Organizations and Markets

A Critique of Economics from an Unusual Direction

12 December 2007 at 6:41 pm stevphel 3 comments

| Steve Phelan |

Charlie Munger, the second largest shareholder in Berkshire Hathaway after Warren Buffett (and a member of the Forbes Wealthiest 400) gave a speech at UCSB a few years ago. The full transcript of his speech can be found here.

To summarize, Munger believes that economics suffers from:

1. Overweighing what can be counted

2. A failure to follow the full attribution ethos of hard science

3. Physics envy

4. Too much emphasis on macroeconomics

5. Too little synthesis

6. Extreme and counterproductive psychological ignorance

7. Too little attention to second (and higher order) effects

8. Not enough attention to ‘febezzlement’

9. Not enough attention to vice and virtue effects

As a complexity theorist, I was sympathetic to the argument that academics tend to ignore second- and higher-order effects.

I was also tickled by the concept of febezzlement — a term Munger invented to refer to “functionally equivalent embezzlement.” This refers to the tendency of certain economic agents, like mutual fund managers, to create a cashflow by skimming off the top of an appreciating asset. The client attributes the increase in asset value to the manager’s skill when, in fact, the value would have appreciated without (or in spite of) the fund manager. One gets the feeling that Munger believes most of these intermediaries could be eliminated without a significant loss to the economy (and perhaps even a gain).

Vice and virtue effects refer to institutions that encourage (or discourage) greater economic efficiency (like the ‘protestant work ethic’ or ‘affirmative action’).

HT: Greg Mankiw/Management R&D

Entry filed under: Former Guest Bloggers, Management Theory, Methods/Methodology/Theory of Science.