Colin Read, Everybody's Business
---- — In the paper the other day were two stories in which people pleaded guilty to serious fraud. This sort of crime can range from stealing cash from a business to claiming a disability or worker’s compensation by a person who is able to work.
As I read the stories, I tried to understand how someone could rationalize fraud. While some may argue that fraud is not a serious crime like robbery, extortion or treason, I believe otherwise. Fraud tears at the fabric of a productive economy.
Let’s begin with the perpetrators’ likely rationale. A fraud is an intentional deception formulated to allow personal gain at the expense of another. I can’t help but believe that today’s entitlement society allows people to easily rationalize fraud. They argue that their victim is no more entitled to those profits than they are. They may go even farther and convince themselves they deserve the money more.
Maybe they are poorer, maybe they think they are harder working or more deserving, perhaps they feel slighted or underappreciated, or maybe they simply resent their victim or their victim’s wealth. If it is a fraud against the government, perhaps they think they can gain handsomely and it will cost each one of us just a bit. Intentional tax fraud is a classic example.
Try as they might to convince themselves their transgressions serve a higher ethical purpose, fraud still takes property from another. Theft is always wrong. There can be no rationale. No one is entitled to the property of another, no matter how deserving they are or how undeserving their victims may be.
Misappropriation of another’s property also violates an important economic premise that is often a theme of this column. The economic system is designed to create production. An enlightened system does so in a sustainable manner that recognizes the need for incentives today and intergenerational incentives tomorrow. If we get it right, we optimize the economic pie we all share.
On the other hand, the political system seems to have little regard for the efficient and sustainable growth of this economic pie. Politics all too often seems focused on the division rather than the creation of the pie, and the class warfare such an approach engenders.
Using this analogy, we see that the goal of all economic policy ought to be to contribute to a more efficient, sustainable and expanding economic pie. This is why fraud and politics are an affront to economics.
Like politics, fraud is not designed to increase efficiency or production. It is looking for the easy win, with no regard to the loss of others. Fraud’s mantra is that there is a sucker born every minute.
On one level, economics is silent on whether such a transfer of wealth from the sucker to the fraudster is undesirable. Such “transfers” are not judged by economists because economics is not a normative tool that can discern who is worthy and who is not.
However, such unwillingness to weigh into the normative realm does not mean economics is silent on the disincentives caused by fraud. In a world in which fraud is tolerated or insufficiently deterred, we would devote too much of our effort into guarding what we have and not enough into providing for ourselves. And, if we know that a portion of our production will be misappropriated, there is a reduced incentive for us to produce such goods or wealth.
Another problem is that fraudsters spend a great deal of energy perpetrating and hiding their crimes. This energy would be better directed at producing for oneself.
In fact, most crimes have this element that one succeeds at the expense of another. It is this counterproductive quality that allows us to know when something is a crime and must be discouraged, or when something contributes to our economic pie and ought to be encouraged.
I believe we under-deter such frauds. One who steals from us all by making false claims, or one who defrauds others through identity theft, or pilfers billions of dollars through Madoff-like investment fraud, tears at the very fabric of our economy. They all make us wary, erode our trust and force us to watch our wallet rather than work to produce. And yet, these crimes are often viewed as less serious than others that claim far fewer victims.
Colin Read is a contributor to Bloomberg.com and has published eight books with MacMillan Palgrave Press. He chairs the Department of Finance and Economics at SUNY Plattsburgh. Continue the discussion at www.pressrepublican.com/0216_read.