The Bezzle, Regulation, and locus of control 

The Bezzle definition - 

“At any given time there exists an inventory of undiscovered embezzlement in—or more precisely not in—the country’s business and banks. This inventory – it should perhaps be called the bezzle – amounts at any moment to many millions of dollars. It also varies in size with the business cycle. In good times people are relaxed, trusting, and money is plentiful. But even though money is plentiful, there are always many people who need more. Under these circumstances the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly. In depression all this is reversed. Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous. Commercial morality is enormously improved. The bezzle shrinks.”

 - John Kenneth Gailbraith

I think of the financial crisis and alignment of interests. When times are good, incentives are aligned across the agents (see “the principal-agent problem” for more information on agency theory). That is, borrowers are borrowing and paying (swapping income for capital assets), lenders are lending, market makers are making markets, and investors are investing (swapping capital assets for income). 

When the music stops and the economy declines, the participating agents are disrupted and the search for blame starts.  The disruptions included borrowers not paying, investors not investing, etc.  This blaming, in part, is characterized by the magnitude of the Bezzle. I do find it interesting that, generally in the good times, the agents are (perhaps unwittingly) participants in the Bezzle. 

Also, this relates to the role of the regulator. (See Jeff Hulett, “Role of the Regulator”). There is pressure to grow the Bezzle inventory during good times. This should be assuaged by a well defined banking regulatory playing field. Both, defining what is out of bounds, and even more important, enforcing what is out of bounds.  For a number of reasons, the regulators struggle with pro cyclical enforcement and are likely to default to reactionary, rear view mirror remediation based regulatory action. 

In Zach Carter’s biography on JM Keynes (The Price of Peace), he makes an unintended reference to a broader definition of the Bezzle, as related to Keynes’ view of the 3 political problems of mankind, namely, economic efficiency, individual freedom, and social justice. 

“People had once accepted an unequal system because it had improved their lives (note: Keynes is referencing the Gilded Age just prior to WW1); because they had embraced it, the system had been able to generate prosperity. Now everyone from the coal miner to the investment house magnate had come to believe in a bleak, limited future (whatever the bankers said about the virtues of the gold standard, the paucity of actual investment in the economy was a more telling measure of their true feelings). That collective doom and gloom could not be broken by individual acts of courage.”  

Economic systems will be accepted if a “rising tide raises all boats.” So as long as Pareto Efficiency is the case, even an unequal system will be accepted, as long as all parties are comparatively better off.  Kahneman would have a field day identifying the failures of invariance evident in the Gilded Age. 

Hence, in the bleak, depression time, the Bezzle shrinks as trust falls. In Keynes view, it is up to the government to prime the pumps so all fare better to break the cycle. However, as a society, we have not yet figured out how to break the cycle without increasing the Bezzle. Unfortunately,  economic growth and the Bezzle seem inexorably linked. 


When times are good, people focus on themselves and apply an internal locus of control.  The belief that good times are the result of individual achievement. The Bezzle grows because of that internal focus. “As long as I’m doing better, I’m not going to be as likely to compare myself to others or otherwise spend my energy on the unfair actions of others”

When times are bad, people focus on their environment and apply an external locus of control.  The belief that bad times are the result of others. The Bezzle shrinks because of that external focus. “It must be others that are causing my pain, so I’m going to seek recompense for unfair action.”

Naturally, this is a failure of invariance, as framed by the good or bad times circumstances. The truth is, we likely have the same amount of control, and that control is mostly illusory. As such, being vigilant in good times is a good strategy as most others are not. 

8/2/20 - a quote from A Rutherford's book Systems Thinking - Mental Models

This is a good reminder that our external locus may be focused on the closest adjacent external force where there is more control or access. Important to recognize the problems likely are mostly external:

“Avoid operating from a blaming stance,

though. Instead of leading a whodunit, encour-

age questions such as "How could we have

been responsible?" Often, problems are not cre-

ated by internal forces but external, yet we are

still responsible for allowing the external force

to influence us. Thus it's useful to ask, "What

did we do to allow these external powers to

control us?"”

Reminds of the aphorism “No decision is still a decision.”


NN Taleb on regulation, from his book Skin in the Game:

Regulation can be bad:

“For there are always parasites benefiting from regulation, situations where the businessperson uses government to derive profits, often through protective regulations and franchises. The mechanism is called regulatory recapture, as it cancels the effect of what a regulation was meant to do.”

Lawsuits can be better:

“The other solution is to put skin in the game in transactions, in the form of legal liability, and the possibility of an efficient lawsuit.  The Anglo-Saxon world has traditionally had a predilection for the legal approach instead of the regulatory one: if you harm me, I can sue you. This has led to the very sophisticated, adaptive, and balanced common law, built bottom-up, via trial and error.”

But there is a case for regulation:

“This doesn't mean one should never regulate at all. Some systemic effects may require regulation (say hidden tail risks of environmental ruins that show up too late). If you can't effectively sue, regulate.”

This generally gets at my “Role of the regulator” position, I.e., Regulation as guard rails. It doesn’t say what you can do, it says what you can’t. Problem being, the negative lacks creativity or completion. Which is probably fine for regulation, leaving creativity and completion up to the entrepreneur. It does require the regulator to be pro cyclical, which is challenging, I.e., the Bezzle. 

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