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Fool's gilt

By Daniel M. Ryan
web posted July 7, 2008

As the price of oil continues its seemingly unstoppable climb, as is consistent with any commodity in a price spike, the usual appeals to government are making the rounds again. The oil companies came in for the usual thrashings, even though their net profit – in a very good year – is paltry compared to, say, that of MTV or VH1. As more people become income-statement savvy, though, the less easy it becomes to pick on the big oil companies: an unintended consequence of "The People's Capitalism."

Despite the now-familiar lack of steel shown by oil company executives when testifying, it looks like the political wildcatters came up with a largely dry hole. Those big oil companies are becomin' harder to blame. Come the next "permanent" price spike, the boys on the stand might get enough gumption to actually stand up for themselves.

Since the "Big Oil" circuit is no longer the small minority it used to be, political wildcatters have needed to sink another one in another target. They have, of course, sunk the next hole into the Big Speculators, a suitably targetable small minority. Since few know what they do, let along the details of how they operate, mythification has filled the gap.

And, of course, there are the usual proposals to get the government further into the energy racket.

Psychoanalyzing Weber, or Contextualizing Weberism

The enabling myth for all sorts of government-promoted schemes is, of course, Max Weber's theory of bureaucracy. Weber claimed that a bureaucracy was the most efficient mechanism for governing, as government employees are supposedly disinterested in the outcome. The more modern version claims that Weber's model of the disinterested civil servant is an ideal type; the oft-observed tendency for bureaucracies to grow autocatalytically is shrugged off as merely a deplorable accident.

Weber's theory is a classic example of the kind of flawed theory that gets pegged as "good in theory, bad in practice." What that maxim really means is, "logically consistent, but glib." The fact that bureaucracies grow, without any long-term correlation to the problem they were originally set up to deal with, says that many ‘disinterested' bureaucrats do have interests. A raise in pay, the prospects of promotion, and (of course) prestige: the archetypical bureaucrat is interested in all three. Being a human being like you and me, a bureaucrat naturally has success needs – most of them just tend to be non-pecuniary. Even in private industry, there are people who like bragging about how many people they boss – and not about the size of their pay. There also are others whose self-esteem needs are met with satisfaction in a job well done. Prestige, of course, is non-pecuniary in its heart. Anyone who believes different is invited to buy a European title of nobility and see what happens.

Even government officials who match in all other respects the ‘disinterested' characterization have interests too. Try mocking them, and you'll see then getting ‘interested' in a hurry. In fact some of them get ‘interested' in a way that resembles the caricature of the small-town, aspersion-hurling monopolist when the new competitor from out of town shows up.

Can Weber himself be faulted for these blind spots? Except for a certain failure of imagination, he really can't. His theory was put together in a time when the only person who could become a government official in his native Germany was a "von." What this meant was: a person who provably had at least one German aristocrat as a direct male ancestor, however many generations removed. Such people were, of course, deferred to by the unfavored others back in his time.

Anyone who's born to this kind of purple has no real need to buck for higher pay, to scheme for a promotion, or to gun for bragging rights. Weber's unambitious bureaucrat had no need to be a social climber, because he already came from the top of the social heap (with respect to the run-of-the-mill commonfolk.)

Given this limited sample space, it should be unsurprising that a different sample space (a bureaucracy staffed with middle-class people possessing normal success needs) has led to a different outcome. The most that can be said about Weber's theory is, "it's fine if you hire only from the Social Register, but it's not if you deviate from the class background of Weber's original sample." The closest matches from the ordinary middle class are people who lack ordinary ambition.

Does Disinterest Work?

The trouble with using "gentleman of good character in the staff" as a performance metric for boost-the-economy programs, is that good character can be (and often has been) intermingled with ignorance and foolishness. Can pecuniarily disinterested people arrive at a better result than pecuniarily interested people, if boosting the economy in a non-wasteful manner is the goal sought?

As far as commodity price prediction, there's an easy way to test this hypothesis. It's called "paper trading."

"Paper trading" means trading with imaginary dollars in a marketplace that comes as close as practicable to the real thing. A paper trader can't lose any real money, nor can (s)he gain any. The only reward that comes with paper trading, outside of a formal contest with one or more valuable prize(s), is prestige or job satisfaction.

In fact, barring the pay and promotion angle, it's precisely the same reward that a normal bureaucrat is supposed to gun for.

Profits from trading result from sizing up a supply-demand imbalance on a market. Successfully securing a profit means directing a resource from a less optimal use to a more optimal use. An experienced trader who's suffered a bubble pop knows full well that following the "greater fool theory" makes a fool out of the follower. It's the inexperienced trader that has to learn the hard way about why "buy high, sell higher" ends up yielding fool's gold. Had Dickens been around today, he would have quickly put into place the momentum trader who "was" a multimillionaire – including the one who greater-fooled in thinly-traded stocks.

Nevertheless, a large part of the political establishment keeps on insisting that speculation in and of itself can move prices to the point of significant contra-economic distortion. When stripped of the mythology, all this charge means is that the charger thinks that the Greater Fool Theory works.

Since I'm trying to inject some realism into an issue that's permeated with fear and vaunting, I should observe the customary obligation to suggest that the government ‘do something' instead of confining myself to illusion dispelling. Since the economic efficiency of any government energy program hinges upon accurate forecasting of energy prices, how about an experimental paper-trading laboratory for the up-and-coming bureaucrats who would be slated to run such a program? As noted above, paper trading does gibe with the criterion for disinterest, as there are neither pecuniary gains nor pecuniary losses that result from success or failure. Putting together a paper-trading unit in a bureaucracy would limit the incentives for being right to the ones customarily enjoyed by the bureaucrats that today's governments actually have. Securities regulators could be consulted as to the design of such a ‘lab' so as to ensure realism. And, of course, it would be prudent to have a securities regulator vet the winner's list so as to see what kind of person comes out on top.

Such a pilot program would be a good way to see if the old chestnut about disinterestedness and economic efficiency is true…or whether it's nothing more than "fool's gilt." ESR

Daniel M. Ryan is a regular columnist for LewRockwell.com, and has an undamaged mail address here.

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