Undercover Economist

The hazards of a world where mediocrity rules

“It’s absolutely amazing, but under the right circumstances, a producer could make more money with a flop than he could with a hit.” Thus spoke accountant Leo Bloom, played in The Producers (1968) by the much-mourned Gene Wilder. In Bloom’s thought experiment, a dishonest producer would raise a vast sum by selling the profits of a Broadway show many times over. Provided the Broadway show was a flop, nobody would come looking for their share of the profits and the fraudsters could retire to Rio. If the show was a hit, of course, “well, then you’d go to jail”. That was where Bloom and his partner Max Bialystock ended up: their musical, Springtime for Hitler, was far too good.

In the real world, people tend not to become richer when they do a worse job. There are exceptions, of course. In 2013, a jury found that Fabrice Tourre, formerly a trader at Goldman Sachs, had misled investors about the nature of “Abacus”, a complex financial security — and done so because that was his job. Abacus was, like Springtime for Hitler, a bet on collapse mis-sold to investors who did not seem to fully understand it.

Both cases are extreme examples of “moral hazard” — the odd phrase that economists have taken up to describe perverse incentives that encourage people to be careless, reckless or even outright saboteurs. Moral hazard traditionally applies in insurance cases, and indeed recent reports from Vietnam describe a woman who cut off her hand and foot in an attempt to collect a six-figure payout from her insurance company. There was a rash of such self-harming frauds in the Florida panhandle 50 years ago.

Economics has no difficulty analysing such cases — several Nobel Memorial Prizes have been given to economists who studied moral hazard. Still, they run counter to the mood music of mainstream economics, which tends to strike Panglossian chords. The starting point of modern economics is the perfectly competitive equilibrium, in which resources are allocated efficiently and the market will deliver more of what people really want. Against such a stirring symphony, Leo Bloom and Fabrice Tourre hit isolated, dissonant notes.

Yet there are corners of the economy where poor work is the norm, not the exception. A few years ago, two Italian academics, sociologist Diego Gambetta and philosopher Gloria Origgi, published an article reflecting on what they called “the LL game”. It has since found a catchier term: Kakonomics — the economics of rottenness.

In a kakonomy, mediocrity rules. People not only supply shoddy work and expect shoddy work in return, they actually prefer to receive shoddy work. I’m put in mind of the shared student house in which nobody can quite be bothered to wash the dishes, empty the bins or even buy new toilet paper. The presence of a housemate who bustles around wiping up the filth might seem to be welcome but, in fact, it’s an aggravation because it puts pressure on everyone else to join in.

Gambetta and Origgi observed the LL game being played at an advanced level in Italian universities. Not only would both parties to an agreement deliver low-quality (hence the “LL”), but they would insist to each other that they were doing an excellent job, and pronounce themselves delighted with what they had received in return. For example, a visiting lecturer might agree to deliver a series of eight original seminars and be paid an honorarium of €1,200 in advance. In fact, the payment is six months late and it’s only €750 (some excuse about taxes); meanwhile, the lecturer is mostly on holiday with his family and only gives five lectures, all of which are old hat. Both sides expected as much yet both sides loudly announce they’re delighted with the superb professionalism on show. Meanwhile, they are indeed pleased enough: the faculty has not been embarrassed by some visiting star and retains a larger entertainment budget; the lecturer enjoyed a free holiday without having to do any serious work.

There is something rather charming about a kakonomy at first glance. It can be quite pleasant to relax and be a little bit crappy for a while, and we all know that there is nothing quite so exhausting as a colleague — or, worse, a spouse — who is relentlessly perfect.

But a true kakonomy is collusive, a tacit agreement to be mediocre at someone else’s expense. In the case of many Italian universities, it appears that collusive mediocrity costs Italian students and the Italian taxpayer. (Lacking personal experience, I take Gambetta and Origgi at their word about the quality of most Italian universities.) Once a kakocracy has been established, it is likely to endure: recruiters will be careful not to hire anyone who might not only rock the boat but also repair the leaks and fix the outboard motor.

The spectre of kakonomics is a reminder of the importance of things that cannot be measured: the culture of an investment bank, or a university, may matter just as much as the explicit rules. Even when Bialystock and Bloom went to jail, they moved on to the next scam without missing a beat.

Written for and first published in the Financial Times.

It helps any new book to pick up some advance orders, so if you like my writing please consider pre-ordering my new book, “Messy“. (US) (UK) More to follow soon…

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