Ed Conard And Crackpot Economics

David Frum asks Nick Hanauer, an early investor in Amazon as well as other successful tech enterprises, what he thinks of Ed Conard’s theory that the investors among the .01% are the indispensable risk-takers that fuel the American economy. As it turns out, not much:

Risk-taking? These guys aren’t risk-takers. Think of the founders of Google. They came from middle-class families and went to Stanford. Short of inheriting the crown of England, there’s nobody in this life less exposed to risk than a Stanford Ph.D. in computer science. They had a business idea. They didn’t put up their own money. They used other people’s money—venture capital. And the venture capital company wasn’t using its own money either. They were investing other people’s money too—and taking fees of 2% on principal and 20% of profits for their trouble.

Hanauer goes on to share who he thinks is really at-risk when it comes to start-ups of the kind that made him so wealthy; it’s probably not who you’d think.

What’s striking about the debate over Conard’s fairy tale capitalism — which is more or less the official doctrine of the Republican Party and is little removed from presumptive nominee Mitt Romney’s economic platform — is the way it shows the bankruptcy of what passes for intellectual debate in our politics. From what I’ve read of Conard’s theory, both in Adam Davidson’s New York Times Magazine piece and through the previews he has made available on his website, it’s self-evident crackpot nonsense, gussied up with copious econojargon and delivered with the unbending, serene confidence of the religious zealot. From the Davidson profile:

A central problem with the U.S. economy, he told me, is finding a way to get more people to look for solutions despite these terrible odds of success. Conard’s solution is simple. Society benefits if the successful risk takers get a lot of money. For proof, he looks to the market. At a nearby table we saw three young people with plaid shirts and floppy hair. For all we know, they may have been plotting the next generation’s Twitter, but Conard felt sure they were merely lounging on the sidelines. “What are they doing, sitting here, having a coffee at 2:30?” he asked. “I’m sure those guys are college-educated.” Conard, who occasionally flashed a mean streak during our talks, started calling the group “art-history majors,” his derisive term for pretty much anyone who was lucky enough to be born with the talent and opportunity to join the risk-taking, innovation-hunting mechanism but who chose instead a less competitive life. In Conard’s mind, this includes, surprisingly, people like lawyers, who opt for stable professions that don’t maximize their wealth-creating potential. He said the only way to persuade these “art-history majors” to join the fiercely competitive economic mechanism is to tempt them with extraordinary payoffs.

Yes — and it’s actually an act of mercy  to burn a heretic at the stake; that way, they’ll have the opportunity to recant and save their souls from an eternity in Hellfire. It’s simple logic! Yves Smith rightly points out that a smooth, perfectly calibrated, and miraculously simple All Encompassing Worldview is not something worthy of reverence or at worst self-consciously measured criticism. On many other issues in our society, that kind of intellectual authoritarianism is rightly greeted with great skepticism. And history has provided more than a few examples of why that’s for the best:

Just because someone has an internally consistent world view does not make it accurate. Fans of slavery, alchemy, the Inquisition, trial by combat, and Ptolemaic astronomy all had logical looking arguments supporting their now discredited views. Conard at first seems to yet another evangelist of a hopelessly flawed and dangerous orthodoxy, and the more he speaks, the more he seems to be deeply imbalanced, so intensely invested in his distorted personal mythology that he is driven to make the world at large reflect it back. It would be far better for Davidson and the New York Times to treat people like Conard as epitomes of deep-seated cultural pathologies, rather than promote them.

Remember: Conard is ostensibly an aspiring public intellectual. His book is an economic Ten Commandments, a catalog of the supreme knowledge he’s delivered to us from the Mount Sinai of his enormous wealth. Yet if you’re not already an adherent to the church of the free market — and even if you are; Glenn Hubbard, an otherwise stalwart defender of high finance and the Republican dogma, criticizes Conard for ignoring the problem of rent-seeking — Conard’s philosophy is rather immediately recognizable as a distorted product of  desperate rationalization and base self-interest. Why, then, is this economic creationism granted such unwarranted publicity and respect? I think Krugman’s got the answer:

Disputes in economics used to be bounded by a shared understanding of the evidence, creating a broad range of agreement about economic policy. To take the most prominent example, Milton Friedman may have opposed fiscal activism, but he very much supported monetary activism to fight deep economic slumps, to an extent that would have put him well to the left of center in many current debates.

Now, however, the Republican Party is dominated by doctrines formerly on the political fringe. Friedman called for monetary flexibility; today, much of the G.O.P. is fanatically devoted to the gold standard. N. Gregory Mankiw of Harvard University, a Romney economic adviser, once dismissed those claiming that tax cuts pay for themselves as “charlatans and cranks”; today, that notion is very close to being official Republican doctrine. …

And why is the G.O.P. so devoted to these doctrines regardless of facts and evidence? It surely has a lot to do with the fact that billionaires have always loved the doctrines in question, which offer a rationale for policies that serve their interests. Indeed, support from billionaires has always been the main thing keeping those charlatans and cranks in business.

It’s not exclusively “charlatans and cranks” profiting from telling money what it wants to hear; or, if you prefer, the charlatans and cranks have climbed their way up to vantages previously thought of as remote from the depredations and avarice of the outside world. Professor Conard: Coming soon to a business school near you.

62 thoughts on “Ed Conard And Crackpot Economics

  1. Pingback: Ed Conard And Crackpot Economics — The League of Ordinary Gentlemen

  2. Using “crackpot” in the title makes the author look like one, not his intended victim.

    There’s a valid counterargument here: the lily needs no such gilding.

  3. It’s a constant source of surprise (and face-palm) for me how economic ideas get disseminated out into political debate.

    For one thing, both the “income inequality in necessary for economic growth” and the “tax cuts can increase revenue” ideas have some basis in fact. At very high marginal tax rates you can do serious damage to your economy, and even your tax base by raising taxes. But at lower marginal tax rates the effect is very slight. It never goes away completely, a tax increase always nets you a little less than linear mathematics would predict, and raising taxes will inevitably put a couple of people off their grand business venture, but that is an inevitable cost of taxation – you’re transferring resources form the private sector to the public sector, so of course the private sector is going to shrink a little.

    The real issue is spending – no amount of side effects, no matter how slight, can justify taxing for spending that does no good, or less good than it would do in the hands of the people who earned the income. The focus should be on spending – is the government spending enough money on the right things, and is it spending money on things it shouldn’t?

    But of course you can’t demagogue that as easily, so instead we get politicians using economic theories they don’t understand to rationalise a “I can give you what you want for free!” fiscal policy.

    • Sounds about right, JamesK. The proper defense of “stimulative” tax cuts is not that they pay for themselves–they largely don’t—but that they prevent a worse spiral and crash.

      As for Krugman’s continual double-down on Keynesian [gov’t] spending—if it fails, it’s because it was not enough—is workable in theory. They call it the Martingale in gambling, that you just double down on your losses until you win one and that gets you back to even. That’s why casinos instituted “table limits,” to prevent a millionaire from always winning back his lost hundreds.

      In the real world, table limits are even more stringent—even a gov’t-backed green energy golden goose can get the pox and bite the Big One. The Martingale is not always successful in real life: too many variables. Landing a man on the moon was not a certainty that was only a matter of money and will to achieve. It could have turned out that the radiation is too great to effectively shield against [which is still an unsurmounted obstacle to traveling to Mars and back].

      As to the substance of high rewards for shouldering risk, that remains unaddressed. The young entrepreneurs invest their youth: their sweat equity is untold hours writing code or networking or selling, instead of chasing skirts and embracing the slacker lifestyle. Playing games is easier than creating them.

      As for the capital investment part, Silicon Valley was impossible without the “angel” investors, whose risk was prohibitive—for every Google there where hundreds that died in the crib. That the payoffs should not reflect beating the bad odds seems to defy the reality.

      In my view, the counterargument is Bell Labs.

      http://www.amazon.com/The-Idea-Factory-American-Innovation/dp/1594203288

      Dupont, and that ilk. But that this is an appealing alternative to Mr. Isquith and his ideological allies seems doubtful.

      • Can you provide evidence for “Krugman’s continual double-down on Keynesian [gov’t] spending”? His position on the inadequacy of the stimulus has been consistent from before it was passed to today.
        • That rhetorical quibble is all you got out of the whole piece above? Bell Labs is the interesting part here, unless you think technological innovation magically drops down from heaven like contraceptives or Pell grants.
          • No, your being wrong about Krugman doesn’t mean I think technological innovation magically drops down from heaven.

            As far as the rest, I stopped reading when you tried to tell us the only way to get talented people to focus on anything other than “chasing skirts and embracing the slacker lifestyle” is to pile ever larger monetary rewards on them. Playing games may be easier than creating them, but for many people the latter is a more attractive way to spend time. And that would explain your supposedly interesting counterexample of Bell Labs too.

          • Bell Labs is not the interesting part. The government monopoly which funded Bell Labs is the interesting part. Want a Bell Labs? Maybe we need to see such places as Bell Labs as we see Sandia Labs.

            In point of fact, technological innovation does magically drop down from heaven by way of Washington. And most of the doctors who do residencies here are paid by Medicare. I thought the Libertarians had given up on John Galt and Dagny Taggart. Seems some of them find ol’ Ayn Rand just as viable as ever.

          • Clawback: Cite Krugman nailing Obama for wasting a trillion of our dollars on underfunded Keynsianism, then yr argument will be real, not plastic.

            Well done, Blaise—the interesting part is indeed Bell’s monopoly status that made Bell Labs’ investments in undirected R&D possible. I was hoping someone would catch up.

            & my thx to Mr. Isquith’s OP for opening this line of thought. I hope he’s reaping the fruits of his own labor.

          • An inadequate stimulus isn’t wasted; it’s just inadequate. Really, the basics of the theory here aren’t difficult.

            And no, the idea of showering megacorps with free money in the hope they do something socially useful with it isn’t new or interesting. Megan McArdle has been trying to make that case in regards to pharma for many years now, among many other examples.

    • a tax increase always nets you a little less than linear mathematics would predict

      That’s very far from “tax cuts pay for themselves”; absent marginal rates far in excess of the current ones, they don’t. Claiming they do is an example of the “I can give you what you want for free!” fiscal policy you’re criticizing.

  4. “What are they doing, sitting here, having a coffee at 2:30?”

    …maybe they fishing felt like it? What’s it to you, Ed?

    • There are a few warning signs for the psycho control-freak micro-manager:

      1. He assumes that work scales linearly: if you can do X at 40 hours/wk, you can do 2X at 80 hours/wk. He concludes from this that if you’re only working 40 hrs, you’re stealing from the company.
      2. He thinks that you’re only working hard if you look like you’re working hard.
      3, If you’re not approaching a problem exactly the way he would, he thinks you’re lazy or stupid. Or, worse still, you’re doing it wrong deliberately.just to piss him off.

      Any guesses what it’s like to work for Ed Conard?

  5. Risk-taking? These guys aren’t risk-takers. Think of the founders of Google. They came from middle-class families and went to Stanford. Short of inheriting the crown of England, there’s nobody in this life less exposed to risk than a Stanford Ph.D. in computer science.

    Pretty bad example. Brin (and I think Page too) dropped out of the PhD program specifically to jump into the Google project with both feet. And of course, being born a Russian Jew in the 20th century was always such a sure thing, almost like being born to the House of Windsor.

    • Yes, and when he says they didn’t invest their own money, it brings up so many rebuttals, but the fact is that someone risked money. It’s such an obscurantist strategy, one wonders how smart people even give it credence.
      • someone risked money

        As Hanauer points out, largely pension funds and other aggregations of many middle-class people’s nest eggs, not the mythical VRTEJC (*).

        * Visionary Risk-Taking Entrepreneurial Job Creator

      • Conard’s criticism was of talented people, such as those sitting near him having coffee at 2:30, who he supposed had talent to create valuable things. He wasn’t criticizing them for sitting there rather than writing checks to fund startups.
    • Brin came to the US at the age of 6. He’s the son of a math professor and a NASA scientist. What awful risks was he facing if Google had fizzled, other than being reasonably successful working for someone else?
          • Google’s Brin is 38. David Brin, the SF writer, is 61, and he risked being beaten to a pulp (or drowned in a vat of coca-cola) by anyone who made it all the way through the second Uplift trilogy.
          • Regarding Sergie Brin: Make that grandfather, then. Plus, I hate people who are my age and rich.

            Regarding David Brin: I only got to book 2. I’d limit my ambitions to yelling “Why is there a f*cking monkey in this book?”

      • “What awful risks was he facing if Google had fizzled, other than being reasonably successful working for someone else?”

        And here I thought the middle class was being hollowed out. You mean working hard and taking advantages of the opportunities you are given is actual a path to success in 21st century America?

        • While holding an advanced CS degree from Stanford? I’d guess your chance are fair to middling. You might even rise to the status of paying lower taxes than Warren Buffet’s secretary.
          • Is that why you and your buddies feel the need to beat their heads in and spray poison down their throats? (That is, they are no more my amigos than the Davis police are yours.)
          • Have I completely misread the editorial line of Mr. Isquith and yourself, that the Occupy movement represents the vanguard of a new political direction for the country? Or at the very least, the potential for such a change?

            (And of course, if anything, LT Pike’s being a working class union member in good standing make him your buddy more than mine. And the Occupy kids , being ‘self important white kids with no important message or agenda’, make them my brothers)

          • Nor more so than the guy quoted laudably in the OP who said Sergey Brin has taken no risks to get to where he’s at today and mischaracterized the man’s educational achievements.
  6. When Nick says where the real risk comes from in his view, I cringe. Conflating investment (which inherently carries risk) with pensions & insurance (the whole point of which are stability) has to be up there among the dumbest decisions we’ve ever made. It’s like we assumed everything would always go up & risk was dead.
  7. One thing I’ve noticed is how there is a kind of ideological sorting in the social sciences. Sociologists all tend to be rather far to the left while economists tend to be left of center or even sligthly center to center-right neo-liberals and libertarians.

    A good part of far left intellectualism, therefore seems to be about discrediting economics and economists. Yet even if it is the case that economics does get things wrong, isn’t it still rational to bet on economists because they are still more likely to get things right than lay persons?

    Of course, the same could be said about sociology. However, even if we take sociologists seriously, it is not clear what kinds of policy implications they provide. A lot of sociology has incorporated critical theory into it and thus is often aimed fairly explicitly at providing a critique of existing power structures and relations.
    The kinds of policy implications that sociological theories (to the extent they are true) have are not straightforward. Furthermore this looks like a far more explicit and blatant ideological motivation. Not to mention that the whole critical theory program is aimed not at finding out the truth, but theorising in ways that benefit the worst off. And given the strong Marxian influences all you’re likely to get from critical theory is anti-bourgeoise or anti-capitalist narratives, whether or not said narratives are true.

    • Good grief. Economics is sociology. From the mark-up Apple charges for an overpriced telephone to the price of good scotch to the price of a dozen organic range-free chicken eggs, most of the numinous qualities of Utility form the basis of profit. The mark-up on shoes made by little children breathing toluene fumes in unventilated factories add up to profits. Sociology tells us why this is so.

      You ask what policy implications the sociologist might provide. A sociologist isn’t interested in solutions. He looks at the world as it is and writes up reports. If he critiques existing power structures, he does so from the facts. Can a child breathing toluene fumes be reduced to a pawn in a game of ideology? The ideology of capitalism has put that child in that factory and not in school. That is a simple fact. It is not up for discussion. Capitalism makes no room for child labour laws. And why should it? The child is taking a risk by working there, a risk his parents thought work taking. If recrimination is useless, the child will smear that glue all day long and he will not go to school.

      The influence of Marx has passed away. This is the Age of Capitalism. The rights of man are either dying or dead.

      • The ideology of capitalism has put that child in that factory and not in school. That is a simple fact. It is not up for discussion.

        No its no a simple fact. Its a causal story that states 3 things.

        1. that a child is working a factory.

        This is a fact

        2. A counterfactual: The child could have otherwise been in school.

        If this is a fact at all, it is no simple fact. In many 3rd world countries, more often than not, a child who is not working in a factory is starving or a child soldier or is a child prostitute.

        3. A causal claim: That it is capitalist ideology which caused this and not various forms of political and social corruption and venality or for that matter, the kids own parents.

        This too is not a simple fact and also up for discussion.

          • Just because the ideology of capitalism doesn’t propose that the child be put in school, doesn’t mean that it proposes that it proposes that the child be kept away from school. At the very least the ideology of capitalism says that children in factories is a temporary condition. The next generation will fare much better and will go to school. What do the alternative ideologies offer? Empty promises.
          • That’s so completely riddled with false and misleading premises, I think I’m going to put this conversation away as a practical example of logical fallacies.

            Everything’s a temporary condition. Education promises a better future. It manifestly reduces overpopulation. What do the alternative ideologies offer which capitalism does not? Education. End of story.

      • Also, unless you are making a purely internal critique (as in “what you do doesn’t match your stated goals”) you cannot make a critique without invoking values, which unless you’ve advancing a vastly reductive and revisionist theory of axiology, is distinct from facts (and are anyway distinct from the kinds of facts that sociologists claim to peddle.)
        • It’s brutally simple. The only places where Marxism ever made any headway were in peasant societies. You have not exactly denied that capitalism puts children in factories or chains them to looms, nor do you argue such things should be abolished in favour of long-term investment in the society, creating an educated population which might earn more. You raise specious arguments about how those children might be starving. That the factory owner might fund a school for the children of the people who work in those factories goes unsaid, because you know perfectly well why children are hired: because they are cheap labour and increase profits.

          My point is this: sociology cannot be extricated from economics. I will allow your question begging and glittering generalisations about which professions are leftist and which are rightist. But capitalism has values, starting with profit and necessity. To say otherwise is nonsense.

          • The only places where Marxism ever made any headway were in peasant societies.

            Them and academia. A lot of Marxian thought found a home among thinkerswho were partial to pastoralism. i.e. a lot of people who are partial to Rousseau are also open to Marxian (as distinct from what passes for what is currently called Marxism) thought.

          • Marxism is somewhat alive in the lit field though the bros du jour are deluze and guittari(sp?). To tge extent that i saw them invoked in an essay on american black metal of all things.
    • Straight up on that one, Murali. The thing is, these social science, in their pretense of being sciences, advertise themselves as being value-free. But implicit in yr analysis is that they’re anything but.

      Now it’s fine for Joe Lefty to assert his values, and often, they are valid: Kids should be in school, not at work.

      However, the reality is that kids not working is a luxury for a society, present only where there is sufficient wealth, be it imperial Rome or our modern bourgeois capitalist state. Pre-industrial or pre-capitalist states tend not to have abundant wealth, and indeed it seems absurd that the kids would sit on their asses while there are chores to be done on the “family farm” [let’s use that figuratively here].

      • Let’s not tar all the social sciences with the same brush (which was kind of my point) Things that go on in economic departments look very different from things that go on in the sociology department which can again be different from the geogrphy department or the history department. Part of this is related to the way continental philosophy has snuck into the universities via humanities departments like sociology and literature.
        • Welcome to the 21st century, Murali. Continental philosophy is pretty much a historical dead end. If it had a few useful bits, they’ve long since been incorporated into the post-analytic tradition.
          • Shrug. You just go on thinking sociologists are lefties and economics guys are righties and those wicked old Continentals are out there wreaking havoc on the world. I’ve spent too long around fundamentalists of the religious persuasion to ever believe they will think for themselves. Now I’m coming to believe this is true of all fundamentalists of all persuasions.

            There never was a practical distinction between the Continentals and the Analytical philosophers. “Continental” was always used as a pejorative among philosophers to describe people who still thought Heidegger wasn’t any entirely bad guy for backing the Nazis.

          • There is a real difference between Continentals and the analytics, but it is not as sharp as is commonly thought.

            One rough difference is of approach. Analytic philosophy tends to be more problem centred. What is the difference between the mind and the brain? Why should we be Moral? Continental philosophy is more tradition cetered. According to continentals, none of the above questions make sense except in the context of specific philosophical traditions.

            Another difference is stylistic. While there can be obscure and unreadable texts in analytic philosophy, it is on average clearer and more easily understandable. This is a serious problem when it comes to bridging the traditions as many continental papers are just incomprehensible. Part of it is about deliberately arcane terminology. Another part is just bad sentence construction. Sometimes, arcane terminology is necessary. However, analytic philosophers suspect that continentals are being deliberately obscurantist.

            Remember Bob Cheeks? Remember how he would often go off about Vogelin and immanentising one thing or another? Remember how it sounded like faux erudition? Remember how incomprehensible it all was? Well continental philosophy is like that all (or most of) the time!

          • Most of my exposure to philosophy comes from logic via WVO Quine and linguistics from Derrida. Anyone who’s ever done much translation will understand why Derrida’s Grammatology is important: he’s one of the first to explore the difference between the way we write and the way we speak. Throw out all the rest of Derrida if it suits your purposes and just concentrate on this fact: there is a difference between writing and speaking.

            Why does translation have to be so hard? Why doesn’t French or German work like English? Why do I have to switch gears to go from one language to another? How do I stay in gear when I’m there? Is there some underlying concept which represents the number 95 independently of quatre-vingt quinze, four (times) twenty – fifteen or Fünf und Neunzig, five-and-ninety? It’s pointless to ask such questions: it just sounds right in that language. Any explanation of the problem will require some rum vocabulary. That’s why Derrida is so hard to follow. For what it’s worth, he reads better in French. Misunderstanding Derrida in English translation is proof Derrida was more often right than wrong.

      • TVD,
        I’m sorry, when did you actually meet a trained physicist who is now a practicing social scientist?

        They ain’t all chimps.

        I’m about ready to start shredding some arguments on the “Joe Lefty” values, which are FAR from obvious, and indeed counterfactual. Jews got into the middle class via education. The irish? The Italians? They worked to get in, put their kids into factories, and clawed their way up.

        The idea that kids should be in school is hardly a consistent “Joe Lefty” value.

  8. Guess we’ve found the right’s version of George Soros.

    Gajillionaire finance person who thinks he has god’s insight into humanity by his success.

    • That has significantly reduced my opinion of Malcolm Gladwell. He’s specifically claiming that most successful entrepreneurs are predators. Its not clear what that means, since the actual article is behind a paywall. Does that include my friend who owns a painting business? My other friend who ran a software startup? If not, where is the line? Plus, he includes in this John Paulson, of all people, one of the few who had the sense to short the mortgage market. What’s predatory about that?
  9. Pingback: Conard Line « Nexcerpt

  10. As Buffett says there is already class warfare and our class is winning. However Hanauer points out too much success will kill the golden goose.

    In Game Theory there is the “Prisoner’s Dilemma.” The basic idea is that if you are a prisoner planning to escape with some fellow prisoners, you have the choice of being faithful to them and benefiting from their plan, or you can betray them and earn what may be a very considerable reward from the authorities. You also must consider that this choice will have occurred to the others, which means that you stand in danger of special retribution if you are betrayed first. This kind of problem can be abstracted into a little game.

    A,B B, Keep
    Faith B, Betray
    A, Keep Faith 3,3 0,5
    A, Betray 5,0 1,1
    In the game all the players choose secretly whether to Keep Faith or Betray each other, and then points are scored when the choices are revealed. If two players (A & B) Keep Faith with each other, then moderate benefits are earned by both. If both players Betray each other, then there is a minimal benefit. But if one player can sucker the other into Keeping Faith while Betraying him, he earns the maximum benefit while the victim gets nothing. That is Conard’s game.

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