Thursday, May 24, 2007

The government we deserve

Bryan Caplan recently published a book "The myth of the rational voter", arguing that bad policies are less often the result of vested interests than of politicians responding to the irrational biases and ignorance of voters politicians pandering to the biases of stupid and ignorant voters- biases which the politicians often share.

Greg Mankiw called it the best book he has read lately.

I came across the story of Sergei Mavrody while browsing Blanchard's Marcoeconomics- it could have been used as a case study in that book.

From Blanchard (emphasis added):

In 1994 a Russian "financier," Sergei Mavrody, created a company called MMM and proceeded to sell shares, promising shareholders a rate of return of at least 3000% per year.

The company was a huge success, its share price increasing from 1600 rubles in February t0 105,000 rubles in July.

The trouble was that the company was not involved in any kind of production and held no assets, except for its 140 offices in Russia. The shares were intrinsically worthless. The company's initial success was based on a standard pyramid scheme..Despite repeated warnings by Government officials, including Boris Yeltsin, that MMM was a scam and that the increase in the price of shares was a bubble, the promised reurns were just too attractive to any Russian people, especially in the midst of a deep economic recession.

The pyramid collapsed by the end of July 1994 and the company closed but

Mavrody tried to blackmail the government into paying the shareholders, clamining that not doing so would trigger revolution or civil war. The government refused, leading many shareholders to be angry at the government rather than Mavrody. Later that year, Mavrody actually ran for Parliament, as a self-appointed defender of shareholders who had lost their savings. He won!

Warms the cockles.

Postscript: I was reminded of this post in Free Exchange, which quotes Anthony de Jasay

There is a subconscious belief in France that the state does not pay Paul by taking the money from Peter. It just gives it to Paul, and Peter is not made worse off. This is so because the money sits in an imaginary reservoir and the state can "unblock" it (debloquer is the French word used to describe this happy event). . .

Is this true? I don't know. Does it seem plausible? Sure does.

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