemptuous garbage. I think every man and woman with even the slightest amount of dignity should violate IP laws just to spite the pieces of shit who made it. I sometimes pirate things that I don't even watch, just to spite the corporations that made them. Alexandra Elbakyan for the win.
I think that's why a lot of more moderate people advocate for "dismantling" rather than straight revolution. One way is by offering alternatives - if a railway shuts down, it's a lot less disruptive if there's also a bus route. You might build tools that achieve the same things existing tools do, with less damage. Or have telegraphed rule changes for the tools so everyone can figure out another way of doing things ahead of time.
The thing with fraud is that it's not telegraphed and usually not purposeful, so it breaks these tools suddenly and leaves people with massive issues. Kinda like the difference between offering everyone credits for installing solar panels vs taking a hammer to the coal generator - end result might be the same, but the impact to the average person is very different!
A government is just a security company. Residents are customers; taxes are revenue; soldiers/bureaucrats are employees; rulers are owners. Nationalism would have you believe that governments are divine expressions of popular sovereignty, but this is woo.
If you're enfranchised with political power, perhaps you can change the system. The second option you have is to vote with your feet. Unfortunately, there's no polity on this earth I consider especially attractive, so I too feel at an impasse. Fascinating modern age we live in. A third option is revolution, which is really just a euphemism for war. This is a last resort, as the cure can be worse than the disease.
>Who did Elizabeth Holmes harm with her fraud except a bunch of filthy rich VCs ?
The people and businesses who would otherwise have received all the capital investment she sucked up. And all the people who would have benefited from the products those businesses would have created.
>What's remotely sympathetic about Big Corpos ? Who gives a shit about lying to them or disrupting their markets or looting their property or doing any amount of things that would have been, in my book, henious crimes against flesh-and-blood humans, but are actually - again in my book - completely okay and virtuous if done against corporations.
Oh, I see, you must be a time traveler coming to us from after the AI singularity. In this time period, corporations are still composed entirely of flesh-and-blood humans. It's you who think corporations are magic here, where as soon as people join together in a corporate governance structure you can parisitize them to your hearts content while inflating your ego with faux-moralistic inanities.
A company is just a group of people. Sometimes a company is a business that sells widgets to make a profit, sometimes a company is just two guys hiking in the woods. A corporation is a specific type of company, which is given certain rights and responsibilities by the state. But in some sense, it's still just a group of people.
When a corporation experiences financial loss, there's a hierarchy in who takes the brunt of the harm. First the shareholders, then the creditors. If one person steals from say, Walmart, the first people to feel pain are the Walton family and other shareholders. Some shareholders are billionaires, some shareholders are podunk retirees. If more people loot Walmart until earnings go negative, then the corporation can't make good on its debt obligations (usually to banks). If this situation persists, the company may go bankrupt and liquidate its assets, in which case employees lose their livelihood. Such an event also has second-order effects on Walmart's customers and vendors. Often, the harm is combated through things like red-tape and loss-prevention, which has its own costs.
> [Adam Smith] wrote this in 1776, but had the US Constitution and Bill of Rights existed at the time, he might have argued that a meeting between two competitors to decide how to price their wares would be protected by the First Amendment.
Probably not, since he was Scottish, but I can definitely see an American Adam Smith making that argument. Actually, how do US anti-collusion laws get around the First Amendment?
I think he explains how regulations trump the First Amendment. You can assemble and say whatever you want, but if you choose to do this business, you accept these limitations.
I understand that the First Amendment protects expression of ideas but not speech in the commission or planning of a crime.
You can say "we should make those rich bastards give their money to us poor slobs" as an expression of injustice and a desire for political change, but if you follow it up and a bunch of you go and find some well dressed people and you say "give us your money or we'll beat you up" you can't say you were expressing your free speech rights.
"A ‘corporate drone’ would be someone whose only purpose was to fertilize the corporate queen and I can’t think of a single company that’s managed that way."
No, that's a bribery scheme. Putting someone politically connected on the board whose job is to collect money and provide 'protection' is used fairly often. There are countries where that's about the only way to do business if the company is above a certain size.
I'm reminded of the Hunt brothers' corner on the silver market. It caused great distress until the commodities exchange changed the rules to destroy them:
> On January 7, 1980, in response to the Hunts' accumulation, the exchange rules regarding leverage were changed; COMEX adopted "Silver Rule 7", which placed heavy restrictions on the purchase of commodities on margin. The Hunt brothers had borrowed heavily to finance their purchases, and, as the price began to fall again, dropping over 50% in just four days, they were unable to meet their obligations, causing panic in the markets.
There are analogs where the trade-off is between cost/effort and accuracy rather than between cost/effort and probability of being defrauded. E.g. once can get directly NIST-certified weight sets for >$1000, or less directly (and less accurately) calibrated weight sets for $20.
Some time ago I worked as a software engineer for a tech company that operated a website where customers could find and review businesses. The tech company built a search engine using the review data, and made their money by allowing businesses to advertise on the search and review pages.
This tech company had a pretty poor reputation among business owners. Many business owners accused them of essentially running an extortion scheme. The business owners claimed that the sales reps from the company would call them frequently and use aggressive sales tactics. Business owners claimed that the sales reps would threaten them with removing good reviews, or of promoting bad reviews on their page. The tech company was particularly unpopular in social media, where they would get flooded with stories about family, friends and favorite businesses being extorted by the sales reps.
Inside the company much of this was dismissed. The “extortion” thing was discouraged by the company on the strongest terms, and periodically we’d hear stories of some sales rep or another that was caught saying something inappropriate to a customer, and was promptly fired. Still, as time progressed I had a very uncomfortable feeling in my gut. After a particularly uncomfortable dentist appointment and haircut, I stopped telling business owners where I worked.
From what I gathered, working as a sales rep for this company really sucked. Compared to other sales gigs in SF, they had really poor pay. At the time, the sales reps had to commute to downtown San Francisco, requiring them to live in very expensive housing, usually with many roommates. The company also didn’t have commuter benefits in their compensation for sales staff as they did for engineering.
The sales team also operated based on leads & quotas. As a sales rep, you’d get a stack of businesses, and you had to cold-call them and sell ads to them. Your compensation, and your continued employment, depended on how many sales you made. From what I heard it was a very high-churn environment, and people who didn’t perform would routinely get cut.
Naturally, working in pretty crappy high-pressure conditions for not very much pay lead to a lot of the issues that business owners complained about.
When you buy an ad, it places your business above the organic search results (labeled as an ad). So the sales rep can say “if you buy an ad you will appear in the top of search results” and be technically saying the truth. Of course, many business owners will take that statement to mean “ranked in the top of the organic search results”, and that’s a misconception that the sales rep is incentivized not to correct.
Very similar situations can arise with “if you buy ads you will get more positive reviews”, since buying an ad may cause more people who use the site to visit your business, and they might then write reviews, some of which may be positive. Or “if you buy ads it will get rid of your bad reviews”, since more positive reviews may push negative reviews down from the front page of your business.
Some sales reps went even further, colluding with friends to actually write positive reviews in exchange for ad sales, etc… And, of course, when the company found out about such tactics, they quickly fired the involved sales reps.
So it certainly sounds very similar to the Distributed Control Fraud. The tech company creates very adverse working conditions for their sales staff. Those adverse conditions incentivize the sales reps to commit distributed fraud to drive more ad sales. The tech company reaps the rewards, and when something egregious happens, they fire the involved sales reps.
For what it’s worth, I don’t think this arrangement for the tech company was premeditated. I think it was just where they ended up by trying to optimize costs, one small step at a time.
Bonus: Another interesting aspect of this is that often business owners would get upset because positive reviews of their business would be removed by the site. What would often happen is that when a new business would open, owners would invite friends, family and such to the opening, and encourage them to write positive reviews.
From the point of view of the tech company, there would all of a sudden be a bunch of people who would create new accounts, write one positive review for one business, and then never review anything else. Eventually, such reviews would be marked as fraudulent and removed.
I always thought that this was interesting, because from the point of view of the business owner it really seems like they didn’t do anything wrong. They think of fake reviews as something that’s done by spam bots, or in some sort of organized way for money, and they don’t categorize “my brother wrote a positive review for my pizza shop” as the same sort of manipulation. So to them a relative’s positive review being removed feels like proof that the tech company is trying to mess with their business. It also doesn’t help that typically, a few weeks after the business opens and starts getting reviewed, they are contacted by a sales rep.
The distributed control fraud was a concept I didn't have a name for when I was writing my own book review for this contest (didn't make the cut).
The case I was discussing was PG&E and maintenance - to summarise, the system they were using to assess risk didn't make any sense, but no one was motivated to correct it, so lack of maintenance on a pipeline segment led to a catastrophic failure destroying several houses in a residential area and killing people. The executives didn't come up with the system, and the engineers don't control the maintenance budget, so no blame could be laid either way.
I'm convinced that this happens in every single industry and is one of the top threats to the average person, because this sort of thing tends to be systemic, affecting huge numbers of people.
For those who enjoy reading about large fraud cases, this review reminded me of a recent case where an online charter defrauded the state of CA for ~50million:
> Here’s how witnesses say it worked: Rigney reached out to dozens of high school football programs and other youth athletic organizations. In presentations to coaches, he would offer to donate a certain sum of money to the athletic program for each student who filled out the paperwork to sign up for the summer program. The donations started at $25 per student, according to the indictment.
> Nothing would be required of the students, other than participation in the previously scheduled athletic program. For each student Rigney signed up, he also got $25, according to the indictment.
Essentially, they exploited the fact that the state didn't have very rigorous ways of verifying student enrollment in summer programs. Getting a student's info + parent signature was sufficient to get paid, even if the student then received no actual instruction.
"If Lying For Money's most important idea can be described in a single line, it's that fraud is an equilibrium phenomenon – or, as Davies likes to put it, 'It is highly unlikely that the optimal level of fraud is zero.' "
"It seems to follow that the more centrally-planned an economy is, the more vulnerable it becomes to fraud, corruption, and exploitation by bad actors. (The extent to which various 20th century experiments in centrally planned economies support this conclusion is left as an exercise to the reader.)"
The thing about the "20th century experiments in centrally planned economies" is that way there was a common blueprint to their dismantling - the control fraudsters at the top becoming envious of their western counterparts and attempting liberalization to join them.
There were generally three ways it could go:
1. Central Europe decided to join their western peers outright - which required immediately adapting the western norms. This meant the fraud was a one-off - once they divided the spoils, they were forced to operate within - more market-oriented, but otherwise strict - EU regulations. Their countries suffered economic recessions, but got over them in a decade or two, are are mostly fine nowadays.
2. China never let go of central control. They reaped the benefits of liberalization without damaging the overall economy. The corruption and fraud went widespread and started damaging the social matter of the country, but the central authority was there to go after them eventually, up to executing a few (thousands?) of them (I disagree with the method's severity on ethical grounds, but I certainly agree, as Davies assumedly would, with the notion that whatever highest level of severity you choose, fraud and corruption are up there with violent crimes as the most deserving of it). It seems to have worked and they, too, seem mostly fine.
3. The core USSR just liberalized without guardrails. Fraudsters hoarded everything they could and continued to exploit it, with nothing to stop them. It was a total social and economic collapse, continuing to the present day.
So, on one hand, a single centralized institution is naturally vulnerable to a hostile takeover by bad actors (or rather, all institutions are vulnerable, but a centralized one provides a single point of failure for the whole of society, so the consequences of a takeover are catastrophic) - the existence of alternative competing institutions is one simple way to prevent that.
But on the other hand - a single centralized institution appears to prevent fraud and corruption, and I think it's pretty easy to understand why: centralization prevents bad actors from extracting resources away from the system. In a centralized economy, there's nothing outside of the system (or at least nothing legitimate and non-low-status) - there's only so much corruption and fraud you can commit to the system if reaping benefits requires you to continue to operate within it.
Complete aside: I'm a casual reader here, but I just followed links back to your post "The Toxoplasma of Rage" and wanted to send you a fan post for that.
The pretense that wind or solar can reliably power heavy industry or even residential areas is probably a Big Store con, but there are elements of counterfeit science. And 'a control fraud makes you question your trust in the institutions of society' fits. So does 'a market crime makes you question society itself'.
> Adam Smith was breaking with centuries of tradition when, in The Wealth of Nations, he frowned practice of price fixing by describing it as a "conspiracy against the public."
I wonder if Smith was writing at the time that the conceptualization of markets was changing from a place where the sellers would have stable employment to a place where the buyers would get the best deal. As people moved away from minimal subsistence, the culture would shift from maximizing stability to allowing changes that delivered more to consumers.
Really great review! Enjoyed the discussions of different kinds of fraud (read: different things in our society that can be exploited by bad actors).
I just wish the reviewer discussed a bit more about how to limit how bad the fallout can be. My one gripe is that it's handwaved as "all healthy societies have a bit of fraud, if there's no fraud that means you live in a low trust society where everyone is suspicious of one another all the time".
And then what???
I understand that a high trust society increases the likelihood of fraud. So does it follow that a high trust society also needs to plan to deal with the consequences of fraud? I'm not talking the punitive measures - for subprime mortgages and PPI alike it's clear that it's both hard and pointless. But we're saying that a high trust society cultivates a ready crop of victims for fraudsters in exchange for making things easier for everyone doing legitimate business - it would only be fair if society had some safety nets for those victims.
"In discussing different equilibrium points for trust, Davies brings up what he calls the "Canadian Paradox," which is an observation that a low-trust society will have less commercial fraud than a high-trust society (an example of one such high-trust society being Canada, which in 1985 was home of the Vancouver Stock Exchange, dubbed by Forbes Magazine's Joe Queenan as the "Scam Capital of the World.")"
How does that work dynamically? Does fraud grow unrestrained in high trust societies? Wouldn't that turn them into low trust societies?
Thanks for this book review! I am particularly intrigued by the idea that *complexity enables fraud*, as explained with reference to trust chains and centralized economies.
It's interesting to note that despite the world becoming more complex, the prevalence of fraud doesn't seem to have increased significantly compared to the "good old times." For instance, while the Internet has indeed been the scene of several instances of fraud, the majority of its users continue to have positive experiences. As issues like email spam emerged, technical solutions such as spam filters were developed to maintain a balance. In my experience, most people still rely on the Internet, trust sources like Wikipedia, and conduct online transactions without hesitation.
*Isn't it intriguing how the level of fraud appears to remain relatively stable, maintaining an equilibrium of sorts, even as complexity continues to grow?*
Bonus thought: I wonder about the implications for a world where AI is increasingly pervasive, enabling people to do increasingly complex things without fully understanding the details.
Theranos is an interesting example, because you wouldn't have to do the regular financial due diligence - you would merely have to check with skeptically-minded medical experts. Even at the time, people said "this is impossible", and the thing about impossible stuff is that it doesn't happen.
"But when the SEC responded by changing the rules and extending the settlement period by one week, the plan started to unravel: giving the short sellers an extra week to procure shares made a huge difference, because remember, this happened in 1922"
The SEC did not exist in 1922. What actually happened? Is this error in the book, or was it introduced by the reviewer?
> The illegal dumping of toxic waste [...] is a kind of fraud (and one which often involves other frauds in counterfeiting safety certification), and as a kind of fraud, it is essentially a market crime.
I disagree. The problem with illegal dumping of toxic waste is the toxic waste. Additionally, there may be a market distortion if the motive is profit, but that is a very minor concern in comparison. As an intuition pump, consider a company which engages in illegal dumping without any financial gain, perhaps because their CEO hates the EPA or whatever. Would that company be any less criminal for it? On the other hand, consider a company which violates regulations without material harm: perhaps they sell pure sugar pills as homeopathy without going through the prescribed steps of first diluting some substance beyond detectability. Their market advantage is exactly the same as the one of the illegal dumping company. Are they equally bad?
If that is a market crime, then every crime committed for financial gain is a market crime. Stealing to finance a drug habit? Obviously a market crime against the other users of that drug, as you raise its prices with an unfair advantage. Murdering your relative so you can inherit? A market crime against the job market in which you would have to work otherwise. I will stop here before I run into Godwin's Law.
Capitalism itself seems to be based on this kind of phenomenon.
Imagine that wage is banned. All corporations become coops. Then, it will be quite easy for the elected managers to do all kinds of (what this author calls) frauds to the coop members. So, the system will eventually devolve into usual capitalism: in many cases, the oversight costs for the coop members will become too much, and they will just let managers slowly become capitalists.
In this sense, a hypothetical transition from capitalism to socialism as predicted by Marx seems to be dependent on decreasing oversight capacity costs to the point where coops become more efficient than waged-employees-based corporations.
> A long firm clearly falls under ‘Thou shalt not steal’, and a counterfeit under ‘Thou shalt not bear false witness’
How did this make it into the review? Forging a document cannot be said by even the most dimwitted philosopher to fall under the category of falsely accusing people of crimes. Bearing false witness is when you show up and testify "I saw it happen, and X is what happened" when in fact X didn't happen.
Forgery is essentially the opposite of that, when you present your own testimony as having been given by someone more trustworthy than yourself.
It's also strange, to me, that this taxonomy uses the word "counterfeiting", almost always applied to creating illegitimate money, for the crime already known as "forgery". It is true that forgery involves counterfeiting a document in much the same way that counterfeiting involves counterfeiting a piece of currency. But why go out of your way to be confusing? This kind of thing mostly just suggests that you want to write about a phenomenon without ever having been exposed to any prior discussion of the subject.
"eBay is famous for siding with buyers in the event of a dispute, so whenever I sent an item, there was always a possibility that the seller would falsely dispute the charge by claiming the item never arrived. "
There's a typo, should say "buyer would falsely dispute"
I know a bit of Ponzi’s biography, and describing him as he is here is pretty deceptive. He was a career “con man” of sorts, not some hapless publisher who stumbled into fraud.
A few other weird errors and I am not sure I find the categorization into 4 buckets very helpful. Seems like most large frauds hit several of them at one point or another.
I would also repeat some of the previous comments especially regarding the optimal level of fraud is zero. It’s just that this goal is not worth achieving. Maybe a better way to say it is the best structure for society we currently can envisions involve some level of fraud.
A different kind of Laffer Curve:
“ ...fraud is an equilibrium phenomenon – or, as Davies likes to put it, "It is highly unlikely that the optimal level of fraud is zero."..”.
As I've posted elsewhere: the optimum amount of fraud is, in fact, zero, but the optimum amount of defense against fraud is less than the amount it would take to actually reduce fraud to zero.
I don't think you're actually disagreeing, you're just phrasing it differently.
I think this actually is a problem with the original phrasing, though: it's literally wrong inasmuch as is takes some level of stochastic fraudulent conduct as a given, but particularly since most people are honest dealers in a high-trust society, it's not clear that this is a precondition one necessarily has to grant. It's descriptively accurate, but seemingly in a kind of contingent way - the reason you can have high trust society at all is basically because most people rely on a cooperative heuristics in their day to day lives rather than actively trying to maximize individual returns like the sociopathic paragons implied by the idea of homo economicus (this is, I think, an important thing that virtue ethics gets basically right about how humans operationalize ethical precepts and a reason that it's worth taking seriously even though it can sometimes seem easy to dismiss).
If the propensity to commit fraud is more a matter of individual deviance (most people in finance aren't Madoff, most people who know the well-off aren't going to be Anna Sorokin), than of spontaneously-arising and uniformly-distributed stochastic tendency, coupled with some set of designing mutable incentive structures for average Joes to avoid pathological incentive failure states (i.e., basically don't put otherwise-basically-normal people in situations where their livelihood depends on pitching PPI instruments) you can conceivably get the rate of fraud pretty damn close to zero by just incapacitating the fraudsters.
TL;DR: at one point in time you could probably argue that, given the costs of quarantine, "the optimal rate of smallpox is not zero." But, like, actually the optimal rate of smallpox pretty clearly is zero--the statement that it isn't is actually smuggling in a lot of empirical assumptions that aren't necessarily static.
what is the optimal amount of fraud prevention under this framework?
Depends on the costs and accuracy of identifying individuals with high propensity to commit fraud (presently, probably pretty high / impractical, although you could try things like screening for oppositional defiant disorder as a precursor to antisocial personality disorder if this ends up having predictive power for propensity to commot fraud) and the QALYs lost by imprisoning / euthanizing / aborting / otherwise incapaciting them (eg in some hypothetical future having a Culture drone just follow them everywhere and restrain their behavior) versus the size of the peace dividend implied by doing so. Under present conditions the book’s thesis is probably right — my point is just that the claim states as a categorical universal what’s actually a claim that’s highly contingent on the state of a given Pareto frontier. Just like the optimal amount of smallpox might be non-zero if you don’t have vaccines, but the correct response to that situation is to develop vaccines rather than adopt thr maxim that “the optimal amount of smallpox is nonzero.”
but fraud is more general than smallpox. i am willing to accept the optimal amount of contagious disease is non zero
> basically don't put otherwise-basically-normal people in situations where their livelihood depends on pitching PPI instruments
Unfortunately the material world puts a lot of us in that situation all the damn time.
I completely agree with a lot of your analysis. I think the use of the word “optimal “ is throwing up a lot of dust. The equilibrium between cost of prevention and cost of acceptance is genuine (look at all those baby penguins hurling themselves into the acean) but optimal as a descriptive brings Baggage…maybe
Could be that I don’t properly understand the word as used here. To me it implies “ideal”
I agree that the issue is the sense that "optimal" means "ideal".
It seems like having less fraud couldn't possibly make things worse.
It comes down to whether you see economic efficiency as the highest good.
the issue isn't the semantics, but the pointer-chasing. The Prisoner's Dilemma appears paradoxical because what's optimal for the *individual* is not optimal for the *equilibrium*.
Ok, I get it. I believe my understanding of this issue is now optimal…
😆
I think they are. Perhaps we should talk about a level of fraud that is tolerable, not “optimal.”
He's saying it's the economically efficient amount of fraud.
If you believe that efficiency is the highest good, then it's the ideal amount of fraud.
Likewise, there is an optimal level of sexual assault, murder etc. Anything that has a cost to prevent.
(Which is in fact what we do and what you see.)
Fair enough. Like sea level is the optimal relationship between air and water
Efficient crimes exist.
why is the optimum amount of fraud zero, yet the optimum amount of fraud prevention non zero?
I think this falls out of the assumption that the peace dividend is much higher than enforcement costs in a world in which fraud is very uncommon. Keep yourself off the slippery slope for cheap by coming down like a ton of bricks on uncommon deviations
Part of the idea is that the rarer something is, the more value there is *and* the cheaper it can be to endorce by driving it down to “zero” from “uncommon” (think about how much more value there is preventing the first Covid-19 case than the 100th).
See, e.g., the discussion of the first-offender model in the Caplan excerpt here:
https://slatestarcodex.com/2019/04/02/social-censorship-the-first-offender-model/
this kind of makes sense, thanks!
In what sense is the optimum amount of fraud zero if the optimum amount of defense against fraud is less than it would take to actually achieve zero fraud?
At any given level of fraud, the answer to "Ceteris paribus, would it be better if there was less fraud?" is "yes."
But "ceteris paribus" doesn't hold, since current conditions control the amount of fraud seen. It's like saying "Ceteris paribus, would it be better if my dice rolled seven every time?" and the answer is "yes" in the same way, but also it's not a physical answer, but a wishful one.
Eh. At this point we're just arguing over definitions.
I disagree. For fraud to be zero we need people who will always follow the authorities, with no risk taking drive. That would be very sad society.
For example, the doctor who was prescribing amphetamines online for ADHD is now charged with fraud. While he clearly acted in grey area, I don't think he believe that he was committing fraud. He probably thought that the authorities will accept his interpretation.
To have zero fraud, we also need zero people operating in grey area.
The example would be doctors who prescribe Ozempic for weight loss even thought it is not licenced yet for this condition. Would it be fraud to do withing Medicare or other insurance system? Who knows, I think it is good to prescribe it for weight loss and so far no doctor has been charged for fraud but such possibility certainly exist. The only way to avoid it, would be never prescribe medicines outside their licenced indications. That would be world where all decisions are made top-down.
Not all circumvention of legislation is fraud. Fraud is defined as intentional deception to secure unfair or unlawful gain, or to deprive a victim of a legal right. If the person does not believe they are committing fraud, or believes that they're skirting the law to get the best result for their patient, and isn't self-deceptive about the reason, then they are not a fraudster. They could be prosecuted under fraud because the legal system is agnostic about their intentions and "I believed I was doing the right thing" can be used as a defense by both fraudsters and legitimate gray area risk-takers, but that goes back to the question of how much effort should be taken to prevent fraud, not what the optimum amount of fraud is. It's still zero.
Is the common definition of fraud inherently more precise than the legal one? People try to narrowly define such human expressions such as intention but ultimately human psychology is more complex and resists neat definitions.
Was that doctor who was prosecuted acting solely with the desire to help people and not trying to earn more money? Who knows but people are complex.
Scott's story about whales included in the taxonomy of fish was really nice and then it turns out it was all wrong because there is no fish in the taxonomy at all. And yet, we all know what fish is and use the word every day.
This was a frustration of mine with the review. As presented, Davies' language is sloppy, and the review neither addresses this nor does anything to clean up the sloppy language for the readers of the review. Otherwise, I thought the review did a good job of balancing interesting examples with top-level summary.
Much like the optimum number of mouse droppings in your flour.
I wonder if normal people understand the degree to which "'product demo' which is just a kludged-together sequence of smoke and mirrors" is completely normalized, perhaps even lionized, in tech. One of the war stories the old-timers at my work love to tell is how 10 years ago as a scrappy startup they landed our first big logo and contract with a pitch deck and product demo for Big Established Corporation that promised all sorts of things we hadn't built yet. Of course then we went and built it. Funny thing, the old-timers at my previous job at a different startup had almost the exact same story to tell. All exciting products in tech seem to start with an over-optimistic product demo.
Part of the difference between this and Theranos could be degree of uncertainty around whether the product would actually work. Writing a bunch of code isn't the same as developing a new technology.
It’s true, but also worth being clear that while it’s a spectrum, there is a big difference between A) giving a demo that you know to be doable and saying to your customer “this is what we can sell you”, and B) actively lying about the maturity and capability of your tech to customers, investors, and regulators.
It’s possible to be wrong in case A and fail to deliver, but usually the way this pans out is you say “this is in beta” and they say “ok let’s pay based on delivery milestones” and then stop paying when you miss milestones. In other words the outright fraud over years case is quite uncommon.
It's less about whether what you are saying is doable but more about whether what you are saying is accurate. Frank is a fraud event though there was nothing impossible about their claims, the problem is that in regards to specific questions they deliberately fabricated data. In particular you will get in trouble to lying to Banks, investors, and the SEC or lying about health care claims. Note Elizabeth Holmes was not found guilty of lying to the customers only of lying to investors.
I worked once for a online-language-teaching firm that claimed to have a working "correction" function for written tasks. Of course they did not. MS would have bought them if they were near. They cheated by having ONE sentence in their presentation that seemingly was corrected fine. NO other sentence would! - The people selling it were not happy about the con, but just fine Jim&Jane teachers. The professor who thought of that scam and sold it to the DAAD was and is a respected German professor at top-university LMU. Die Welt will betrogen sein. "They want to be BSed, they get BSed"
I have heard that when big rich companies need a custom software developed, they often order it from multiple suppliers, compare the products and choose the best one, but pay for the development of all (and then pay extra to the winner). Because time is more important for them than money, so they would rather pay five developer teams so that at least one of them is guaranteed to develop the product on time, than pay one team and risk that the product is not made on time or is full of bugs.
Of course, there are software development companies specialized for scamming these big rich companies. They enter the competition with the intention to lose (and get paid anyway) and produce the cheapest shitty version that seems like they were at least trying. Like, the application has all the required dialogs, but nothing is optimized, and all calculations return wrong results; some guy in India probably made it in an afternoon. The supplier bills hundreds of man-days; the tester from the big company clicks a few buttons and writes a report for their superior that the application is full of bugs; the supplier gets paid but rejected... which is exactly what they aimed for. (They never have to fix the application, because it is not used.)
Considering that only one application is selected and everyone else is rejected, participating and being rejected is not consider a red flag in this business. So the supplier can continue doing this to other companies for years.
"A ‘corporate drone’ would be someone whose only purpose was to fertilize the corporate queen and I can’t think of a single company that’s managed that way."
I have several Ask A Manager links for you.
The British Royal Family might count in a very literal way.
One thing I'll take away from this review is a better understanding of the Drones Club of which many P G Wodehouse characters are members. I'd never quite understood the name because I'd never understood apiology well enough to understand the difference between a drone and a worker. (For which I can probably blame the people who misuse terms like "corporate drone").
It's not quite the same thing, but I've heard two people independently talk about corruption at a company in my geographical area, where the top executives are apparently having sex with each other and sustainably looting the company. And yet it apparently isn't the worst-managed company in the field.
> Having bitcoin trapped in escrow can be a problem when the price of bitcoin is volatile, and to make up for this volatility, sellers who used escrow frequently had to charge higher prices.
This was probably just an excuse, as Silk Road 1 offered hedging to eliminate volatility as a concern. (Which interestingly, turned out to be a spectacularly bad idea and led to huge losses from bad trading + MtGox account hacking/seizure, but inasmuch as DPR1 ate the losses and it was secret until after MtGox's collapse, couldn't've mattered.)
> They don't, technically speaking, have something that could be considered a "product" yet, but they do have a really cool idea for something that they claim might one day become a multi-billion dollar company, even though the thing that they're suggesting has never been done before.
This is not really what happened with Theranos. The original idea for Theranos as described in _Bad Blood_ was completely reasonable (along the lines of a WiFi-enabled bandage, and there's likely a bunch of stuff on the market now like it). The microfluidic blood testing came later as a pivot (this is part of why Theranos was so *old*). Where Theranos starts going off the rails into the 'snowball' is when the bloodtesting kept not panning out while social proof kept accumulating and sophisticated investors declined to invest and unsophisticated non-biotech whales ignored the red flags (like not even being allowed to do a blood test themselves - the reason why Google Ventures passed on Theranos). You only need one Rupert Murdoch whale to make a casual decision and rack up a very large total capitalization.
The FTX description also seems wrong. The problem with Alameda Research wasn't that the hedge fund turned out to be a ponzi and had paid out all its investments to prior investors in Alameda. (Did they even *have* external investors at the terms quoted at such length? I was under the impression Alameda itself didn't even have external investors at the time of collapse and it was exclusively owned, like the most-successful hedge funds tend to be, by its employees/partners, like SBF.) If it had been, that would've been those sophisticated investors' problem and no one else's. It's not Alameda's investors who are suffering all the grief from FTX, it's everyone else. In this post's typology, the Alameda/FTX thing is (at least) a threefer: a confused stew of long firm (insolvency of both firms but continuing to do business long afterwards), control fraud (commingling funds, corporate structure), and market crime (special non-liquidation and margin call/negative balance privileges). FTX depositors weren't the primary beneficiaries, but the Alameda/FTX principals like SBF and their counterparties like everyone they paid advertising to and better traders who were using FTX to enthusiastically screw over FTX & Alameda's incompetent traders.
Can confirm both that wifi-enabled bandages exist - a friend of mine uses one for glucose monitoring - and that Alameda's initial japan arb _worked_ and was over by the time FTX started. What they got into trouble with was buying other ponzis. With (loans taken out from) exchange customer money.
Nah, they were "in trouble" from the start. SBF was always recklessly incompetent, so it was only ever going to end badly, the only question was, how big would he be allowed to get before the inevitable. See e.g.:
https://forum.effectivealtruism.org/posts/xafpj3on76uRDoBja/the-ftx-future-fund-team-has-resigned-1?commentId=hpP8EjEt9zTmWKFRy
https://milkyeggs.com/crypto/what-happened-at-alameda-research/
Fair point, sounds like most of the japan arb money was also lost on ponzis before FTX even existed.
My understanding from obsessively reading everything I could during FTX's implosion, is that Alameda was originally created by SBF and Caroline as the vehicle to exploit the Japan/America Bitcoin price discrepancy, and per your comment, didn't take outside investment initially. However, once the price of bitcoin equalized between America and Japan through their arbitrage, they had by that time gained a lot of attention by other investors, and they started to take on investment funds and Alameda became a hedge fund specializing in cryptocurrency.
SBF realized that Alameda could benefit from having it's own cryptocurrency, and created FTX. Once that got some traction and started taking up all of his time, he handed off control of Alameda to Caroline to lead as CEO, and SBF focused on FTX full time.
The problems began when Alameda started getting eaten alive by other hedge funds. It turns out, a few years at Jane Street isn't a guarantee you can survive in the quant world, and there are a lot of extremely smart people working in other hedge funds who compete with you, even in crypto. So Alameda started losing a lot of money. FTX on the other hand, wasn't really making much money, but they had an enormous amount of user assets. And SBF used those assets to prop up Alameda, without telling the users that their crypto assets weren't kept separate in any way, but actually were all just dumped into one giant pool, and when you went to withdraw or add crypto assets, SBF and friends would just add or subtract from that pool as needed, occasionally converting between different cryptocurrencies as needed to make users whole. That was a problem in itself - but the bigger problem was the users certainly didn't know their money was being used to backstop Alameda, and they were essentially exposed to a very badly run cryptocurrency hedge fund.
When Binance's CEO starting having beef with SBF, he publicly sold off a large portion (I think eventially all) of Binance's FTT holdings (FTT is FTX's coin), which led to a large sell off of FTT, which led to a liquidation crisis at FTX. They had to pause withdrawals, which led to their death spiral of increased withdrawals and within days FTX was insolvent.
Thank you. As someone who has not read deeply on this I find it to be a very enlightening summary.
Clearly the correct heuristic is to fund Harvard undergrad dropouts (Bill Gates, Mark Zuckerberg, Edwin Land - co-founder of Polaroid) and Stanford PhD dropouts (Elon Musk, Larry Page, Sergey Brin, Andy Bechtolsheim).
> A big part of the fun of Lying For Money is reading stories with details that would be too outlandish to be considered plausible, except for the fact that they actually happened.
I love books that are heavy on examples of clever (or not-clever-but-still-interesting/entertaining) events. Similarly, Bruce Schneier's recent *A Hacker's Mind* has similar buckets-o-examples for hacking, from ATM jackpotting to the congressional filibuster. Same with lots of books about large tech companies, since they describe the galaxy-brained strategies used on different projects (e.g. Amazon's mass in-person tests for Alexa; Google's IPO and fiber tactics).
Where are more good books, like LFM or AHM, that contain lots of wacky situations involving a decently-high level of intelligence?
(I've tried e.g. trivia books and true-crime-compilation books, but most trivia does not describe clever/intellectually-interesting events, and most true-crimes are depressing and also not-clever.)
The modal true crime TV episode involves a person who murders his or her spouse for the $125,000 life insurance payout and then quickly blows it in Vegas.
Ikr
The modal true crime case sadly involves a 15-25 year old woman who is abducted raped and killed by a random man who cannot be identified for one reason or another.
You might really enjoy https://darknetdiaries.com/ -- a podcast on the "dark sides of the Internet" featuring true stories of fraud, crimes, or the prevention thereof.
One of my favorite episodes that is also related to the topics in this review: "Money Maker" is an Interview with Frank Bourassa, who counterfeited and sold about $250 million in fake US 20 dollar bills: https://darknetdiaries.com/episode/102/
I do like that show, yeah! Usually the transcripts, but yes
I found Ross Anderson's "Security Engineering" absolutely mesmerizing with its description of various (successful) attempts to bypass payment mechanisms.
Favorite description: Do you get your electricity from a coin-operated power meter? A quick application of an arc-welder will bypass that annoying shut-off switch; free electricity forever!
Cool, I'll check this out!
one of my favorite related quotes goes something like "If you are smart and hard-working enough to get away with long-term financial fraud, you are likely also smart and hard-working enough to make a good living running a legitimate business" , paraphrasing from Patrick McKenzie
>The English language has an irregular verb to describe the problematic effects of performance contracts, depending on how much sympathy you feel for the person at the sharp end. I respond to incentives / You game the system / He is a crook.
I always like hearing new Russell Conjugations.
The fact that fraud is more common in high trust societies is not at all shocking to me. I live in a very progressive community, and was on a number of charity volunteering listservs at the time COVID first hit. All of a sudden, these listservs started getting more and more people emailing them with barely believable sob stories about how first their husband lost his job, then their kids had to undergo expensive emergency surgery, meanwhile they accidentally dropped all their groceries that they bought with their last dollars into a pit, etc, and could you please send me money at this sketchy location. Many people on the listservs ate it up and I saw individuals claiming that they gave hundreds of dollars to these people each time, just like that. When others on the listservs started pointing out that the story is untraceable, there's no record of the person existing, and all the other red flags, the donors were shocked, and most eventually came to the conclusion that "well, the scammers must have really needed the money anyway in order to go to such lengths to get it, even if their story didn't check out fully".
One reason why older people are targets for scammers.
That was a great review. I'm going to buy the book.
I spent a of time trying to get my students to understand that every new regulation offers the opportunity for at least one new fraud. More regulations ALWAYS means more new frauds.
That Eigenrobot encapsulates the idea perfectly.
Two quibbles, not sure if the review can still be edited?
The SEC did not exist in 1922, so it could not have changed the rules governing Mr. Saunders' short squeeze. Maybe the New York Stock Exchange? I don't know if the error is in the book or the review.
The current indictment against SBF has 13 counts.
Anyway, thank you for a very enjoyable review.
After the first book review of this season dropped and I missed the opportunity to comment on it (It was long, I was busy, some stuff came up) and the comments were so great that Scott promised a "best of" post about them, I thought "there should be a way of regulating how long people have to read a post before the comments section gets flooded -- maybe it could be locked for the first 8 or 12 hours, that way people would need to come back later, which would incentivize the more insightful comments".
I made time to read this one all the way through so as not to get left out again, and at time of writing there are only single-digit comments. Having read it, however, I realize that I could have just committed the fraud of writing this comment having pretended to have read it, thus capturing the incentives just fine. I probably could have figured that out from the title if I'd been thinking ahead.
Sometimes I happen to be free when these things come out and I read them quickly in one go. If I wanted to comment I would do so straight away whilst the post is still fresh on my mind. Often after such a locking period I'd be too busy again and wouldn't actually get to comment...
As I also pointed out on Ozy's post, the claim that "long firm" is unrelated to both "long" and "firm" is inaccurate. It does seem to be true that the "long" in "long firm" is unrelated to the usual word "long", but that doesn't seem to be the case for "firm"; that seems to be just the usual word "firm". Sure, it comes from "firma", signature... but so does the usual word "firm"! I really doubt that the word "firm" there is some separate derivation.
Wiktionary agrees that they're related.
I think you must be right. Also the word "firma" for signature is Italian/Spanish (it's also meant "business" in various languages for hundreds of years).
It seems extremely unlikely that the word “long” here refers to some long obsolete Anglo Saxon word. I would expect it is originally slang of some kind and maybe analogous to “long game”.
Apparently, the phrase "the old firm" might instead derive from the adjective, as in "old, firm friends". Which apparently has the same Indo-European root as "dharma".
I don't see what the negative externality is for insider trading. Or for what Clarence Saunders did.
SBF's business model wasn't to get money from (eventually just stealing from) EAs (he was instead giving money to them). It was to get it from crypto enthusiasts.
Debatable if short squeezes are bad. As for insider trading, if market participants think some people trading on insider information, transaction costs go up and a higher tax on economic activity is levied, reducing overall investment and activity
I don't see how there's a "tax" on economic activity. Some people might exit the market, but there's no requirement that that the market be full of people with little information.
The victims are “people with all the publicly available information”, not “people who didn’t do enough research”. Information that isn’t publicly available could be collected and provided as a service, but paying for that service would be a tax on trading. As it is, companies (pay the cost to) reveal that information for free, and the law requires them to tell the truth and is mostly enforced, and therefore people mostly trust the reports without paying to verify them.
In normal financial trades there is going to be variation in how much traders know even if we're restricting things to publicly available information. And the laws requiring that companies are honest in the information they release are entirely separable from laws on insider trading.
Absent insider trading, whether you're the genius or the sucker is a function of putting in the work, reading publicly available disclosures and doing maths.
If insider trading isn't illegal, if you're not an insider you're a sucker, which means "some people might exit the market" only it's not just some people, it's probably like 99% of the liquidity (I had originally written capital, not as sure about that) on the stock exchange. (Off-market investment would be largely unchanged, that's the all-insider domain already)
It wasn't illegal in Japan prior to 1988, and I don't believe they had 99% less liquidity back then. For the UK it was in 1980.
I would have assumed people would pay investment managers to invest for them in the legal-insider-trading world. It wouldn’t remove the liquidity from the market, but it would introduce principal-agent problems, reduce the diversity of investor research, and impose higher costs on investors.
I don't think any of this is true at all. As others have pointed out, many many markets have existed without rules about insider trading and without any apparent issues. The reality is that under the current regime most inside information doesn't get disclosed at all, so prices are less accurate. With insider trading it would pretty much be the same as now but with more accurate prices. All the pension funds holding Microsoft for dividends aren't going to dump them because someone somewhere might have insider information about the stock some day.
That’s true. But the purpose of both insider trading and mandatory disclosure laws, working together, is to ensure a theoretically level playing field where seeking inside information won’t provide a benefit. Being better informed based on public information is pro-social, and both types of law work together to encourage it. Trying to get access to inside information (or paying for a service which provides it) would be anti-social, and the laws discourage it.
Edit: I’d differ from Thor Odinson’s position, I’d just expect subscription services to start collecting inside information.
Why is it anti-social to seek inside information? Why is it valuable to have a "level playing field" as if this were a competitive game rather than a means of allocating capital?
The laws are at least somewhat ambivalent. Employee stock purchase plans are generally encouraged, and all employees have some degree of insider information (though not at the level that e.g. the CFO has!).
It might be easier to see with used cars. How much are you willing to pay for a car when an insider might know something important is broken and you don't? Now consider how that lowers the price for a car that's actually good, too.
For market makers, this is about short-term uncertainty. How will the price move today? The spread will be higher when they think counter-parties are sophisticated.
Higher volumes and lower transaction costs happen when there's less uncertainty about what things will be worth.
There is greater uncertainty without insider trading because the inside information is not being incorporated into the market
There's no ban on "insider" selling for used cars, and the market still persists despite the market-for-lemons theory of adverse selection.
https://marginalrevolution.com/marginalrevolution/2005/12/adverse_selecti.html
The question isn't whether the market persists, it's whether prices are different than they might be. That's the "tax" when there is one. When people decide not to buy something due to a reputation of low quality, that means there's lower demand for it and it's harder to sell. (Though, maybe it doesn't matter for meme stocks?)
The article you linked to says this was solved for used cars by reducing the risk of getting a low quality car. Inspections and certification will do that. There's a cost to them, but this can be worth it. The book review talks about cases when it cost less to take a risk instead.
The negative externality for insider trading is that retail investors don't want to get owned by insider traders selling them stuff that's actually crap, and retail investors have a lot of money that we would like circulating in the stock market instead of put into other investments.
Retail investors not wanting to lose money is not an "externality", nor is it a public good for their money to be in the stock market rather than "other investments".
A stock being "crap" would seem related to normal rules about whether public information about a company is honest. But let's imagine the insider believes the stock to be overvalued because he works for the company and management decided on (but haven't publicly announced) a hare-brained scheme that they think is brilliant but would actually be a disaster. In a world where insider trades are actually impossible, can the retail investor still wind up saddled with that overvalued stock? Of course, it's publicly listed. Whoever's selling it will just be an "outsider" unwilling to discount the price of the stock in order to offload it.
On average, insider trading benefits wealthier people and disadvantages less wealthy people (because each unit of insider trading profit probably goes to someone who already has some insider trading profit). So diminishing returns means that insider trading directly lowers a country’s average standard of living.
That sounds like a very post hoc justification to me. I have a hard time imagining that anyone starting from the question of "what can we do to reduce wealth concentration?" would settle on the answer "ban insider trading". If you asked me to make a list of all the possible government policies that could be used to reduce wealth concentration, that would be really far down on my list.
Sure, but the increased inequality would definitely be a negative externality of allowing insider trading to improve capital allocation
I think I can answer these a little more clearly. First, remember that insider trading is only illegal in a few specific clubs - the public stock exchanges. It doesn't have to be an absolute negative externality; it's just the rules of these clubs that happened to get written into law. These particular clubs decided that they wanted rules that reduce trading friction, which includes banning insider trading. I don't think it's any more complex than that: rules against insider trading are one of a number of viable options that market participants could use to maximize the effectiveness of the market as a price discovery mechanism. Remember, that's one of the main services that the NYSE provides to its users: you can buy a bit of a company from anyone, anywhere. But if you buy it through the NYSE, you get the additional benefit of knowing what the last guy paid for a bit of the same company, and that's valuable information to you. Other possible mechanisms for achieving the same thing would include supporting more intrusive intelligence services (consultants who'd investigate for insider trading); but it seems like most stock exchanges regard having insider trading rules as the cheapest way of achieving the wide dissemination of information.
With what Clarence Saunders did, the answer seems more obvious: By accepting services of high value from another individual, he made himself beholden to that individual, meaning that his judgment is potentially no longer influenced solely by the law that he knows, but also by his self-interest as a consumer of services. It makes him more likely to be open to pressure from [whatever that rich dude's name is].
It's not merely the rules of a private club, there are laws handed down by governments above those clubs. With Clarence Saunders it's a different story as it does appear to have been the Exchange itself that intervened without some state actor forcing it to.
I suspect we simply pretend it is because leveling the playing field democratizes capitalism (qua asset-ownership). If the Average Joe can't buy stock, can't buy a house on credit, and can't save money in a stable currency, how is he supposed to retire? Therefore, the SEC and Fannie Mae.
The problem with insider trading is that exchanges and firms want more investors investing in firms.
If investors are investors getting shorn by insiders, they will stop investing.
It is really that simple.
The optimal level of insider trading is non zero but note that lots of "insider trading" is legal in the US (and other markets). What is illegal is specifically trading with material non public information and what is enforced is egregious cases of that.
While we may believe in caveat emptor, most people also believe there are limits to what trades can be done in good faith and insider trading is similar to selling an exhausted mine or buying a field that has oil underneath.
"(Once you find a way to illegally dump your waste, you can scale the operation up, as toxic waste disposal is a thing that many companies will pay for.) It might not look like the archetypal "market crime," but Davies argues that it deserves to be categorized as such:" This doesn't do a great job of justifying why dumping toxic waste ought to be considered a market crime. It seems closest to a Long Firm, if anything. In other words, if you're a company specializing in waste disposal, you accept the liability of disposing waste at the same time that you accept the payment from the waste creator, and then you decline to deal with liability.
I would have said “counterfeit, but committed against the state/the environment”. You (legally) agree to take the waste, then the law requires you to deal with it, but you defraud the state/the environmental oversight body by pretending to deal with it. In a Long Firm, you escape your liabilities by disappearing, or by holding the liabilities in a company which goes bankrupt. In a waste disposal fraud, the scam company continues to exist, and keeps providing its counterfeit service.
I agree that “But it is a kind of fraud (and one which often involves other frauds in counterfeiting safety certification), and as a kind of fraud, it is essentially a market crime” isn’t a great argument. The other market crimes described all involved manipulating prices of a known product. Waste disposal fraud involves charging a fair price for what the client expects, but delivering a different product.
None of the other market frauds appear to have victims apart from investors. While that’s still bad, it’s not as bad as illegal dumping. It feels like bad argument on the book’s part to lump waste disposal fraud with other market fraud, and then present this as evidence that market fraud in general causes significant harm (“ If anything, the inclusion of this category of corporate violence under this heading ought to disabuse the reader of any sense that market crimes are ‘technical’ or ‘victimless’”).
I agree that I'd probably just call it long firm in the parlance used here, but I do think there's at least a colorable argument for the placement used in the book.
Toxic waste disposal that complies with regulation is very, very expensive. If some shady firm is able to undercut "real" disposal firms by just yeeting the waste into a river, their clients are likely to "hear no evil and see no evil" in exactly the same way that the bank didn't look too closely at how their employees were selling that PPI. Here it's a bit different because the malefactors are contractors rather than employees, but I think that's why the author put it where he did--the people with control just weren't going to investigate how they got those great results cheaply.
"whenever I sent an item, there was always a possibility that the seller would falsely dispute the charge by claiming the item never arrived."
I think you mean "buyer," not "seller."
Funny footnotes:
One of my all-time favorite footnotes came in a book which made a passing reference to the war of 1914 to 1918 as World War Two. The footnote read, "World War One took place in 1756-63."
They're not wrong...
I'm inclined to agree. The Seven Years War / French-Indian War(in the Americas) / War of the Pragmatic Sanction (/ a few other names depending on which part of it your country fought in) was more global than what is conventionally referred to as WW1, though significantly less so than WW2 - the part outside Europe was almost entirely English colonies against French colonies, but WW1's non-European part was also all just colonies
Uh...the Ottoman Empire is at most only sort-of colonies, and Japanese seized German colonies.
Brazil, China, and Siam also took part.
The Ottoman Empire was also only sort-of 'outside Europe'. 'Europe' is not clearly defined and you can find a lot of historians who will argue that the Ottomans were more European than Asian.
This. I count the Ottomans as European, even if many of their territories are not. Istanbul is clearly in Europe, geographically, and Anatolia as a whole is fuzzy.
China I thought was only involved insofar as Europeans had trading ports there? Brazil and Siam being involved is genuinely news to me, Siam makes sense on thinking about it but Brazil is a true surprise.
IMHO the true master of the ironic footnote was Terry Pratchett. My favourite:
"Lord Vetinari was a firm believer in the principle of One Man, One Vote. He was the Man; he had the Vote."
I recently ran across the TV version of "Going Postal". It was great to see Charles Dance as Vetinari; I think he was one of the best parts of "Game of Thrones".
Oooh, I haven't seen that. Must look it out: it's one of my favourite of the books, and I agree that Dance is a great choice for the part.
Such a shame wars are not zero indexed
If the Seven Years War was World War I, then I'd say that the Great War of 1914-1919 was World War IV, with the Wars of American Revolution (1775-1783) and the Great French War (1792-1815) as WW2 and WW3 respectively.
I liked the review! Still wondering the measurements before and after one of these events on trust levels in society
"For example, nowadays we tend to frown upon price fixing and collusion: we expect different vendors within a market to compete against each other."
This is something I've never understood about libertarian economics. Firms are supposed to compete with each other to lower prices; this is central to the functioning of a market economy. But if Firm A lowers its price, Firm B will lower its prices as well, meaning they'll both end up with the same market share and lower profit margins than when they started. And firms know that this is going to happen, because they've read economics textbooks.
So why would anyone do it? Wouldn't we expect price-fixing and collusion to be the norm in a truly free-market society? And once you've introduced ethics - "companies have an ethical obligation to keep bidding lower and lower on price until their margins have been sliced razor-thin" - why not just say that firms should keep prices low simply because it's good for consumers?
Even if the relative market share of each firm doesn't change, the *size* of the market can. If Firm A lowers its prices, it can sell more units even if Firm B also lowers prices to match, because there will be some people willing to buy at the new lower price that wouldn't have bought at the original price. Under some circumstances - such as Firm A sitting on a bunch of unsold inventory - it is in Firm A's interest to lower prices just to sell more units, even if it can't actually increase its market share that way.
This is true when the price is above the “monopoly price”, where the total profit to the sellers is maximised. Past a certain point, decreasing the price actually reduces your profits, because the lost profits from selling more cheaply outweigh the benefits of selling more units.
Prices for standard goods like bread, which is easy to start selling, often fall below this down to pretty much exactly the cost of producing it plus the smallest profit margin anyone will accept. Otherwise, new people would enter the market selling at the lower price, until there were no more people willing to pay the higher price (modulo differences in perceived quality).
This breaks down if it’s hard to enter the market.
As the review itself says, economists mostly *do not* say that "companies have an ethical obligation to keep bidding lower and lower on price until their margins have been sliced razor-thin". This isn't something that's said very often by almost any group, but the review classes it as an "emotional appeal".
On the widget competition point, you do need to account for other parties such as:
1) Firm C, which is in the whatchamacallit business and is eyeing entry into the widget business
2) Firm D, which could import widgets from its overseas partners
3) Customer Z, who is thinking of spending their money on Firm E's thingamujiggs rather than the increasingly pricey widgets of Firm A or Firm B.
4) Governments A (national) and B (state), which might remove rules that keep competition lower than it would be otherwise.
Where I come from, one of the current classic cases of high margins right now is the airline business, which is protected from 2) and 4) – Australia literally has a law preventing foreign airlines from flying domestic routes. The irony is that airline businesses are nevertheless famously chronically unprofitable over long time-spans.
How does 2) protect an airline business? Surely overseas competition should drive down prices, except as dictated by 4.
Sorry, sloppy writing; thanks for picking up the error. Should be "protected *from* 2) and 4)". And 4) should read "which might remove rules". I'll change them now.
Post in haste, repent in the comments section.
Interestingly, it feels like the death of Tiger + Virgin’s bankruptcy have had the combined effect of allowing higher prices and worse service. 50% of domestic flights seem to get cancelled rn.
Not all firms are equal. Suppose Alice at Firm A invents a machine that can stamp out widgets for less than a dollar of fuel and maintenance per widget, while Bob at Firm B is assembling widgets by hand for $1.50 worth of labor. If Alice sells widgets for $1.40 each, she captures the entire market - at least until Bob makes some equivalent investment in efficiency - and can put those extra forty cents toward amortizing costs of building that machine, or saving up for the next one.
I mean, at a first glance, the timeline of the change of heart seems to correlate pretty well with the rise of workers' unions. (As for the obvious objection that proscribing all collusion seems like an overkill - maybe there was no viable closer Schelling point.)
(And of course espousing "free market" ideas signals commitment to firms' well-being rather than actual freedom in any meaningful literal sense, and the case of unions have long been a good demonstration of this.)
How and why would worker's unions cause firms to lower prices? Isn't it the opposite? They increase costs for firms and encourage the firms to sell higher quality goods at higher prices?
Unions are workers colluding to raise the price of work (among others). This lowers the firms' profit margins, far more than what competition with other commodity producers could. I'm proposing (half in jest, but the more I think of it, the more "yeah, this checks out" it sounds) that capitalists had no way to counter this on the market alone, and "no collusion ever" was the only social norm they could reasonably push and coordinate around. Hence, cartels had to go.
Fixed prices are an unstable equilibrium. The stable equilibrium is cost of producing + the accepted rate of return on the capital at risk.
If 2 parties are fixing prices higher than that theoretically a third party should enter the market, undercut them both and then still get better than average returns.
If there are many business in the market anyone can defect on the price fixing agreement to get a short term boost.
Even if there is some barrier to market, like there are only two rail way lines between A and B, that doesn't make the market stable. A third party is unlikely to build a whole new rail way but customers might switch to trucks, or send less things between A and B if the prices are fixed high enough
If Firm A and Firm B have established prices above the minimum profit, a theoretical Firm C can open and jump into the gap they've left, at which point A and B are both forced down and also lose market share to C.
I think this depends on whether you think barriers to entry are a function of the government or the market.
If taxi company A and B collude to charge $5/min they profit maximize until Uber finds a way around the medallion system and charges $2/min. So in that case absent a regulatory barrier to entry the market is competitive.
Whether you think this is the exception or the rule probably correlates pretty strongly with how libertarian you are.
Other people have pointed out that 1. It encourages companies to lower their costs so they A can lower prices when B can't, and 2. There's always the possibility of C entering the market if profit margins are too high. But I want to point out that Smith also advocated competition because, as employment went higher, corporate profits would be reduced by the bidding up of wages as well. The the point wasn't just to get prices low; it was reduce corporate profits to a minimum, distributing them both to consumers as lower prices but also workers as higher wages.
"All exciting products in tech seem to start with an over-optimistic product demo."
Self driving cars! Neuralink!
It's a great book. This review is very long. Does that strengthen it?
More concise review here, tilted towards an audience or accountants:
https://intheblack.cpaaustralia.com.au/business-and-finance/upside-of-commercial-fraud
Interested to see anyone compare the two.
Done. Longer&wittier is better for me/ACX readership. That said, the "more concise review" is very fine, "tilted towards an audience of accountants" (with less time) thus picking other examples of fraud vs. anti-fraud (e.g. double-entry bookkeeping), but getting the main message right, and telling more about the (high!) expertise of the author. The end is kinda unfortunately abrupt. Probably enforced by the editor-in-chief. Original text probably longer+better. Why substacks will be the medium of the future, not e-papers. - Both reviews made me like the book, both will not make me buy the book. But then: https://www.richardhanania.com/p/the-case-against-most-books
Mark, thanks for taking the time and for your generous and interesting comments.
"The end is kinda unfortunately abrupt. Probably enforced by the editor-in-chief." Don't get me started. This was originally written for print, where the end of the main story came at "We continue to trust each other in normal commercial dealings because, mostly, that’s the road to prosperity."
The last two subsections were originally break-out boxes, but were just slapped on the end of the electronic version. Amazingly common in web versions of print stories, and impossible to get changed ... Damn, you got me started.
Me dumb. You are the author, oops. It IS a very fine piece - perfect, if those boxes stayed out. And it must hurt to see it abused that way. Jeeez ... Hope you get your newsletter started soon :) Substack has no break-out boxes, but then: who ever liked those even in print?
Yeah I thought the review was very long for what it brought to the table. More almost a cliff notes rather than a review.
I read about Alves do Reis on Wikipedia, and discovered an interesting twist: His counterfeit currency scheme actually required both high trust and low trust. Everyone believed that he was a legitimate agent of the national bank, and also everyone believed that the bank had sent him to *secretly* print extra money for shady but technically legal reasons.
That's not always that unusual. "Yes, I'm a crook, but someone else is going to be the one that gets robbed" is a common enough element of con artist pitches. At least some of Bernie Madoff's investors looked at his returns over time and concluded that he probably had been lying about *how* he was making money for clients, but they didn't withdraw their money because they assumed that he actually was making that money (through illegal methods) instead of lying about *whether* he was making money at all.
"Psst, buddy, the White House sent me to tell you to mint a $1,000,000,000,000 coin. Let me know when you're done, so I can take it to the Federal Reserve."
I believe this was a factor in the pyramid schemes that crashed the Albanian economy in 1997. Albanians were sophisticated enough to recognise a pyramid scheme when they saw one, but assumed the schemes were covering some underlying profitable crime like drug-smuggling and invested anyway.
How did the Albanians get their sophistication in pyramid schemes? Why did the country went into civil-war, when those schemes faltered?
> How did the Albanians get their sophistication in pyramid schemes?
It's a pretty simple scam, you don't need to be especially sophisticated to spot it. But I should have said that the alternative explanation is that the Albanians *weren't* sophisticated enough (perhaps due to decades of communism), and thought the pyramid schemes as stated were legit.
> Why did the country went into civil-war, when those schemes faltered?
Because the schemes *weren't* backed by drug money, but were instead just bog-standard pyramid schemes. And like all pyramid schemes, they eventually collapsed, taking a big chunk of the wealth of the nation with them.
The PPI scandal is exactly the same as what happened at Wells Fargo...
Many Thanks! I _thought_ that the PPI case sounded similar to what I remembered from Wells Fargo.
It really happens with all kinds of products throughout the retail business world.
Car warranties at dealerships, extended warranties at big box stores.
Those are HUGE profit centers. There was a long time from like 95-2005 at least where the only part of Best Buy that made money was the extend warranties. It was an extended warranty company masquerading as retailer.
> It seems to follow that the more centrally-planned an economy is, the more vulnerable it becomes to fraud, corruption, and exploitation by bad actors. (The extent to which various 20th century experiments in centrally planned economies support this conclusion is left as an exercise to the reader.)
I'm not sure I buy this. Vulnerability to fraud, specifically, seems like it would scale with chaos.
I could see an argument that certain styles of centrally-planned economies have fewer checks against fraud. But when I think "centrally-planned economy" I think "Soviet Union", and I don't really think of the fraud, corruption, and exploitation there as being directly related to the central planning, per se. There were a lot of other things going on there, too.
Fraud scales with cognitive intractability. One way to explain this is the "Chain of Trust" model proposed by the book, intractability increases the number of people you have to trust in order to make a decision : in a hunter-gatherer society the Chain of Trust is a single-dinner-table's worth of individuals, in a modern one it can reach a small country's worth (hundreds of thousands). There are no scammers in a hunter gatherer tribe, they are all busy starving.
More generally, the wisdom of software is "There are 2 ways to build programs : To make them so simple there is obviously no errors, or to make them so complex that there are no obvious errors." Replace "software" with "society" or "economic systems" or "law" and you have basically the same thing, the scammer/fraudster is a black hat hacker and their speciality is finding non-obvious bugs, logical inconsistencies, holes, undefined behaviours, and vague corners in social and economic protocols. Both the software hacker and the social hacker are masterminds of "Story-Punning", crafting a scenario that looks one way but isn't, or looks one way but is actually the other, or looks n different ways depending on how you look at it. The guy feeding the computer "-1" as a buffer size is story-punning (-1 looks like a valid buffer size - it's a number - but actually isn't), and the guy feeding a senior age victim a story about tech support is also story-punning (they look like tech support - they call you and talk about computers - but they actually aren't.). Complex systems - or equivalently frailer minds - allow more story-punning, because there are more data points and moving parts to weave your story through.
Centrally planned economies are astonishingly complex systems. Chaotic economies (like those countries with weak institutions and lax protocols) are also astonishingly complex systems. Both are heaven for corruption and fraud, because the relevant dimension fraud varies on is not complexity or centrality-distributedness, it's intractability, how much of the system can't fit within a human brain. You can have tractable systems that are either central or distributed (or any other 2 extremes of any spectrum), and you can have intractable systems that are both.
Hm. I might wind up agreeing; I'll have to think about this. Thanks!
What do you see as causing the corruption in the Soviet Union? I always thought the central planning meant decision-makers with misaligned incentives we’re setting the targets. The central government sets high targets to look good, then everyone lies and/or sets high targets for their sub-units to look good to their bosses and avoid imprisonment.
I'd mostly put it down to autocratic government, including selection effects on the type of people likely to hold power, and the related lack of free press. The latter sort of meshes with central planning, in the more general sense that prices are one type of signal about how well a system is working. But prices are a noisy one-dimensional signal, so they're more like a warning light saying **something** is wrong, but won't generally tell you what exactly is the problem without investigation.
When I think of "corruption", I don't so much think of the misalignment that you're talking about. That occurs in America, too, and not just in government but also in the private sector. I suppose, to me, "corruption" indicates more of a direct personal benefit than simply "looking good at your job".
Would a randomly-chosen US politician would have done better economically than the actual Soviet leaders, under the same pressure? Or if (implausibly good) hackers permanently shut down the free press in the US, would Soviet-style corruption be the result?
The corruption I’m imagining is where a factory with enough leather for 40,000 shoes produces 60,000 shoes with too-thin soles, to meet a target. Managers would have a big personal benefit from this: they were frequently thrown in awful prisons if they didn’t meet their targets. And as in the PPI example, I don’t want to blame the factory managers for this: it’s the fault of the people who set the targets. But the factory managers are still acting corruptly.
This particular failure mode is less likely to persist in a free market. There, consumers would choose not to buy the thin-soled shoes. Sooner or later the company would inevitably go out of business, even if no overseer thinks to check for shoe sole thickness (unless people wanted the thin-soled shoes).
My impression is that such corruption was more common in the USSR than the US, and contributed to the weakening of the USSR’s economy.
Maybe that is another, even better, case for "zero fraud may be not a good thing" - cuz in modern societies zero fraud most likely means: NO TRUST. Not a tiny bit of it. And that is bad for everything. The CCCP was nothing but a zero-trust endeavor. Lenin liked the phrase: Dowjerjaj, no prowjerjaj - trust, but verify. ie: no trust. Where cheating was possible, it was done. A million times a day in tiny ways . When control+CCCR ended: in huge ways. "Zapzarap" (sth. disappeared "magically") was one of the first 10 words I learned in Russian.
You're simply not familiar enough with centrally planned economies.
That could easily be true. Can you go into more detail about how centrally planned economies work?
I'll start with noting that governments are made up of agents that are seeking their own ends, who are put in place by 'principals' (either a voting public, like in the US, or a complex political/military apparatus like in China or USSR). This is true of both market economies and planned economies.
The big difference in planned economies is that government is in charge of _everything_. They run the companies, the regulators, the policymaking, the allocation of economic factors to production, everything.
This has two very important implications. One, it means the accountability to the principals is very diffuse. If you're accountable for everything, you're accountable for nothing. You get away with vague campaigns and marketing that convince enough people to put you or keep you in power. This greatly increases fraud/corruption at all levels.
Two. There is no space for markets. This means that you remove a few extremely important drivers for improving efficiency - revealed preferences of consumers, competition and incentives.
Which basically means that there's excessive 'waste', or, fraud/corruption. The people who want to produce something will buy off bureaucrats to let them allow the production for them and no one else. Or you will create public sector firms owned by government that are essentially vehicles for siphoning tax money into the hands of the politically connected.
Of course, both of these mechanisms exist in market economies. But without having experienced it first hand, it can be difficult to imagine the extent to which it can make a difference.
You can guess though, from the performance of centrally planned economies relative to market economies
Along these lines, it's not at all unknown for Mormons to fall victim to spectacular frauds engineered by fellow Mormons.
Here's a psychological question: My brain seldom is able to follow any criminal scheme more complicated than "Murder your spouse for the insurance money." My IQ drops a like a brick when somebody tries to explain to me how to pull off a scam. I would make the world's worst criminal mastermind. Is this not uncommon?
Lots of people could run or resist scams effectively, but also lots of people couldn’t. Every scam out there has lots of people who don’t understand it, or else nobody would try it. Is that what you’re asking?
Give an example of one you don’t understand and why. Is the Ponzi scheme, for example, hard to understand in your opinion?
Another crime (in the article) that is easy to understand: create a limited-liability company, take a lot of debt, pay yourself a generous salary, then let the company collapse.
Or simply: tell people to give you money first in return for some product or service later. Deliver the product or service to the first customers, to build trust. Then collect lots of money from many people... and disappear with them (move to a different country, change your name, start a new life).
Sell smartphones on e-bay: first sell 100 of them to yourself and give yourself hundred 5-star ratings. Then sell 10000 more to other people, but send them literal bricks wrapped in paper. Live in some shitty country where police doesn't care about crimes done abroad. Change your name and do the same thing over and over again.
Factual note: The exit scam at the start of the book was not the Silk Road, but a later dark net market called Evolution. Silk Road is notable for being a market run by a true believer which did not have an exit scam, and with no signs there would have been one had the founder not gone to jail. https://gwern.net/dnm-survival
I understood exit scams to refer to those perpetrated by vendors on the platform, not the platform itself.
The opening segment of the book is first about a vendor on Evolution who did an exit scam, in part by getting people to not use Evolution's escrow service. Then Evolution itself pulled an exit scam.
So far this year's reviews seem a step above last year's.
Bit of a tangent: In Planecrash, Keltham makes no sense - we're told dath ilan is a high trust society, but Keltham is so paranoid about the exact wording of contracts and deals it surprises even the people of golarion, who's whole society is worshipping the god of tricky deals. This implies, as you point out here, that dath ilan should actually be an incredibly low trust society.
(Which we also see in other ways, like the norm against crying in front of other people).
That sounds like a society where you trust people to abide by contracts but don't trust them to write contracts fairly.
1) Trust level is not the ONLY variable that influences how many precautions you take. Sometimes a precaution would be cost-effective but you didn't take it because you didn't think of it. Someone who is smarter and/or better-trained than you might take that precaution even if they are more trusting than you.
Someone from modern USA is probably going to be better at writing contracts than an Iron Age farmer. This does not imply that the Iron Age had higher trust levels.
2) Several of Keltham's precautions (though not all of them) guard against accidents, not just malice. For example, specifying that a certain number is not allowed to be negative could prevent unfortunate consequences that NO ONE intended. Keltham is a computer programmer and it makes perfect sense to me that he'd have lots of practice asking "what happens if this instruction is executed faithfully but ignoring intent while in an unexpected context?"
3) Keltham is not blindly applying dath ilan's ordinary standards. He knows that he is Trading With Aliens, which apparently is an entire genre of fiction on dath ilan, so he has access to ideas from a wide range of thinkers who were thinking specifically about Trade With Aliens and not just ordinary dath ilani contracts.
4) I don't think it is ever implied that Keltham is being more careful than a smart Cheliaxian would actually be. People are only surprised that he takes this level of caution because he isn't *aware* that he is dealing with people who like tricky deals, which implies that he's being more cautious than typical people in other countries (who don't worship the god of tricky deals), not more cautious that typical people in Cheliax specifically.
> 4) I don't think it is ever implied that Keltham is being more careful than a smart Cheliaxian would actually be. People are only surprised that he takes this level of caution because he isn't aware that he is dealing with people who like tricky deals, which implies that he's being more cautious than typical people in other countries (who don't worship the god of tricky deals), not more cautious that typical people in Cheliax specifically.
Weren't there a couple of contracts he negotiated, where afterwards Chelaxian humans or devils said something like, "Let's make sure no one else finds out that deals like this are possible?" This might not technically be him being more cautious, but rather standing on the shoulders of extremely cautious giants, but either way I think it counts.
If devils don't want people to know it's *possible*, that seems like it's clearly a case of my point #1; i.e. Keltham is being more clever than Golarion natives, not more cautious than them. The reason other people aren't already doing it is because they haven't thought of it, not because they think it's too much bother. (Otherwise, devils needn't be concerned about people learning of it.)
Also, the only specific example of that I can recall turns out to be something that Asmodeans can't use against each other anyway (trivial spoilers):
When negotiating with Lrilatha, Keltham asks her to promise she doesn't expect the contract to do anything she doesn't expect that Keltham expects. Lrilatha privately asks Carissa not to tell anyone about that idea.
Later in the story, Carissa tries asking someone for that clause, and the other party just laughs and says "no".
My analysis is that the other party can defeat this precaution if they're willing to admit that they're being tricky, which makes it useless for Asmodeans negotiating with each other, because they already know they're trying to trick each other. It works for Keltham because keeping Keltham ignorant of the fact that devils are tricky is more important to Lrilatha than any trick Lrilatha could've written into that particular contract.
Ah, I think that was it, and you're right.
As I recall, Keltham describes dath ilani education as constantly playing tricks on children. The result is, more or less, from what I understand, that they learn to always keep track of how they know what they think they know. They assign probabilities to beliefs, they track chains of attribution, and they're constantly on the lookout for someone trying to pull something on them. Which "just so happens" to lead to them being more likely to spot things that other people overlook, and to question assumptions that don't make sense, and otherwise engage in science.
It doesn't seem out of character that a dath ilani, dumped into a strange world that he has to learn about from scratch, would revert to his standard method of learning.
The books are more interesting, I am not sure the reviews are any better, I think they might be worse.
If you are interested in this category of books, you would probably like “Extreme Economies,” written by Richard Davies (same last name, funnily enough!). It’s about how people make markets work in very extreme situations where they cannot rely on normal market conveniences, like prisons, refugee camps, and the least civilized rainforest in the world.
Interesting case study is the smoked mackerel market in a men’s prison , where Steve Madden served his term. Apparently he “perfected “ it.
The review mentions criminals building up trust as part of their scams, but it is worth pointing out that this is the defining characteristic of a long firm fraud: In the author's example, the perp doesn't simply borrow a load of bread and immediately hoof it off to Outer Mongolia! They borrow a batch, and then promptly pay for it, and repeat this process several times, with progressively larger amounts. Only once the suppliers have been lulled into a false sense of security, do the criminals vanish.
I had never heard of the claimed etymology of the phrase "long firm", but assumed it was simply short for something like "long (established) firm", to reflect the time needed to build up familiarity and trust in its dealings.
Another class of fraud which may have been mentioned is what might be called "skimming", where insignificant amounts are taken from each of numerous sources. The well-known classic example is the IT developer in the 1960s (?) who added to a banking application some code which would transfer half cent residues from customer accounts to his account.
I bet the etymology of long firm is just from the ordinary words long and firm, maybe it’s part of an originally longer phrase as you say. The etymology described in the article seems fake.
The book says that market frauds "are not technical or victimless, the entire market is the victim", but I'm not sure about that.
There is a strange assumption here that "The Market" is a single monolithic thing. It's not. Allow me an extreme counter-example : Let's say there is a market for criminal pedophiles* to have "fun" with 12 year old kids, If I pull a fast one on those pedophiles and (say) claim I have a 12 years old lolita ready for fun then run away like hell with the money, I have greatly damaged trust in that market, and yet, who the fuck cares about pedophiles and their human-traficky markets ?
That was an extreme example to illustrate what I mean (not all markets are born equal), but there is plenty of stories of real world fraud that when I hear my immediate reaction is grabbing a popcorn and being amused by it. Who did Elizabeth Holmes harm with her fraud except a bunch of filthy rich VCs ? If she wasn't a piece of shit who threatened employees and played on the progressive thirst for "Oh ma gaad a woman CEO YAAAAS QUEEEN", I would have been quite frankly on Team Elizabeth. Similarly for the recent story about the 30-under-30 girl who pulled a fast one on Goldman Sachs.
What's remotely sympathetic about Big Corpos ? Who gives a shit about lying to them or disrupting their markets or looting their property or doing any amount of things that would have been, in my book, henious crimes against flesh-and-blood humans, but are actually - again in my book - completely okay and virtuous if done against corporations.
I also advocate what we can call micro-control-fraud, which is (in the book's terminology) control fraud done on the scale of the individual worker, which is in simpler terms means "Lying to your boss and mis-representing the amount of work you do and benefit you bring to the company", which is - to borrow 4chan's word - Based, insanely based. There is a caveat here, I don't advocate doing this if it will harm your coworkers, such as when they have to do or fix the work you claim you are doing well. Please don't harm humans, humans are ok (not really, but as ok as anybody can be). Just harm corporations.
I hate the tendency of people to moralize and ethicalize practices against corporations. Corporations, like Nation States, are not objects of morality, unlike living things with brains or living things in general. They can (indeed, for the vast majority of them, they **should**) be harmed, stolen, frauded, lied to, scammed, etc... Insofar as any corporation is worthy of moral respect, it's only the amount of moral respect you should grant to its founder/manager.
* : Criminal to distinguish them from those who were born in the very sucky situation of finding themselves turned on by kids, but never harm kids.
> Who did Elizabeth Holmes harm with her fraud except a bunch of filthy rich VCs?
She harmed the entire biotech sector. Legitimate startups with real technology now (AIUI) find it much harder to raise money because of her. And hence she harmed anyone who could have been helped by those real technologies coming to market faster.
I take back that example. I still think that the vast majority of the financial sector and "consultants" are bullshit, and harming that market doesn't impact anyone.
I will accept the first part (I don't know enough about the financial sector to say, but I too have a sense that a lot of it is bullshit), but not the second. Some of the biggest market participants are pension funds, so harming the market harms ordinary retirees.
Theranos di provide some possibly inaccurate test results to ordinary people.
And some people went to the hospital because of it.
Goldman Sacha might be more harmful than the competitors who would replace them; I don’t know much about them. But if someone scams them, they’ll put up interest rates on their home loans, and ordinary people will suffer as well.
...you're proving the thing you're saying you're refuting. The entire pedophile market is the victim, just like the quote said.
"Who cares about them" is not a tenable benchmark. Scammers never care about their victims. We had a commenter on this site a while back saying old people deserve to get scammed when they start to lose their faculties. "Who gives a fuck about some no-nothing soccer mom and her no-future kids?" It's pure mob rule.
That's not fair. There is a hard red line between any human or indeed any living thing, and a corporation. One (usually) feels pain and is worthy of moral consideration, the other is not capable of that.
Corporations have human CEOs and middle management and rank and file employees, any or all of whom will be affected.
"What's remotely sympathetic about Big Corpos ? Who gives a shit about lying to them or disrupting their markets or looting their property or doing any amount of things that would have been, in my book, henious crimes against flesh-and-blood humans, but are actually - again in my book - completely okay and virtuous if done against corporations."
Who do you think make up Big Corpos, if not flesh and blood humans? When a corporation is looted and goes out of business, who will suffer more: the one CEO, or the thousands of ordinary employees? When the economy ceases functioning and nobody can get food at a reasonable price because the corporation that makes the food was defrauded and the one that transports the food was robbed, do you think it's the CEO of the big agro company who will go hungry, or the single mother working a low paying service job?
Wow. Have you considered that humans are currently living in the best of all times, and that corporations have a very big part to play in that, and what you're advocating is likely to lead to worse times for ordinary humans?
(1) I'm not convinced our days are the best of all times,
(2) I do believe it's a vastly better time than lots of other times,
(3) I think (2) is mostly because of science, tech, and some social innovations. Corporations are not among the social innovations that I think was necessary to achieve a good time. I believe they are harmful social innovations that dramatically lowered the quality of the good times.
In the 19th century, people were living better and more affluent lives than ever, yet horrible factory working conditions and slavery were a features of those times, when you remove horrible factory conditions and slavery, things get better, not worse. Just because something is a feature of good times, doesn't mean it's good.
Corporations are evil paper clip factories, where lots of smart people work with 10x the amount of dumb people in order to make an entity that is an idiot-savant, a specialized paper clip maximizer and nothing else. I hate them with passion.
> Who did Elizabeth Holmes harm with her fraud except a bunch of filthy rich VCs ?
Didn't at least one of her employees commit suicide because he couldn't deal with the guily of having become, in his view, gradually complicit? (I think this was long before the scandal came to light.)
I mean, markets and corporations are tools. So in your first example, that's a hammer that's being repeatedly used to harm children. If you break that hammer, no one will be sad.
However, say, Theranos - this was quite bad. That particular market was more like a natural-ish thing of infrastructure, say, a river, watering crops for a range of farmers (water = money from VCs, farmers = people with ideas, crops = products, and I will admit in this metaphor there were plenty of people trying to grow stupid, impossible or harmful crops like deadly nightshade or unicorn horns, but there were also plenty of people growing good stuff like wheat).
Elizabeth Holmes basically planted a bunch of blackberries right on the waterway, sucking up large amounts of funds. At the end of her scam, her blackberries matured, forming a nasty thicket that has choked the waterway. Everyone downstream of that (including people who would have grown actually useful crops) had their funding dry up suddenly, and because of that we've lost a lot of crops that could have been really helpful for many people.
It kind of depends, case-by-case. You don't sabotage the nuclear reactor because you're upset about what they're doing with the waste because then everyone would have no electricity and potentially be dealing with even more uncontrolled radiation release. Sure, the direct victim is the nuclear plant, but everyone will be feeling the consequences!
(When doing market fraud it's probably best to start small. Media piracy? You're going around picking locks. I think IP law is stupid so I don't get particularly mad about people picking locks)
As I said above, I take back the E. H. example, even ignoring the money she sucked (which I don't believe would have gone to better pursuits on average, it would have gone to shitty uber and tinder clones that startups tend to be these days), the biotech sector she hurt was legitimately a beneficial thing.
About the "You can't harm corporations because that will harm other people" argument, it's correct, but what should I do ? Almost every evil organization or giant social structure that humans invent harms more innocent people when it loses. Who did the fall of the Soviet Union harm ? Who was hurt the most from any war no matter who won ? What is the ratio of Nazis-to-innocents that were killed, raped, and forced to live in absolute misery for decades when Nazi Germany lost WW2 ?
>IP law is stupid
Stupid is the understatement of the century, it's a unique mix of stupid, evil, and pathetic, contemptuous garbage. I think every man and woman with even the slightest amount of dignity should violate IP laws just to spite the pieces of shit who made it. I sometimes pirate things that I don't even watch, just to spite the corporations that made them. Alexandra Elbakyan for the win.
I think that's why a lot of more moderate people advocate for "dismantling" rather than straight revolution. One way is by offering alternatives - if a railway shuts down, it's a lot less disruptive if there's also a bus route. You might build tools that achieve the same things existing tools do, with less damage. Or have telegraphed rule changes for the tools so everyone can figure out another way of doing things ahead of time.
The thing with fraud is that it's not telegraphed and usually not purposeful, so it breaks these tools suddenly and leaves people with massive issues. Kinda like the difference between offering everyone credits for installing solar panels vs taking a hammer to the coal generator - end result might be the same, but the impact to the average person is very different!
A government is just a security company. Residents are customers; taxes are revenue; soldiers/bureaucrats are employees; rulers are owners. Nationalism would have you believe that governments are divine expressions of popular sovereignty, but this is woo.
If you're enfranchised with political power, perhaps you can change the system. The second option you have is to vote with your feet. Unfortunately, there's no polity on this earth I consider especially attractive, so I too feel at an impasse. Fascinating modern age we live in. A third option is revolution, which is really just a euphemism for war. This is a last resort, as the cure can be worse than the disease.
>Who did Elizabeth Holmes harm with her fraud except a bunch of filthy rich VCs ?
The people and businesses who would otherwise have received all the capital investment she sucked up. And all the people who would have benefited from the products those businesses would have created.
>What's remotely sympathetic about Big Corpos ? Who gives a shit about lying to them or disrupting their markets or looting their property or doing any amount of things that would have been, in my book, henious crimes against flesh-and-blood humans, but are actually - again in my book - completely okay and virtuous if done against corporations.
Oh, I see, you must be a time traveler coming to us from after the AI singularity. In this time period, corporations are still composed entirely of flesh-and-blood humans. It's you who think corporations are magic here, where as soon as people join together in a corporate governance structure you can parisitize them to your hearts content while inflating your ego with faux-moralistic inanities.
A company is just a group of people. Sometimes a company is a business that sells widgets to make a profit, sometimes a company is just two guys hiking in the woods. A corporation is a specific type of company, which is given certain rights and responsibilities by the state. But in some sense, it's still just a group of people.
When a corporation experiences financial loss, there's a hierarchy in who takes the brunt of the harm. First the shareholders, then the creditors. If one person steals from say, Walmart, the first people to feel pain are the Walton family and other shareholders. Some shareholders are billionaires, some shareholders are podunk retirees. If more people loot Walmart until earnings go negative, then the corporation can't make good on its debt obligations (usually to banks). If this situation persists, the company may go bankrupt and liquidate its assets, in which case employees lose their livelihood. Such an event also has second-order effects on Walmart's customers and vendors. Often, the harm is combated through things like red-tape and loss-prevention, which has its own costs.
c.f. https://www.sportskeeda.com/pop-culture/news-this-heartbreaking-chicago-walmart-looting-video-goes-viral-woman-tearfully-documents-destruction
Chicago is starting to resemble Somalia. Insanely based, indeed.
> [Adam Smith] wrote this in 1776, but had the US Constitution and Bill of Rights existed at the time, he might have argued that a meeting between two competitors to decide how to price their wares would be protected by the First Amendment.
Probably not, since he was Scottish, but I can definitely see an American Adam Smith making that argument. Actually, how do US anti-collusion laws get around the First Amendment?
Interestingly, I can see no protection on free assembly in the 1688 English Bill of Rights, and the only protection on freedom of speech applies to Parliament: https://www.legislation.gov.uk/aep/WillandMarSess2/1/2/introduction
I think he explains how regulations trump the First Amendment. You can assemble and say whatever you want, but if you choose to do this business, you accept these limitations.
I understand that the First Amendment protects expression of ideas but not speech in the commission or planning of a crime.
You can say "we should make those rich bastards give their money to us poor slobs" as an expression of injustice and a desire for political change, but if you follow it up and a bunch of you go and find some well dressed people and you say "give us your money or we'll beat you up" you can't say you were expressing your free speech rights.
"A ‘corporate drone’ would be someone whose only purpose was to fertilize the corporate queen and I can’t think of a single company that’s managed that way."
No, that's a bribery scheme. Putting someone politically connected on the board whose job is to collect money and provide 'protection' is used fairly often. There are countries where that's about the only way to do business if the company is above a certain size.
It never ends.
https://prospect.org/health/2023-05-23-quackonomics-medical-properties-trust/
Readers might also be interested in this List of past fraudsters similar to SBF: https://nunosempere.com/blog/2022/11/28/list-of-past-fraudsters-similar-to-sbf/
I'm reminded of the Hunt brothers' corner on the silver market. It caused great distress until the commodities exchange changed the rules to destroy them:
https://en.wikipedia.org/wiki/Silver_Thursday
> On January 7, 1980, in response to the Hunts' accumulation, the exchange rules regarding leverage were changed; COMEX adopted "Silver Rule 7", which placed heavy restrictions on the purchase of commodities on margin. The Hunt brothers had borrowed heavily to finance their purchases, and, as the price began to fall again, dropping over 50% in just four days, they were unable to meet their obligations, causing panic in the markets.
Re chains of trust:
There are analogs where the trade-off is between cost/effort and accuracy rather than between cost/effort and probability of being defrauded. E.g. once can get directly NIST-certified weight sets for >$1000, or less directly (and less accurately) calibrated weight sets for $20.
Some time ago I worked as a software engineer for a tech company that operated a website where customers could find and review businesses. The tech company built a search engine using the review data, and made their money by allowing businesses to advertise on the search and review pages.
This tech company had a pretty poor reputation among business owners. Many business owners accused them of essentially running an extortion scheme. The business owners claimed that the sales reps from the company would call them frequently and use aggressive sales tactics. Business owners claimed that the sales reps would threaten them with removing good reviews, or of promoting bad reviews on their page. The tech company was particularly unpopular in social media, where they would get flooded with stories about family, friends and favorite businesses being extorted by the sales reps.
Inside the company much of this was dismissed. The “extortion” thing was discouraged by the company on the strongest terms, and periodically we’d hear stories of some sales rep or another that was caught saying something inappropriate to a customer, and was promptly fired. Still, as time progressed I had a very uncomfortable feeling in my gut. After a particularly uncomfortable dentist appointment and haircut, I stopped telling business owners where I worked.
From what I gathered, working as a sales rep for this company really sucked. Compared to other sales gigs in SF, they had really poor pay. At the time, the sales reps had to commute to downtown San Francisco, requiring them to live in very expensive housing, usually with many roommates. The company also didn’t have commuter benefits in their compensation for sales staff as they did for engineering.
The sales team also operated based on leads & quotas. As a sales rep, you’d get a stack of businesses, and you had to cold-call them and sell ads to them. Your compensation, and your continued employment, depended on how many sales you made. From what I heard it was a very high-churn environment, and people who didn’t perform would routinely get cut.
Naturally, working in pretty crappy high-pressure conditions for not very much pay lead to a lot of the issues that business owners complained about.
When you buy an ad, it places your business above the organic search results (labeled as an ad). So the sales rep can say “if you buy an ad you will appear in the top of search results” and be technically saying the truth. Of course, many business owners will take that statement to mean “ranked in the top of the organic search results”, and that’s a misconception that the sales rep is incentivized not to correct.
Very similar situations can arise with “if you buy ads you will get more positive reviews”, since buying an ad may cause more people who use the site to visit your business, and they might then write reviews, some of which may be positive. Or “if you buy ads it will get rid of your bad reviews”, since more positive reviews may push negative reviews down from the front page of your business.
Some sales reps went even further, colluding with friends to actually write positive reviews in exchange for ad sales, etc… And, of course, when the company found out about such tactics, they quickly fired the involved sales reps.
So it certainly sounds very similar to the Distributed Control Fraud. The tech company creates very adverse working conditions for their sales staff. Those adverse conditions incentivize the sales reps to commit distributed fraud to drive more ad sales. The tech company reaps the rewards, and when something egregious happens, they fire the involved sales reps.
For what it’s worth, I don’t think this arrangement for the tech company was premeditated. I think it was just where they ended up by trying to optimize costs, one small step at a time.
Bonus: Another interesting aspect of this is that often business owners would get upset because positive reviews of their business would be removed by the site. What would often happen is that when a new business would open, owners would invite friends, family and such to the opening, and encourage them to write positive reviews.
From the point of view of the tech company, there would all of a sudden be a bunch of people who would create new accounts, write one positive review for one business, and then never review anything else. Eventually, such reviews would be marked as fraudulent and removed.
I always thought that this was interesting, because from the point of view of the business owner it really seems like they didn’t do anything wrong. They think of fake reviews as something that’s done by spam bots, or in some sort of organized way for money, and they don’t categorize “my brother wrote a positive review for my pizza shop” as the same sort of manipulation. So to them a relative’s positive review being removed feels like proof that the tech company is trying to mess with their business. It also doesn’t help that typically, a few weeks after the business opens and starts getting reviewed, they are contacted by a sales rep.
"trying to optimize costs one step at a time" = the road to hell
But your example is spot on.
The distributed control fraud was a concept I didn't have a name for when I was writing my own book review for this contest (didn't make the cut).
The case I was discussing was PG&E and maintenance - to summarise, the system they were using to assess risk didn't make any sense, but no one was motivated to correct it, so lack of maintenance on a pipeline segment led to a catastrophic failure destroying several houses in a residential area and killing people. The executives didn't come up with the system, and the engineers don't control the maintenance budget, so no blame could be laid either way.
I'm convinced that this happens in every single industry and is one of the top threats to the average person, because this sort of thing tends to be systemic, affecting huge numbers of people.
What book did you review? The same one?
Nightmare Pipeline Failures
For those who enjoy reading about large fraud cases, this review reminded me of a recent case where an online charter defrauded the state of CA for ~50million:
https://voiceofsandiego.org/2019/06/12/inside-the-charter-school-empire-prosecutors-say-scammed-california-for-80m/
> Here’s how witnesses say it worked: Rigney reached out to dozens of high school football programs and other youth athletic organizations. In presentations to coaches, he would offer to donate a certain sum of money to the athletic program for each student who filled out the paperwork to sign up for the summer program. The donations started at $25 per student, according to the indictment.
> Nothing would be required of the students, other than participation in the previously scheduled athletic program. For each student Rigney signed up, he also got $25, according to the indictment.
Essentially, they exploited the fact that the state didn't have very rigorous ways of verifying student enrollment in summer programs. Getting a student's info + parent signature was sufficient to get paid, even if the student then received no actual instruction.
"If Lying For Money's most important idea can be described in a single line, it's that fraud is an equilibrium phenomenon – or, as Davies likes to put it, 'It is highly unlikely that the optimal level of fraud is zero.' "
Interesting thought in relation to blockchain.
How so?
I think some of the quote characters may be wrong? When listening to the audio for this, I get many "end quote"s
"It seems to follow that the more centrally-planned an economy is, the more vulnerable it becomes to fraud, corruption, and exploitation by bad actors. (The extent to which various 20th century experiments in centrally planned economies support this conclusion is left as an exercise to the reader.)"
The thing about the "20th century experiments in centrally planned economies" is that way there was a common blueprint to their dismantling - the control fraudsters at the top becoming envious of their western counterparts and attempting liberalization to join them.
There were generally three ways it could go:
1. Central Europe decided to join their western peers outright - which required immediately adapting the western norms. This meant the fraud was a one-off - once they divided the spoils, they were forced to operate within - more market-oriented, but otherwise strict - EU regulations. Their countries suffered economic recessions, but got over them in a decade or two, are are mostly fine nowadays.
2. China never let go of central control. They reaped the benefits of liberalization without damaging the overall economy. The corruption and fraud went widespread and started damaging the social matter of the country, but the central authority was there to go after them eventually, up to executing a few (thousands?) of them (I disagree with the method's severity on ethical grounds, but I certainly agree, as Davies assumedly would, with the notion that whatever highest level of severity you choose, fraud and corruption are up there with violent crimes as the most deserving of it). It seems to have worked and they, too, seem mostly fine.
3. The core USSR just liberalized without guardrails. Fraudsters hoarded everything they could and continued to exploit it, with nothing to stop them. It was a total social and economic collapse, continuing to the present day.
So, on one hand, a single centralized institution is naturally vulnerable to a hostile takeover by bad actors (or rather, all institutions are vulnerable, but a centralized one provides a single point of failure for the whole of society, so the consequences of a takeover are catastrophic) - the existence of alternative competing institutions is one simple way to prevent that.
But on the other hand - a single centralized institution appears to prevent fraud and corruption, and I think it's pretty easy to understand why: centralization prevents bad actors from extracting resources away from the system. In a centralized economy, there's nothing outside of the system (or at least nothing legitimate and non-low-status) - there's only so much corruption and fraud you can commit to the system if reaping benefits requires you to continue to operate within it.
Low trust societies also tend to settle fraud claims outside the court system (if there is one) and permanently.
Complete aside: I'm a casual reader here, but I just followed links back to your post "The Toxoplasma of Rage" and wanted to send you a fan post for that.
The pretense that wind or solar can reliably power heavy industry or even residential areas is probably a Big Store con, but there are elements of counterfeit science. And 'a control fraud makes you question your trust in the institutions of society' fits. So does 'a market crime makes you question society itself'.
> Adam Smith was breaking with centuries of tradition when, in The Wealth of Nations, he frowned practice of price fixing by describing it as a "conspiracy against the public."
I wonder if Smith was writing at the time that the conceptualization of markets was changing from a place where the sellers would have stable employment to a place where the buyers would get the best deal. As people moved away from minimal subsistence, the culture would shift from maximizing stability to allowing changes that delivered more to consumers.
Really great review! Enjoyed the discussions of different kinds of fraud (read: different things in our society that can be exploited by bad actors).
I just wish the reviewer discussed a bit more about how to limit how bad the fallout can be. My one gripe is that it's handwaved as "all healthy societies have a bit of fraud, if there's no fraud that means you live in a low trust society where everyone is suspicious of one another all the time".
And then what???
I understand that a high trust society increases the likelihood of fraud. So does it follow that a high trust society also needs to plan to deal with the consequences of fraud? I'm not talking the punitive measures - for subprime mortgages and PPI alike it's clear that it's both hard and pointless. But we're saying that a high trust society cultivates a ready crop of victims for fraudsters in exchange for making things easier for everyone doing legitimate business - it would only be fair if society had some safety nets for those victims.
"In discussing different equilibrium points for trust, Davies brings up what he calls the "Canadian Paradox," which is an observation that a low-trust society will have less commercial fraud than a high-trust society (an example of one such high-trust society being Canada, which in 1985 was home of the Vancouver Stock Exchange, dubbed by Forbes Magazine's Joe Queenan as the "Scam Capital of the World.")"
How does that work dynamically? Does fraud grow unrestrained in high trust societies? Wouldn't that turn them into low trust societies?
Thanks for this book review! I am particularly intrigued by the idea that *complexity enables fraud*, as explained with reference to trust chains and centralized economies.
It's interesting to note that despite the world becoming more complex, the prevalence of fraud doesn't seem to have increased significantly compared to the "good old times." For instance, while the Internet has indeed been the scene of several instances of fraud, the majority of its users continue to have positive experiences. As issues like email spam emerged, technical solutions such as spam filters were developed to maintain a balance. In my experience, most people still rely on the Internet, trust sources like Wikipedia, and conduct online transactions without hesitation.
*Isn't it intriguing how the level of fraud appears to remain relatively stable, maintaining an equilibrium of sorts, even as complexity continues to grow?*
Bonus thought: I wonder about the implications for a world where AI is increasingly pervasive, enabling people to do increasingly complex things without fully understanding the details.
Theranos is an interesting example, because you wouldn't have to do the regular financial due diligence - you would merely have to check with skeptically-minded medical experts. Even at the time, people said "this is impossible", and the thing about impossible stuff is that it doesn't happen.
"But when the SEC responded by changing the rules and extending the settlement period by one week, the plan started to unravel: giving the short sellers an extra week to procure shares made a huge difference, because remember, this happened in 1922"
The SEC did not exist in 1922. What actually happened? Is this error in the book, or was it introduced by the reviewer?
> The illegal dumping of toxic waste [...] is a kind of fraud (and one which often involves other frauds in counterfeiting safety certification), and as a kind of fraud, it is essentially a market crime.
I disagree. The problem with illegal dumping of toxic waste is the toxic waste. Additionally, there may be a market distortion if the motive is profit, but that is a very minor concern in comparison. As an intuition pump, consider a company which engages in illegal dumping without any financial gain, perhaps because their CEO hates the EPA or whatever. Would that company be any less criminal for it? On the other hand, consider a company which violates regulations without material harm: perhaps they sell pure sugar pills as homeopathy without going through the prescribed steps of first diluting some substance beyond detectability. Their market advantage is exactly the same as the one of the illegal dumping company. Are they equally bad?
If that is a market crime, then every crime committed for financial gain is a market crime. Stealing to finance a drug habit? Obviously a market crime against the other users of that drug, as you raise its prices with an unfair advantage. Murdering your relative so you can inherit? A market crime against the job market in which you would have to work otherwise. I will stop here before I run into Godwin's Law.
Capitalism itself seems to be based on this kind of phenomenon.
Imagine that wage is banned. All corporations become coops. Then, it will be quite easy for the elected managers to do all kinds of (what this author calls) frauds to the coop members. So, the system will eventually devolve into usual capitalism: in many cases, the oversight costs for the coop members will become too much, and they will just let managers slowly become capitalists.
In this sense, a hypothetical transition from capitalism to socialism as predicted by Marx seems to be dependent on decreasing oversight capacity costs to the point where coops become more efficient than waged-employees-based corporations.
I don't see why a CEO could more easily defraud a board, if the board happened to comprise customers/employees.
> A long firm clearly falls under ‘Thou shalt not steal’, and a counterfeit under ‘Thou shalt not bear false witness’
How did this make it into the review? Forging a document cannot be said by even the most dimwitted philosopher to fall under the category of falsely accusing people of crimes. Bearing false witness is when you show up and testify "I saw it happen, and X is what happened" when in fact X didn't happen.
Forgery is essentially the opposite of that, when you present your own testimony as having been given by someone more trustworthy than yourself.
It's also strange, to me, that this taxonomy uses the word "counterfeiting", almost always applied to creating illegitimate money, for the crime already known as "forgery". It is true that forgery involves counterfeiting a document in much the same way that counterfeiting involves counterfeiting a piece of currency. But why go out of your way to be confusing? This kind of thing mostly just suggests that you want to write about a phenomenon without ever having been exposed to any prior discussion of the subject.
"eBay is famous for siding with buyers in the event of a dispute, so whenever I sent an item, there was always a possibility that the seller would falsely dispute the charge by claiming the item never arrived. "
There's a typo, should say "buyer would falsely dispute"
"optimal amount of fraud is not zero"
https://www.youtube.com/watch?v=fqYyxvM85zU
I know a bit of Ponzi’s biography, and describing him as he is here is pretty deceptive. He was a career “con man” of sorts, not some hapless publisher who stumbled into fraud.
A few other weird errors and I am not sure I find the categorization into 4 buckets very helpful. Seems like most large frauds hit several of them at one point or another.
I would also repeat some of the previous comments especially regarding the optimal level of fraud is zero. It’s just that this goal is not worth achieving. Maybe a better way to say it is the best structure for society we currently can envisions involve some level of fraud.
"The Optimal Amount of [Bad Thing] Is Not Zero"
More generally, "the optimal amount of anything is neither extreme."