Chinese Scholars Come to Chicago to Study Law and Economics

by Meredith Heagney

University of Chicago
Law School Office of Communications
July 27, 2012

Six dozen scholars from China, Taiwan, and Hong Kong lined up on the steps behind the Law School, waiting eagerly to have their photograph taken with a man that many consider a personal hero. When Professor Ronald Coase appeared at the door, they erupted into applause.

These scholars are very familiar with the work of the Law School’s Professor Emeritus and Nobel Prize Winner. They have read his writing, assigned his papers to classes they teach, and have worked to apply his insights to the Chinese legal system. Simply put: As the father of law and economics, Coase is a rock star to them. So naturally, they swarmed around him, snapping his picture and thanking him for his many contributions.

Their enthusiasm didn’t end there. The 72 students of the Chicago Summer School in Law and Economics, which focused on Property Rights and Private Law, were intent on learning all they could during the intensive two-week course from July 9 to 20.

In China, where most of the scholars reside, the academic discipline of law and economics is a new one, full of potential insights for the country’s rapidly evolving legal and economic systems. So these scholars chose to travel the 6,500 miles or so to Chicago to study at the birthplace of law and economics, the University of Chicago Law School.

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Divorcé's Guide to Marriage

by Elizabeth Bernstein

Wall Street Journal
July 24, 2012

Want great marriage advice? Ask a divorced person.

People who lose the most important relationship of their life tend to spend some time thinking about what went wrong. If they are at all self-reflective, this means they will acknowledge their own mistakes, not just their ex's blunders. And if they want to be lucky in love next time, they'll try to learn from these mistakes.

Research shows that most divorced people identify the same top five regrets—behaviors they believe contributed to their marriage's demise and that they resolve to change next time. "Divorced individuals who step back and say, 'This is what I've done wrong and this is what I will change,' have something powerful to teach others," says Terri Orbuch, a psychologist, research professor at the University of Michigan's Institute for Social Research and author of the new book "Finding Love Again: 6 Simple Steps to a New and Happy Relationship." "This is marriage advice learned the hard way," she says.

Dr. Orbuch has been conducting a longitudinal study, funded by the National Institutes of Health, collecting data periodically from 373 same-race couples who were between the ages of 25 and 37 and in their first year of marriage in 1986, the year the study began. Over the continuing study's 25 years so far, 46% of the couples divorced—a rate in line with the Census and other national data. Dr. Orbuch followed many of the divorced individuals into new relationships and asked 210 of them what they had learned from their mistakes. (Of these 210, 71% found new partners, including 44% who remarried.) This is their hard-earned advice.

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The Feds' New Mortgage Disclosures Are a Bust

by Jonathan Macey

Wall Street Journal
July 17, 2012

The Consumer Financial Protection Bureau's "Mortgage Disclosure Team" just came out with two proposed forms that are supposed to make things easier for borrowers. It took CFPB a year and half of research, drafting and field testing to produce the new documents. The results shine a light on how the Dodd-Frank Wall Street Reform and Consumer Protection Act, which created the CFPB, operates.

Agency head Richard Cordray claimed in the press release accompanying the new disclosure forms that they give "consumers greater power over the exciting and daunting process of buying a home." They won't. The rules that accompany the new forms reduce the power of consumers to choose the product that they want from the widest array of alternatives.

The CFPB is proposing to revise the old forms into a new Loan Estimate Form and Closing Disclosure Form. The old loan form had been five pages; according to the agency website, the new one is three. The closing form remains at five pages. That's a net savings of two pieces of paper. But the agency rules required to implement the new forms weigh in at an astonishing 1,099 pages.

Will they make it easier for consumers to get a loan? The nonprofit Habitat for Humanity is concerned that they will impede its "ability to enable low-income families to become homeowners." Why? Because any lender, including organizations such as Habitat, is at legal risk if they try to help low-income borrowers who lack the ability to repay their loans. (Habitat lends money to people so they can buy the houses they help build. It uses the monthly mortgage payments to help build still more houses.)

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Human Trafficking and Regulating Prostitution

by Samuel Lee and Petra Persson

NYU Law and Economics Research Paper No. 12-08
July 11, 2012

The effect of prostitution laws on human trafficking and voluntary prostitution is subject to debate. We argue theoretically that neither legalization nor criminalization can simultaneously protect voluntary prostitutes and unambiguously reduce trafficking. We propose a novel, “hybrid” policy that achieves both objectives and restores the free market outcome that arises in the absence of trafficking. If a regulator aims to eradicate all prostitution instead, the optimal policy criminalizes all johns. Criminalizing prostitutes is ineffective and unjust because it fails to eradicate trafficking and penalizes victims. We consider cross-border trafficking, sex tourism, social norms, and political support for prostitution laws. The model predicts that the female-male income ratio is a key determinant of what share of prostitutes is trafficked, the consequences of prostitution laws, and the political will to enact or enforce them.

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Productivity and firm selection: Quantifying the ‘new’ gains from trade

by Gregory Corcos, Massimo Del Gatto, Giordano Mion and Gianmarco I.P. Ottaviano

Vox
July 10, 2012

As protectionist pressures mount worldwide, it is important to continue to shore up the case for open trade policy. This column presents new evidence from Europe on an old gain from trade – the weeding out effect – namely the way increased cross-border competition selects and favours the most productive firms. It argues that this mechanism brings about large gains.

Since the 1988 Cecchini report, there have been many attempts at quantifying gains from trade in the EU. Compared with the state of the art in international trade theory, the main limitation of that literature is its neglect of firm heterogeneity, which implies that only scale economies drive endogenous changes in productivity within sectors. In recent models with heterogeneous firms trade liberalisation has, instead, an additional positive impact on sectoral productivity through the selection of the most efficient firms (Bernard et al. 2003, Melitz 2003).

The reason is a combination of import competition and export market access. On the one hand, as lower trade costs allow foreign producers to target the domestic markets, the operating profits of domestic firms in those markets shrink whatever their productivities. On the other hand, some domestic firms gain access to foreign markets and get additional profits from their foreign ventures. These are the firms that are productive enough to cope with the additional costs of foreign activity (such as those due to transportation and remaining administrative duties or institutional and cultural barriers).

The result is the partition of the initially active domestic firms in three groups. As they start making losses in their home markets without gaining access to foreign markets, the least productive firms are forced to exit. The most productive firms, meanwhile, are able to compensate lost profits on home sales with new profits on foreign sales and so can survive and expand their market shares. Finally, firms with intermediate levels of productivity also survive but, not being productive enough to access foreign markets, are relegated to home sales only and their market shares fall. Since international trade integration eliminates the least productive firms, average productivity grows through the reallocation of productive resources from less to more efficient producers.

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An Organ 'Donor' Revolution

by Sally Satel

Wall Street Journal
July 9, 2012

With all eyes fixed on the Supreme Court's recent health-care decision, a life-saving development swooped in under the radar: It is now legal to compensate bone-marrow donors. This represents a triumph for the 2,000-3,000 people with cancer and blood diseases who die each year while awaiting a marrow transplant.

Efforts to challenge the federal ban on compensating marrow donors began three years ago, led by the Institute for Justice, a public-interest law firm. The firm's clients were families afraid their ill loved ones would die because they couldn't get a transplant.

Last December, the U.S. Court of Appeals for the Ninth Circuit ruled unanimously in their favor. Pivotal to the judge's decision was that modern bone-marrow donation is accomplished through a process called apheresis, through which doctors filter bone marrow stem cells from blood drawn from a donor's arm. The process takes several hours.

The apheresis technique did not exist in the early 1980s, when the law banning organ sales (the National Organ Transplant Act of 1984) was drafted. At the time, marrow donation was arduous, involving anesthesia and large hollow needles for extracting marrow directly from a donor's hip bone.

Now that apheresis makes donating marrow cells akin to giving plasma, which can already be paid for under the 1984 law, the court saw no logical basis for disallowing payment for it.

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Watching Behavior Before Writing the Rules

by Richard Thaler

New York Times
July 7, 2012

As a general rule, the United States government is run by lawyers who occasionally take advice from economists. Others interested in helping the lawyers out need not apply.

Of course, there are some exceptions. The government employs scientists of many varieties in technical capacities, from estimating the environmental toxicity of a chemical to the structural soundness of a bridge. But when it comes to forming policies, these scientists and, especially, behavioral scientists are rarely at the table with the lawyers and the economists.

Economists teach us that monopolies are harmful, and this is no exception. Are they really the only social scientists with anything useful to contribute to the efficient running of a government? Imagine that along with the Council of Economic Advisers, a Council of Behavioral Scientist Advisers also provided counsel to the president. What might emerge from such a group?

Thanks to an initiative of the British government, we have some evidence about the benefits that might emerge. Shortly after his center-right coalition took office nearly two years ago, David Cameron, Britain’s Conservative prime minister, established a tiny branch of government called the Behavioral Insights Team. It is led by David Halpern, a social psychologist who has a deep understanding of the workings of government, having previously served in the Labor government of Tony Blair.

Dr. Halpern has a staff of eight civil servants, in addition to a few visiting doctoral students on short-term leave from their universities. The team also has a group of unpaid academic advisers, including me — showing that economists will elbow their way into any activity. As I have been involved with this effort from the beginning, and because I am an economist who also teaches behavioral science — I am not an unbiased source. But having recently returned from a week in London working with the Behavioral Insights Team, I am in a good position to report on some of its progress.

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Paul Hoppe

Power sharing and institutional stability

by Bernardo Guimaraes and Kevin D. Sheedy

Vox
July 5, 2012

Institutions are a key determinant of economic development and indeed many developing institutions are deeply dysfunctional. This column presents a new model suggesting that those in power may prefer to keep bad institutions despite their anti-development effects since they alllow the elite to grab a bigger slice of a smaller pie.

Economic activity is influenced by institutions that determine the rules prevailing in a society. Examples include how much income is taxed; what firms can and cannot do; whether contracts are enforced and disputes quickly and correctly resolved; and limits on the arbitrary exercise of government power.

Institutions are considered by many researchers as one of the main determinants of economic development, causing large differences in the cross-country distribution of income (see, e.g., North 1990, and Acemoglu et al. 2005). Besides there being a strong correlation in cross-country data (Hall and Jones 1999), institutions appear to be important in explaining some key historical events, including differences in the pattern of development in North and South America (Engerman and Sokoloff 1997) and the economic success of England from the 18th century onwards (North and Weingast 1989).

Rules that give rise to economic inefficiencies are often attributed to institutions serving the interests of an elite rather than the interests of society as a whole. This explanation is not wholly satisfactory however, because why would an elite have incentives to set up institutions that shrink the total pie? Why can the elite not design policies that maximise output which then allow them to extract more in taxes?

Answering this question requires understanding the institutional choices of an elite in power. One important constraint on their choices is what they must do to remain in power: excessively predatory institutions might prompt rebellions. Hence, in order to analyse the economic consequences of control of institutions by an elite, it is necessary to think about how rulers come to power and what they do to remain there.

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Green from the Grassroots

by Elinor Ostrom

Project Syndicate
June 12, 2012

Much is riding on the United Nations Rio+20 summit. Many are billing it as Plan A for Planet Earth and want leaders bound to a single international agreement to protect our life-support system and prevent a global humanitarian crisis.

Inaction in Rio would be disastrous, but a single international agreement would be a grave mistake. We cannot rely on singular global policies to solve the problem of managing our common resources: the oceans, atmosphere, forests, waterways, and rich diversity of life that combine to create the right conditions for life, including seven billion humans, to thrive.

We have never had to deal with problems of the scale facing today’s globally interconnected society. No one knows for sure what will work, so it is important to build a system that can evolve and adapt rapidly.

Decades of research demonstrate that a variety of overlapping policies at city, subnational, national, and international levels is more likely to succeed than are single, overarching binding agreements. Such an evolutionary approach to policy provides essential safety nets should one or more policies fail.

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The Death-Penalty Debate Represents a Market Failure

by Betsey Stevenson and Justin Wolfers

Bloomberg
June 12, 2012

The debate over the death penalty offers a vivid illustration of a tragic flaw in the market of ideas: Strong beliefs attract a lot more attention, and can have a lot more influence, than the truth.

In recent years, five U.S. states have eliminated capital punishment, and several others are currently reconsidering their policies. Advocates of the death penalty insist the moves will lead to more murders. They point to a number of studies conducted over the past couple of decades that purport to find clear evidence supporting their view. Experts happily serve up unequivocal congressional testimony, and feed their analyses to lobby groups.

The reality, unsatisfying and inconvenient as it may be, is that we simply don’t know how capital punishment affects the homicide rate. That’s the conclusion of the National Academy of Sciences, which typically plays the role of impartial arbiter in these social-science debates. Their expert panel recently concluded that existing research “is not informative about whether capital punishment decreases, increases, or has no effect on homicide rates,” and that such studies “should not influence policy judgments about capital punishment.”

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Happyism: The creepy new economics of pleasure

by Deirdre N. McCloskey

The New Republic
June 8, 2012

In the first panel of a Peanuts strip—the preceding ones had been about Lucy scolding her little brother, Linus, for not being a good brother—Lucy asks what Linus is offering her: “What’s this?” “A dish of ice cream.” Then Linus explains: “I brought it to you in order that your stay here on Earth might be more pleasant.” She smiles genially, and uncharacteristically: “Well, thank you ... You’re a good brother.” In the final panel, Linus walks away smiling: “Happiness is a compliment from your sister!”

That about sums it up. Pleasure is to be achieved by things like dishes of ice cream. Psychologists have shown rigorously that people are most pleasured exactly as you might have thought if you are a human being: when eating, say, a heaped pastrami on rye at Manny’s Deli off Roosevelt Road in what was once the garment district of Chicago. Happiness, by contrast, is more complicated, though it can also be pursued at Manny’s. It is the pleasure of kosher comfort food, down to the diminishing marginal utility of that last bite—but it is also expressing one’s urban identity and Chicago-ism, even at the costs of the considerable inconvenience in getting to Manny’s and braving the insults of the countermen. It is introducing your friend, a naïve gentile, to the Jewish side of the City of the Big Shoulders, affirming thereby your philo-Semitism. It is participating in the American democracy of a 1950s cafeteria. It is facing, too, the cost of a little addition to the love handles. And it is a compliment from your sister. Pleasure is a brain wave right now. Happiness is a good story of your life. The Greek word for happiness is “eudaimonia,” which means literally “having a good guiding angel,” like Clarence the angel in It’s a Wonderful Life. The schoolbook summary of the Greek idea in Aristotle says that such happiness is “the exercise of vital powers along lines of excellence in a life affording them scope.”

But nowadays there is a new science of happiness, and some of the psychologists and almost all the economists involved want you to think that happiness is just pleasure. Further, they propose to calculate your happiness, by asking you where you fall on a three-point scale, 1-2-3: “not too happy,” “pretty happy,” “very happy.” They then want to move to technical manipulations of the numbers, showing that you, too, can be “happy,” if you will but let the psychologists and the economists show you (and the government) how.

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Sale of visas: A smuggler’s final song?

by Emmanuelle Auriol and Alice Mesnard

Vox
June 4, 2012

Is there a way of eliminating human smuggling? This column argues it can be done that by legalising migration through the sale of visas at a price that pushes smugglers out of business. The resulting trade-off between eliminating human smuggling and controlling migration flows can be dealt with the right policy mix of traditional repressive instruments and innovative pricing tools.

Each year, an estimated 2,000 people drowned on their migrant’s journey from Africa to Europe (The Economist 2005) and many more on other routes. Not only is crossing borders illegally a dangerous operation but it also entails very high financial costs. For border crossings such as from Mexico to the US, human smugglers can charge up to $4,000, while trans-pacific crossings of Chinese immigrants to the US cost above $35,000 in the mid-90s and have since increased sharply.

With estimated revenues of around $5 billion a year in the US and €4 billion in the EU (Padgett 2003), people smuggling is a lucrative business. Over the years, it has integrated with other types of illegal activities such as drug shipping and prostitution. Led by international criminal organisations they pose a threat to the rule of law in countries of origin, transit, and destination.

Although it is important for policymakers to understand why these illegal activities and their associated criminalities are so prevalent, there are surprisingly few studies on the supply side of illegal migration (noticeable exceptions are Friebel and Guriev, 2006 and Tamura, 2010, as surveyed by Mahmoud and Trebesch 2010). Yet, it is important to study the industrial organisation of human smuggling, notably smugglers’ pricing and supply of services, to explore what type of economic policies can be implemented to fight against them.

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Capitalism

by Richard A. Posner

The Becker-Posner Blog
June 3, 2012

I agree wholeheartedly with Becker that capitalism is a superior economic system to any other that has been tried, the others being mainly socialism and communism. The best evidence for this is that out of the 194 countries in the world, I can think of only two that are not capitalist—Cuba, which however is moving slowly in the capitalist direction, and North Korea, the greatest economic failure on the planet.

But this statistic indicates that capitalism is a necessary condition of economic success rather than a sufficient condition. Many of the world’s countries, though capitalist, are basket cases—not as badly off as North Korea, but plenty badly off. Per capita incomes in rich capitalist countries such as the United States, Canada, Germany, Britain, and Japan greatly exceed per capita incomes in poor capitalist countries, which are the majority of countries.

So the big question is, given capitalism, what else does a country need in order to prosper? We know that it doesn’t need abundant natural resources or a large population. But it needs a legal and political system that protects property rights, allows a large degree of economic freedom, minimizes corruption, controls harmful externalities (like pollution) and subsidizes beneficial ones (like education), distinguishes between equality of opportunity (which it promotes) and equality of incomes (which it promotes only to the extent of combating poverty), welcomes and assimilates skilled and wealthy immigrants, and (related to protecting economic freedom) avoids public ownership or control of economic enterprises. To create and maintain such a legal and political system a country also requires a culture of respect for business success, of competition and risk-taking, and of consumerism—since, as Keynes argued, consumption drives production.

Such a combination is difficult to achieve; no nation has achieved it. The variance across nations in culture and in institutional structure is very great, and determines the relative economic success of the different nations.

Since there is so much variance across capitalist countries—so much that can go wrong with a capitalist system because of the complex institutional structure and social culture that capitalism requires if it is to be maximally successful in contributing to social welfare—we need to avoid complacency. Complacency was a major factor in the surprising economic collapse that began in September 2008, a collapse the consequences of which are still very much with us.

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Profits, Competition, and Social Welfare

by Gary S. Becker

The Becker-Posner Blog
June 3, 2012

The financial crisis and the resulting recession have led to a strong reaction in many countries against the profit motive and private enterprise. Left of center political parties are gaining office and power in France, Mexico, Greece, and elsewhere with the promise of much greater regulation of banks and other businesses, renationalizing some companies, and constraining profits through higher taxes and other ways.

It is easy to sympathize with the hostility to the many banks that behaved (in retrospect) so foolishly in ways that damaged everyone else as they took on excessive risk in their quests for greater profits. One can understand also the general reaction against capitalism and “market failures” since commercial and investment banks were in the past a leading example of capitalism at work. Yet anyone concerned about the welfare of the poor and middle classes should resist the temptation to attack competitive private enterprise and capitalism- monopoly or crony capitalism should be deplored. This is only partly because “government failure” also contributed in an important way to the financial crisis as regulators did not rein in the asset explosion of banks and households. Indeed, regulators often encouraged lending to lower income families to buy houses with low down payments, large mortgages and ballooning interest payments.

The main reason to be concerned about the attacks on competitive capitalism is that it has delivered during the past 150 years so much to all strata’s of society, including the poor. I will try to demonstrate this not with a general analysis, but with several rather impressive examples.

China in 1980 was among the poorest countries in the world. It had just gone through the Cultural Revolution and the Great Leap Forward that contributed to the deaths of tens of millions of rural and other Chinese. In desperation, a few farsighted Chinese leaders decided to allow private enterprise and capitalism to gain a toehold in its agricultural sector. To the great surprise of many Chinese political leaders, the result was an explosion in farm output, even though farmers had only tiny plots of land to work with. Seeing the success of the liberalization of farm output, China extended the incentive system to industry by encouraging the growth of private enterprises in some sectors. Again, the results far exceeded expectations as these private companies, many owned by Taiwanese and Hong Kong residents, were not only far more efficient than state owned enterprises, but they also became the leaders in the rapid expansion of exports from China to the US and other countries.

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Unilateral tariff liberalisation

by Richard Baldwin

Vox
May 30, 2012

In the late 1980s, developing nations that had eschewed all forms of liberalisation began to cut their import tariffs unilaterally. This column explains how the communication-technology revolution was the shock that altered the political-economy equilibrium against infant-industry protection and in favour of joining international supply chains which involved tariff liberalisation.

For most of the post-war period, trade liberalisation was slow, involved only rich nations, and occurred only in the context of reciprocal bargains – multilateral GATT Rounds or regional trade agreements.

The reciprocity was critical. Since foreign tariffs would fall only if domestic tariffs did, each nation’s exporters fought against the protectionists within their borders. In this way, governments found it politically optimal to cut tariffs that they had previously found optimal to impose (Moser 1990).1 Developed nations, who played reciprocally in the GATT, lowered their tariffs; developing nations who didn’t play reciprocally in the GATT – due to so-called special and differential treatment for developing nations – did not cut their tariffs.

All this changed in the late 1980s. Developing nations that had previously eschewed all forms of liberalisation began to cut their tariffs unilaterally as seen in Figure 1.

Figure 1. Tariff liberalisation

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How Political Clout Made Banks Too Big to Fail

by Luigi Zingales

Bloomberg
May 30, 2012

The U.S. has historically kept the financial sector in check through a combination of sound principles and serendipitous decisions. But as the financial system gained strength in recent years, it also gained political influence. In the last decade, it has become too concentrated and too powerful, which has damaged not only the economy but the financial sector itself.

How did it happen? In 1933, the Glass-Steagall Act erected a wall between two ways that banks could help customers borrow money. The idea was to keep commercial banks from exploiting their depositors, who might get saddled with the bonds of firms that could not repay the money they owed. One beneficial side effect of the Glass-Steagall Act was to fragment the banking sector and reduce the financial industry’s political power. Another was to foster healthy competition between commercial banks and investment banks.

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The Broken Legs of Global Trade

by Jagdish Bhagwati

Project Syndicate
May 29, 2012

The Doha Round, the latest phase of multilateral trade negotiations, failed in November 2011, after ten years of talks, despite official efforts by many countries, including the United Kingdom and Germany, and by nearly all eminent trade scholars today. While trade officials in the United States and the European Union blamed the G-22 developing countries’ excessive demands for the failure of earlier negotiations in Cancún in 2003, there is general agreement that this time it was the US whose unwarranted (and unyielding) demands killed the talks. So, now what?

The failure to achieve multilateral trade liberalization by concluding the Doha Round means that the world lost the gains from trade that a successful treaty would have brought. But that is hardly the end of the matter: the failure of Doha will virtually halt multilateral trade liberalization for years to come.

Of course, multilateral trade negotiations are only one of three legs on which the World Trade Organization stands. But breaking that leg adversely affects the functioning of the other two: the WTO’s rule-making authority and its dispute-settlement mechanism. The costs here may also be large.

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The on-going debate on natural resources and development

by Erwin Bulte

Vox
May 28, 2012

The so-called resource curse suggests that resource booms are bad for development. One reason put forward is that fighting over resource rents leads to armed conflict. This column argues the evidence identifying resources as a cause of conflicts is weak and that the policy focus should be on institutional reform, rather than on resources per se.

Prices of natural resource commodities have increased a lot in recent years. While the current commodity price index is not as high as it was during its peak in the spring of 2008, commodity prices have increased by 10% over the past 6 months, by 56% over the past 5 years, and by no less than 249% over the past 10 years. For certain specific commodities, price hikes are even larger. In 2002 a single DVD recorder cost as much as a hundred tons of iron ore. The current exchange rate is about one ton of iron ore per DVD recorder.

Several factors explain the reversal of fortune for miners –– conditions have been favourable both on the supply side (e.g., market power in the mining industry) and on the demand side (e.g., economic development in India and China). An important question concerns the degree to which these economic gains trickle down beyond the shareholders of international mining companies. Do high commodity prices translate into enhanced prospects for peaceful economic development for poor resource-exporting countries? This turns out to be a contested issue.

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Why We Lie

by Dan Ariely

Wall Street Journal
May 26, 2012

Not too long ago, one of my students, named Peter, told me a story that captures rather nicely our society's misguided efforts to deal with dishonesty. One day, Peter locked himself out of his house. After a spell, the locksmith pulled up in his truck and picked the lock in about a minute.

"I was amazed at how quickly and easily this guy was able to open the door," Peter said. The locksmith told him that locks are on doors only to keep honest people honest. One percent of people will always be honest and never steal. Another 1% will always be dishonest and always try to pick your lock and steal your television; locks won't do much to protect you from the hardened thieves, who can get into your house if they really want to. The purpose of locks, the locksmith said, is to protect you from the 98% of mostly honest people who might be tempted to try your door if it had no lock.

We tend to think that people are either honest or dishonest. In the age of Bernie Madoff and Mark McGwire, James Frey and John Edwards, we like to believe that most people are virtuous, but a few bad apples spoil the bunch. If this were true, society might easily remedy its problems with cheating and dishonesty. Human-resources departments could screen for cheaters when hiring. Dishonest financial advisers or building contractors could be flagged quickly and shunned. Cheaters in sports and other arenas would be easy to spot before they rose to the tops of their professions.

But that is not how dishonesty works. Over the past decade or so, my colleagues and I have taken a close look at why people cheat, using a variety of experiments and looking at a panoply of unique data sets—from insurance claims to employment histories to the treatment records of doctors and dentists. What we have found, in a nutshell: Everybody has the capacity to be dishonest, and almost everybody cheats—just by a little. Except for a few outliers at the top and bottom, the behavior of almost everyone is driven by two opposing motivations. On the one hand, we want to benefit from cheating and get as much money and glory as possible; on the other hand, we want to view ourselves as honest, honorable people. Sadly, it is this kind of small-scale mass cheating, not the high-profile cases, that is most corrosive to society.

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Frauds, Swingers and the Odd Early Days of Credit Cards

by Louis Hyman

Bloomberg
May 24, 2012

As credit cards came into greater use in the late 1950s and early ’60s, the financial press closely followed their emergence, especially when the wrong sorts got access to them.

Consider, for example, Joseph Miraglia. In one month of orgiastic spending, Miraglia ran up a $10,000 bill entertaining himself across three countries, four girlfriends and one rhinestone-collared cocker spaniel. Miraglia was no scion: He was a clerk from the Lower East Side of Manhattan earning $73 a week. How did he get into the then-exclusive credit-card club?

In 1959, travel and entertainment charge cards, such as Diners Club, were just beginning to lose their ground to bank cards, such as BankAmericard. But the use of credit was still subject to very real technological and moral constraints. Miraglia nicely illustrated how both would soon change -- and foreshadowed some of the consequences.

His adventure began in September 1959, when he ducked into a fancy New York restaurant and saw a pile of Travel and Entertainment card applications for “men of responsibility.” He filled out the Hilton Hotels’ Carte Blanche paperwork, complete with his real pittance of a salary, and, to his surprise, received a card a few weeks later with a letter that said “this card is your key to every luxury Hilton has to offer.”

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