Kudzu and failure

Just back from one of the Kauffman Foundation’s “liberaltarian” dinners, organized by Brink Lindsay and Steve Teles. Steve talked about his new project on what he calls the “kudzu sectors” of the economy: finance, law, and consulting. I’m jealous of the fact that Steve keeps opening up new topics while I keep ploughing the same ground.

As is often the case, Megan McArdle made one of the most insightful comments of the evening, about why bright B.A.s prefer consulting to working for “real” companies or governments. Before the formal event started, Megan updated me on her book-in-progress, on failure and how to arrange social institutions to make it appropriately painful but not catastrophic.

No doubt there’s an equivalently exciting dinner series in L.A., but I haven’t found it.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact: Markarkleiman-at-gmail.com

19 thoughts on “Kudzu and failure”

  1. Hmm, law is a bit different than the other two, or at least big law. Finance and consulting are parasitic off the real economy; big law is parasitic off finance.

  2. As is often the case, Megan McArdle made one of the most insightful comments of the evening, about why bright B.A.s prefer consulting to working for “real” companies or governments.

    Did it have anything to do with Hobson’s Choice?
    And Libertarians talking about Finance? Did they mention their latest biggest fail?
    From the NewScientist article Ditch the bank – borrow from the crowd:

    ~~~~~~~~~~~~~
    “The idea is simple. Lenders meet borrowers through a website that is something of a mash-up between eBay and a social network. To borrow money through Prosper, for example, you set up a profile and apply. The website assesses your creditworthiness, then assigns you a grade and an interest rate. Lenders can then weigh up these criteria to decide whether to finance your loan. They review borrowers’ profiles much as one might review profiles on a dating site, and can finance anything from $25 of a requested loan to the whole thing. Your monthly payment goes directly into the lender’s bank account, including interest. Every part of the process takes place online.

    It was an attractive gambit: people were more likely to get loans, it was all very convenient, and lenders could get a better interest rate. It should have worked beautifully.

    But the whole thing was derailed by an early, crucial mistake. Galvanised by the crowd-sourced success of efforts like Wikipedia, Prosper CEO Chris Larsen believed that his role was simply to provide the technological infrastructure to match lenders and borrowers. Instead of providing guidelines for borrower risk – such as interest rates and credit scores – he thought Prosper should be a “libertarian open marketplace” that relied entirely on the wisdom of the crowd. “That was probably asking too much of the crowd,” he admits.

    The fallout was harsh. Two years after it formed, Prosper was being ruined by defaulters: up to 20 per cent of borrowers were walking away with no repercussions. That ratio was staggering compared with the single digits banks report, and unlike a traditional bank, Prosper had no insurance to repay jilted investors. After an investigation in 2008, the US Securities and Exchange Commission, the country’s primary financial regulator, forced the company to shut its doors.”
    ~~~~~~~~~~~~~

    Simple libertarian ideas for a complex world. Things go boom.

    The real question ought not to be: How many Libertarians does it take to screw in a lightbulb? (None. The marketplace will take of it.)
    But rather: How many Libertarians does it take to screw up the marketplace? (Just one, if he is in charge of the Fed.)

    Given that Libertarians aren’t daunted one iota by their proven failures…
    One has to wonder if it is some kind of cult or neural disorder.

    1. Getting off-topic but the kernel of this is appealing. What do you think a Social Democratic version of this would look like? I’m guessing something more like micro-lending — something with open access but with more transparent and skillful oversight?

      I will say this for libertarians: they have interesting ideas when viewed from 35,000 feet. But almost invariably, when you start zooming in they start looking wildly naive and often a bit bigoted. Unfortunately, too many people are content to be swooned by their pretty landscapes without examining the details.

      1. Tim: “What do you think a Social Democratic version of this would look like?”

        You can probably start out with credit unions and co-op banks. While today we largely see them as fairly typical banks with an odd organizational structure (having members instead of customers), they had their origin in the rural self-help loan societies of 19th century Germany. The titles of the books that the pioneers of co-op banking wrote illustrate the social-democratic slant of the movement [1]:

        Hermann Schulze-Delitzsch, “The working classes and associations in Germany”, 1858.
        Friedrich-Wilhelm Raiffeisen, “The loan associations as a means for relieving the misery of the rural population and the urban artisans and workers”, 1866.

        [1] Interestingly enough, neither Schulze-Delitzsch nor Raiffeissen were social democrats (at least not in the 19th century sense of the term).

  3. “As is often the case, Megan McArdle made one of the most insightful comments of the evening”

    Sarcasm? Please?

    McArdle is even more innumerate than your typical libertarian and has never in her life had any insight that isn’t either trivial or immediately refutable by empirical reality.

  4. Niggling doubt here. Kudzu is an invasive alien species: transplanted without its native enemies (predators, parasites, rivals), a species rampages through its new ecosystem. That’s the way Russlans see robber-baron capitalism, with some justice. But in the USA, the growth of parasitic service professions is surely quite endogenous. Perhaps Dutch elm disease?

  5. Mark: “Steve talked about his new project on what he calls the “kudzu sectors” of the economy: finance, law, and consulting. I’m jealous of the fact that Steve keeps opening up new topics while I keep ploughing the same ground.”

    I like this metaphor. Perhaps we could beg a link to his talk?

  6. Adding to the clamor for the example of MM’s insight.

    Really. A lot of us (from the comments above, it’s not only me) do not understand what you see in her.

    I like to think I am capable of changing my mind, so please, serve us up some cognitive dissonance. Show us what we’ve overlooked.

  7. I think we are getting a little sloppy here. I tend to agree that our economy is much too service oriented, and maybe we have too many people doing finance, consulting and law, as opposed to some other sort of productive job that we could/should ideally shift resources towards, but, that doesn’t mean they’re all “parasitic.” Maybe some, maybe even most, but not all.

    If you want to “go there,” are we not all parasites of the agricultural industry? Well, that and housing and maybe a couple others. But even farmworkers are out of work these days, so, if one wanted to not be a parasite, what to do?

    1. The dinners are off the record; McArdle’s riff was on the ways in which consulting firms make themselves comfortable places for elite-university grads, in ways that “real” workplaces don’t.

      When Megan’s book comes out, I’ll try to post something. But the basic idea is straightforward: if failure is cost-free to those responsible, there’s too much of it. If it’s catastrophic for those responsible, no one takes risks. Institutions from labor markets to bankruptcy rules to health insurance to the social safety net need to be designed to encourage people to take risks, while still rewarding prudence. This is not an analysis “real” libertarians find attractive.

      1. That makes a lot of sense. How does she square that with her idea that the cost of lenders’ underwriting failures should be borne entirely by the homeowners, I wonder? Genuinely curious, as most of what she writes on the blog doesn’t display that sort of common sense.

  8. “When Megan’s book comes out, I’ll try to post something. But the basic idea is straightforward: if failure is cost-free to those responsible, there’s too much of it. If it’s catastrophic for those responsible, no one takes risks. Institutions from labor markets to bankruptcy rules to health insurance to the social safety net need to be designed to encourage people to take risks, while still rewarding prudence. This is not an analysis “real” libertarians find attractive.”

    IOW, nothing original.

    I have a feeling that any review of Megan’s work can use the old line ‘This work is original and true. However, what is original is not true, and what is true is not original’.

    As to: “This is not an analysis “real” libertarians find attractive.”, almost all of Megan’s work is libertarian shilling (with the odd exception).

  9. Thank you for replying, Mark.

    I don’t doubt for a moment that MM knows all about over-privileged elite-unversity grads and the gravy trains they ride. I’m not convinced that graduating from an elite university necessarily means you are “bright” (though you probably will be highly polished), and I wonder how many truly brilliant Any-State University grads find themselves snatched up by consulting firms. So, still don’t see what you admire about her. Maybe in another post in another time…

    And about ploughing the same ground: there’s breadth and depth and there’s a good argument that knowing a lot about a little is a much bigger accomplishment than knowing a little about a lot.

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