Thursday, October 26, 2006


A long long time ago I heard this joke from my Econ 101 professor:

A physicist, a chemist, and an economist are stranded on an island with nothing to eat. A can of soup washes ashore.
The physicist says, "Let's smash it open with a rock."
The chemist says, "Let's build a fire and heat it.”
The economist says, "Why bother? Let's just assume we have a can opener.”

Not much for laughs, but economists think it's funny, which shows they understand their limitations. I have one economist friend who’s prone to blurting out things like, “I don’t know why anyone pays attention to our forecasts; we’re wrong most of the time.”

Enter the Wannabeconomists, a bunch of corporate law professors in an area of exalted legal scholarship known as “law and economics.” These guys believe in the rightness and majesty of economics and just wish people were smart enough to appreciate how the dismal science makes everything work beautifully in Proxyland, including CEO compensation.

Among my favorite Wannabeconomists are Larry Ribstein of University of Illinois College of Law (Ideoblog) and Stephen Bainbridge at UCLA Law School ( Neither has an economics degree, though Bainbridge has a master’s in chemistry and maybe doesn’t need a can opener anyway. Then there’s Geoffrey Manne at Lewis & Clark Law School (not an economist either, but he once taught Law & Literature), who blogs at Truth on the Market.

Ribstein (in a barrage of posts; here's one) and Manne are busy holding down the fort against what Ribstein calls "backdating alarmists." Girlishly giddy, as always, over the beauty of economic concepts, they insist the rest of us are getting our panties in a wad for nothing: This wasn’t about greed, but about retaining good employees; the behavior hasn’t really cost shareholders much; the stocks of backdating companies probably dropped only because the media made such a big fuss; there was no immoral intent because so many companies did it everyone probably thought it was OK; "it's likely the efficient market looked through the accounting;" and no one got overpaid. You get the idea. Oh, and, according to Manne, "THERE IS NO LIE" in options backdating. He put that in caps.

So they get in a blog-to-blog debate with another corporate law professor, Matt Bodie of Hofstra Law School, who attempts good-naturedly on PrawfsBlog to dispute the Wannabeconomists. His best moment is on the NO LIE thing: “Backdating is always a lie -- you are claiming something happened before it actually did. I am baffled that this basic conception can elude my esteemed interlocutors." Me too.

To back up Professor Bodie, here’s what backdater extraordinaire UnitedHealth Group, Inc. told its shareholders in last year's proxy statement: “Historically, the Committee has utilized executive stock options because a holder of an option benefits only if the Company’s stock price increases after the date of grant.”

Pants. On fire. Hot enough to blow open a soup can.

No comments: