Book Review: The Economics of Innocent Fraud

My summer “book a day diet” began with a chewy one.  Fortunately it was short (a “bookette” – only 62 pages).  John Kenneth Galbraith is 95 years old.  So – that makes him the Yoda of economists. And – sometimes – I felt like I was reading something Yoda written had.

Economics of Innocent Fraud is not the first of his books that I’ve read; I hope it’s not the last.  Galbraith takes on the gap between “conventional wisdom” (a phrase he coined) and “reality” and uses the construct of both unintentional (innocent) and intentional fraud to explain how humans continue to snooker themselves.  His writing is dense, but delightful (almost poetic at times) and his wit is beyond acerbic.  About halfway through the bookette I let out a giggle and said “now he’s going to take on Greenspan and the Fed.”  Amy looked over at me with an amused twinkle in her eye and said “you really are a geek, aren’t you.” 

To give you a taste, following is the concluding paragraph from the chapter “The Corporation As Bureaucracy” where Galbraith asserts the “conventional wisdom” that management is accountable to the stockholders of a corporation is baloney.

“There are times when the need for economic and political understanding requires direct, openly adverse comment: Reference to corporate management compensation as something set by stockholders or their directors is a bogus article of faith.  To affirm this fiction, stockholders are invited each year to the annual meeting, which, indeed, resembles a religious rite.  There is ceremonial expression and, with rare exception, no negative response.  Infidels who urge action are set aside; the management position is routinely approved.  The shareholders who previously suggested some social policy or environmental concern have their proposals printed with supporting argument.  These are uniformly rejected by management.  The only significant recent exception has been at the meetings of the highly intelligent, socially eccentric and financially success Berkshire Hathaway, Inc. of Omaha, Nebraska.  Proposals by its stockholders are frequently accepted; some have thought this by prearrangement with management.  In any case, it represents a highly exceptional tolerance on the part of the corporation.  No one should be in doubt: Shareholders – owners – and their alleged directors in any sizable enterprise are fully subordinate to the management.  Though the impression of owner authority is offered, it does not, in fact, exist.  An accepted fraud.”

  • fx

    If you are interested in other takes on the gap between conventional wisdom and reality, you might also enjoy “Freakonomics : A Rogue Economist Explores the Hidden Side of Everything”.

  • Chris Keating

    At the end of the summer, I would love to hear the top 20 list of books that you loved the most and why. Im sure it is on the agenda but thought I would say I think it is an admirable goal!

  • Pete F.

    Question: are the (lack of) results of annual meetings the standard to use when deciding if management is accountable to the stockholders? Galbraith seems to think so. I do not. Shareholders vote with their shares, i.e. buying or selling. It would be naive to expect the annual meeting to be a venue where the management of a billion dollar corporation would solicit and then mull over the opinions of thousands of individual stockholders. Based on the short excerpt, Galbraith seems to expect exactly that. About what I would expect from the economist who predicted that large corporations would come to dominate and dictate the American economy, at the expense of small companies. As a VC, Brad knows better than most how wrong Galbraith was.

    • Thom

      One can hardly advocate socially or environmentally responsible policy by the buying and selling of shares. This means that any dissenting shareholder can only express his/her dissent by ceasing to be a shareholder and thereby losing any voice within the corporation

  • Feld Thoughts: Book Review: The Economics of Innocent Fraud

    Inspired by Brad Feld’s Book a Day diet, I have decided to start my own: 2 a Week starting today.This weeks books are : Mystery of Capital and Passion for success. Link: Feld Thoughts: Book Review: The Economics of Innocent

  • 2 a week

    Inspired by Brad Feld’s Book a Day diet, I have decided to start my own: 2 a Week starting today.This weeks books are : Mystery of Capital and Passion for success. Link: Feld Thoughts: Book Review: The Economics of Innocent

  • That's very interesting. It seems that it is most likely due to the stockholders failure to excercise their power or even take an adequate interest in corporate affairs.

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