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The Actuary The magazine of the Institute & Faculty of Actuaries

The Economics of Innocent Fraud

Penguin Books has turned 70 years old. To mark the milestone, Penguin Books has released a collection of 70 short paperbacks.

Galbraith, the famous Harvard economist addresses the theme of ‘innocent fraud’. Can we innocently commit fraud? The notion of ‘innocent fraud’ seems like a contradiction. However, Galbraith’s purpose appears fine. Innocent fraud could come from false principles given a legal or academic clearing.Galbraith points out nicely that some fraud is innocent. This is a nice high-level premise. If an action is legal, this does not mean the action is right. An example that most actuaries probably know about: financial statements that stick to the letter of financial standards are legal, but they purport to a type of fraud if they mislead. Galbraith addresses corrupt accounting practices in the late 1990s, but the principle applies to all parties in the financial reporting process. To apply the principle in the UK: are the massive deficits in pension schemes an ‘innocent fraud’? is a question that would bother many people. The outstanding debts amount to tens of billions of pounds.

However, while Galbraith points out the major theme nicely, the definition of his theme appears to be weaker. For example, Galbraith laments the lack of consumer and voter sovereignty given the advertising techniques of firms and political parties. He lays blame on the economics profession for fraudulent academic instruction. However, there are many reasons why people do not vote. A vote is one decision. Individuals face a multitude of policies to vote on. There is the view that political parties target the ‘median’ voter and so may disenfranchise other voters. There are also sound reasons for corporate advertising. Advertising provides information and is not always of the persuasive variety. Advertising in itself is also a competitive industry.Galbraith also laments that gross domestic product is a measure of economic and social progress. He suggests that artistic, educational, and cultural aspects of life matter. However, the likelihood is that in some shape or form, these aspects of life feed through to the computation of GDP.

Galbraith’s fame arises from his well-known criticism of management not working in the interests of shareholders. This point survives in modern economics.