Is London Corrupt, Efficient, or Both?

by Neil H. Buchanan

One consequence of a cataclysm like the war in Ukraine -- which at this point is more accurately described as a deliberate slaughter of innocents -- is to cause people to think about things in ways that were recently unthinkable.  Germany's sudden willingness to become a military power is the most obvious and possibly the most consequential such a shift, but there are any number of ways in which the old normal is being scrutinized, questioned, and possibly changed.

It did not even count as an open secret that Vladimir Putin's corrupt oligarchs were laundering their money through western countries.  That phenomenon was sometimes decried and often led to furrowed brows and the shaking of heads, but it was there, out in the open, for everyone to see.  And as the Russian plunderers have spread their money around the world, they have been especially successful in parking their ill-gotten gains in the United Kingdom, and in London in particular.
Now, with people looking for ways to put indirect pressure on Putin, there is a long overdue effort to try to stop these kleptocrats from putting their money in safe investments such as UK properties.  In that light, I will argue here that those investments are in fact economically efficient.  But allow me to be clear in saying that I make that assertion not as a defense of Russian oligarchs but as a criticism of the concept of economic efficiency.  If what these Russians have done can be described as efficient -- and it definitely can be so described  -- then that should tell us something about the market idolatry that causes economists to tout efficiency as the ultimate goal of public policy.
In that sense, there could be at least one positive side-effect of Putin's war crimes.  Any such positive effect is in no way large or important enough to justify that war (nothing could), but we have now been presented with a moment of clarity that should change how public discussions -- even those having nothing to do with military atrocities -- are conducted in the future.  Economic efficiency should at long last be recognized as a fully discredited concept.

Over the last decade or so, I have been spending long stretches of time in the UK, visiting and speaking at various universities on that side of The Pond.  Although I am not the type to engage in stereotypically touristy forays, I have found that hop-on/hop-off buses are a good way to get a sense of the layout of a city in a short period of time.  Day One in a new place thus begins with a ticket on that seeming tourist trap, and the rest of the visit can be spent exploring as I please.

Before I first visited London, I had read over the years that hyper-wealthy Russians had been buying up high-end properties in the most desirable parts of the city, which apparently left many neighborhoods essentially empty most of the time.  After all, Putin's boys were not going to spend their time in one place!  London was merely a good place to park some cash.  Having seen neighborhoods in New York City that had been transformed in exactly that way, I could understand why Londoners were unhappy with that trend.

Seeing the effect in person, however, was quite an education.  From the tourist bus, we saw extensive areas in which there were no people on the street.  That might be normal in Houston, but it is very odd indeed in London.  In this regard, London was New York on steroids.  Prime areas of the city had essentially become an odd kind of safety deposit box, and the only visible humans were the security guards who had been put in place to keep out the riffraff.  I happened to walk through one of those areas after dark one evening, and the only lights that one could see were in lobbies and stairwells.

This did not happen by accident.  Now-Prime Minister Boris Johnson made his name in politics (after having been fired as a journalist for making things up) by becoming the Mayor of London, and he was all in on bringing in the Russians' money by creating tax giveaways to get the oligarchs to choose his city over Paris or Berlin.  Obviously, this was a success, in the sense that it did bring in money to London.
One of the genuinely good decisions that the editorial page of The New York Times has made in a long time is to bring on the [fictional] British commentator Jonathan Pie to write and narrate scathing video commentaries.  In last week's "Welcome to Londongrad, Where Kleptocrats Wash Their Money Clean," Pie described how the British political class's moral surrender to the Russian billionaires had inevitably led to kid-gloves treatment for Putin.  A particularly strong moment in the video comes when he describes the UK government's pathetically weak response to Putin's having had an opponent poisoned in a London restaurant.  Watch Pie's reaction (beginning at the 5:16 mark).  The righteous indignation is bracing.
As Pie explains, the UK's moral surrender involved politicians (on a disgustingly bipartisan basis) making the UK a haven for Russian oligarchs, including giving out "golden passports" and accepting campaign donations from Kremlin-connected thieves.  Even English football clubs suddenly became the playthings of the Eastern European billionaires, one especially pernicious effect of which has been to turn English football fans into apologists for "their" billionaires, with Chelsea's supporters loudly supporting team owner Roman Abramovich by displaying a banner reading "The Roman Empire."  And why not?  With the backlash against the oligarchs, where the freezing of assets makes it impossible to pay players, Chelsea's status as a football powerhouse is in serious jeopardy.  Who cares about Ukrainian lives when there is a cup to be won?!

Geoffrey Wheatcroft, a British journalist based in London, explained earlier this week in The New Republic that Abramovich is "one of the group of Russians who together and in blatantly corrupt fashion looted their country in the 1990s amid the wreckage of the Soviet Union, making colossal fortunes by acquiring monopolistic control of oil, gas, iron, and the other natural resources that are just about all the Russian economy consists of."
And that brings us back to economics and efficiency.  In a Dorf on Law column last Thursday, I wrote this:
The power of the powerful could be reduced or redirected by changing government policy, but the neoliberals respond by saying that we should not blame the powerful for exercising their power.  And if we try to change the rules of the game, that is per se inefficient.  In short, we cannot change things because that would involve changing things, which is bad because everything happens for the best in this best of all possible worlds.
Who are those neoliberals?  They are led by American economists who have long insisted that we needed to be "hard-headed realists" and let "the market" decide our fate.  Back in the 1990's, the looting of Russia that Wheatcroft described was very much a neoliberal enterprise, with economists from Harvard -- in particular Larry Summers and Jeffrey Sachs -- leading the charge for "shock therapy" in the former Soviet Union.  As a starting point, they wanted to set up a stock market in a country that had no existing infrastructure for managing finance, where no law school would have ever had a reason even to offer a course in Secured Transactions, much less financial markets.  What could go wrong?

That is, the most important immediate goal was supposedly to set up private property rights and then allow the "greed is good" mantra to lead to the efficient allocation of resources.  One of my dissertation advisors (who subsequently left Harvard to move back to the University of Cambridge) talked to me about that problem at the time, scoffing at the idea that his colleagues like Summers et al knew anything at all about what they were advocating.  But of course the point was that neoliberals reject the idea that they need to know anything about the facts on the ground, because they are sure that markets (as if that is a self-defining term) are better than the alternative, at all times and in all places.

Of course, the outcome of market transactions depends on how property rights are set up, how contract and securities laws -- and criminal laws -- treat buyers and sellers (and workers), and on and on.  Once certain people have a stake in the continuation of the grift that made them the winners of the market lottery, however, they will do all they can to prevent giving up their gains.

Similarly, from the standpoint of London and the UK's politicians, it would have been wasteful -- that is, inefficient -- not to accept the money coming into the UK.  Markets are supposed to allocate resources to their "best uses," which means the use that captures the highest price.  If outsiders come in and say that they think London mansions are worth five times what they had been selling for, it would be a crime against the market to prevent them from buying those mansions.  "No one held a gun to the heads of the sellers," they might say, so why should we stand in the way of win-win deals?

I have argued many times that everything is efficient even though everything is inefficient, by which I mean that it is always possible to set up one's assumptions such that the desired outcome can technically meet the standards of economic efficiency -- but that under any other set of assumptions, those same outcomes are horribly inefficient.
The surpassingly great economist Amartya Sen once said that "[a] society can be [economically efficient] and still perfectly disgusting."  The further point that I am emphasizing here is that a non-disgusting outcome could be defended as economically efficient, based on different assumptions.  What happened to London was driven by bad decisions, but there was no way to provide a neutral playing field, because we must always make decisions about how markets will work, and no decision is neutral.
For example, the UK government made the decision to allow property to be sold to anonymous buyers.  That alone distorted the outcome from what it would have been had they not adopted that rule.  Now, however, getting rid of that rule could be called inefficient -- but again, it could also be called efficient.

So, is the situation in London the result of corruption, foreign and domestic?  Yes.  Is it efficient?  Yes but no.

Usually, my most reliable example of how neoliberal reasoning breaks down is to say that introducing slavery into a country where slavery is currently illegal would be inefficient, but abolishing slavery in a country where slavery is currently permitted would also be inefficient.  Now, I might have an even better example.  Putin's oligarchs are both efficient and inefficient.  So maybe efficiency is not the best lens through which to assess their impact on the world.