A Level Economics 46: The Role of Regulatory/Competition Authority

Competition authorities and regulators play a crucial role in promoting competition and contestability in non-perfectly competitive markets. They use various tools and interventions to address market distortions, protect consumers, and create a level playing field for businesses. Here are some ways competition authorities and regulators promote competition in non-perfectly competitive markets, along with examples to illustrate their impact:

1. Antitrust Enforcement: Competition authorities enforce antitrust laws to prevent anti-competitive practices, such as collusion, price-fixing, and abuse of dominant market positions. They investigate and take legal action against firms engaging in these behaviors to ensure fair competition.

Example: The European Commission fined Google €2.42 billion in 2017 for promoting its own shopping comparison service in search results and demoting competitors, violating EU antitrust rules. This action aimed to restore competition and give fair visibility to rival comparison shopping services.

2. Merger Control: Competition authorities review mergers and acquisitions to prevent the creation of dominant market positions that could stifle competition. They assess whether mergers are likely to harm competition and impose conditions or block mergers if necessary.

Example: In 2018, the U.S. Department of Justice (DOJ) filed a lawsuit to block AT&T's acquisition of Time Warner, citing potential harm to competition in the media and entertainment industry. The court-approved the merger only after significant divestitures and behavioral commitments were made to maintain competition.

3. Market Studies and Reports: Competition authorities conduct market studies to identify barriers to entry, anti-competitive practices, and market inefficiencies. These studies inform policymakers and regulators, leading to targeted interventions to enhance competition.

Example: The UK's Competition and Markets Authority (CMA) conducted a market study of the online platforms and digital advertising market in 2019. The study revealed concerns about the market power of large platforms and led to proposals for a Digital Markets Unit to enforce a new code of conduct and promote competition.

4. Consumer Protection Measures: Competition authorities protect consumers by ensuring businesses provide accurate information, fair contracts, and quality products. They may penalize firms for false advertising or unfair trading practices.

Example: The Federal Trade Commission (FTC) in the U.S. has taken action against companies making false claims about health products, deceptive advertising, or unfair billing practices, aiming to protect consumers from misleading information and scams.

5. Price Regulation: In some industries, regulators may impose price controls or regulate profit margins to prevent monopolistic pricing and ensure affordable access to essential goods and services.

Example: In healthcare, governments or regulatory bodies may regulate drug prices or set price ceilings for medical services to prevent excessive pricing and ensure accessibility to healthcare for all citizens.

6. Promoting Market Entry and Contestability: Competition authorities may encourage the entry of new firms into the market to increase competition. They may also promote contestability by removing barriers to entry and fostering innovation.

Example: In the telecommunications industry, regulators may allocate spectrum licenses to new entrants to encourage competition and introduce new technologies, leading to improved services and lower prices for consumers.

In conclusion, competition authorities and regulators actively promote competition and contestability in non-perfectly competitive markets through antitrust enforcement, merger control, market studies, consumer protection measures, price regulation, and measures to enhance market entry and contestability. Their interventions aim to create competitive markets that benefit consumers, encourage innovation, and promote economic growth while safeguarding against anti-competitive practices. 

Critical Thinking

 

Why we trust fraudsters

From Enron to Wirecard, elaborate scams can remain undetected long after the warning signs appear. What are investors missing? Tom Straw in The FT

In March 2020, the star English fund manager Alexander Darwall spoke admiringly to the chief executive at one of the largest investments in his award-winning portfolio. “The last set of numbers are fantastic,” he gushed, adding: “This is a crazy situation. People should be looking at your company and saying ‘wow’. I’m delighted, I’m delighted to be a shareholder.” 

Seated in a swivel chair at his personal conference table, Markus Braun sounded relaxed. The billionaire technologist was dressed all in black, a turtleneck under his suit like some distant Austrian cousin of the late Steve Jobs, and he had little to say about swirling allegations the company had faked its profits for years. “I am very optimistic,” he offered, when Darwall voiced his hope that the controversy would amount to nothing more than growing pains at a fast expanding company. 

“I haven’t sold a single share,” Darwall assured him, doing most of the talking, while also acknowledging how precarious the situation was. The Financial Times had reported in October 2019 that large portions of Wirecard’s sales and profits were fraudulent, and published internal company documents stuffed with the names of fake clients. A six-month “special audit” by the accounting firm KPMG was approaching completion. “If it shows anything that senior people misled, that would be a disaster,” Darwall said. 

His assessment proved correct. Three months later the company collapsed like a house of cards, punctuated by a final lie: that €1.9bn of its cash was “missing”. In fact, the money never existed and Wirecard had for years relied on a fraud that was almost farcical in its simplicity: a few friends of the company claimed to manage huge amounts of business for Wirecard, with all the vast profits from these partners said to be collected in special bank accounts overseen by a Manila-based lawyer with a YouTube following. Braun, who claims to be a victim of a protégé with security services connections who masterminded the scheme and then absconded to Belarus, faces a trial this autumn alongside two subordinates that will examine how the final years of the fraud were accomplished. 

Left behind in the ashes, however, is a much larger question, one which haunts all victims of such scams: how on earth did they get away with it for so long? Wirecard faces serious questions about the integrity of its accounts since at least 2010. Estimates for losses run to more than €20bn, never mind the reputation of Frankfurt as a financial centre. Why did so many inside and outside the company — a long list of investors, bankers, regulators, prosecutors, auditors and analysts — look at the evidence that Wirecard was too good to be true and decide to trust Braun? 

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In 2019 I worked with whistleblowers to expose Wirecard, using internal documents to show the true source of its spellbinding growth in sales and profit. As I faced Twitter vitriol and accusations I was corrupt, the retired American short-seller Marc Cohodes regularly rang me from wine country on the US west coast to deliver pep talks and describe his own attempts to persuade German journalists to see Wirecard’s true colours. “Keep going Dan. I always say, ‘there’s never just one cockroach in the kitchen’.” 

He was right on that point: find one lie and another soon follows. But short-sellers who search for overvalued companies to bet against are unusual, because they go looking for fraud and skulduggery. Most investors are not prosecutors fitting facts into a pattern of guilt: they don’t see a cockroach at all. 

Think of Elizabeth Holmes, another aficionado of the black turtleneck, who persuaded a group of experts and well-known investors to back or advise her company, Theranos, based on the claim it had technology able to deliver medical results from an improbably small pinprick of blood. The involvement of reputable people and institutions — including retired general James Mattis, former secretary of state Henry Kissinger and former Wells Fargo chief executive Richard Kovacevich as board members — seemed to confirm that all was well. 

Another problem is that complex frauds have a dark magic that is different to, say, “Count” Victor Lustig personally persuading two scrap metal dealers he could sell them a decaying Eiffel Tower in 1925. As Dan Davies wrote in his history of financial scams, Lying for Money, “the way in which most white-collar crime works is by manipulating institutional psychology. That means creating something that looks as much as possible like a normal set of transactions. The drama comes much later, when it all unwinds.”  

What such frauds exploit is the highly valuable character of trust in modern economies. We go through life assuming the businesses we encounter are real, confident that there are institutions and processes in place to check that food standards are met or accounts are prepared correctly. Horse meat smugglers, Enron and Wirecard all abused trust in complex systems as a whole. To doubt them was to doubt the entire structure, which is what makes their impact so insidious; frauds degrade faith in the whole system. 

Trust means not wasting time on pointless checks. Most deceptions would generally have been caught early on by basic due diligence, “but nobody does confirm the facts. There are just too bloody many of them”, wrote Davies. It makes as much sense for a banker to visit every outpost of a company requiring a loan as it would for the buyer of a pint of milk to inquire after the health of the cow. For instance, by the time John Paulson, one of the world’s most famous and successful hedge fund managers, became the largest shareholder in Canadian-listed Sino Forest, its shares had traded for 15 years. Until the group’s 2011 collapse, few thought of travelling to China to see if its woodlands were there. 

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Yet what stands out in the case of Wirecard are the many attempts to check the actual facts. In 2015 a young American investigator, Susannah Kroeber, tried to knock on the doors at several remote Wirecard locations. Between 2010 and 2015 the company claimed to have grown in a series of leaps and bounds by buying businesses all over Asia for tens of millions of euros apiece. In Laos she found nothing at all, in Cambodia only traces. Wirecard’s reception area in Vietnam was like a school lunchroom; the only furniture was a picnic table for six and an open bicycle lock hung from one of the internal doors, a common security measure usually removed at a business expecting visitors. The inside was dim, with only a handful of people visible and many desks empty. She knew something wasn’t right, but she also told me that while she went half mad looking for non-existent addresses on heat-baked Southeast Asian dirt roads, she had an epiphany: “Who in their right mind would go to these lengths just to check out a stock investment?” 

Even when Kroeber’s snapshots of empty offices were gathered into a report for her employer, J Capital Research, and presented to Wirecard investors, the response reflected preconceived expectations: these are reputable people, EY is a good auditor, why would they be lying? The short seller Leo Perry described attending an investor meeting where the report was discussed. A French fund manager responded by reporting his own due diligence. He’d asked his secretary to call Wirecard’s Singapore office, the site of its Asian headquarters, and could happily report that someone there had picked up the phone. 

The shareholders reacted at an emotional level, showing how fraud exploits human behaviour. “When you’re invested in the success of something, you want to see it be the best it can be, you don’t pay attention to the finer details that are inconsistent”, says Martina Dove, author of The Psychology of Fraud, Persuasion and Scam Techniques. She adds that social proof and deference to authority, such as expert accounting firms, were powerful forces when used to spread the lies of crooks: “If a friend recommends a builder, you trust that builder because you trust your friend.” 

Wirecard’s response, in addition to taking analysts on a tour of hastily well-staffed offices in Asia, was to drape itself in complexity. Like WeWork, the office space provider that presented itself as a technology company (and which wasn’t accused of fraud), Wirecard waved a wand of innovation to make an ordinary business appear extraordinary. 

At heart, Wirecard’s legitimate operations processed credit and debit card payments for retailers all over the world. It was a competitive field with many rivals, but Wirecard claimed to have become a European PayPal and more, outpacing the competition with profit margins few could match. Wirecard was “a technology company with a bank as a daughter”, Braun said, one using artificial intelligence and cutting-edge security. As the share price rose, so did Braun’s standing as a technologist who heralded the arrival of a cashless society. Who were mere investors to suggest that the results of this whirligig, with operations in 40 countries, were too good to be true? 

It seems to me Wirecard used a similar tactic to the founder of software group Autonomy, Mike Lynch, who charged that critics simply didn’t understand the business. (Lynch has lost a civil fraud trial relating to the $11bn sale of the group, denied any wrongdoing, said he will appeal, and is fighting extradition to the US to face fraud charges. Autonomy’s former CFO was convicted of fraud in separate American proceedings.) 

When this publication presented internal documents describing a book cooking operation in Singapore, Wirecard focused on the amounts at stake, which were initially small, rather than the unpunished practices of forgery and money laundering, which were damning. 

Then there was the thrall of German officials. Three times, in 2008, 2017, and 2019, the financial market regulator BaFin publicly investigated critics of Wirecard, taken by observers as a signal of support. Indeed, BaFin fell for the big lie when faced with an unenviable choice of circumstances: either foreign journalists and speculators were conspiring to attack Germany’s new technology champion using the pages of a prominent newspaper; or senior executives at a DAX 30 company were lying to prosecutors, as well as some of Germany’s most prestigious banks and investment houses. Acting on a claim by Wirecard that traders knew about an FT story before publication, regulators suspended short selling of the stock to protect the integrity of financial markets. 

Proximity to the subject won out, but the German authorities were hardly the first to fail in this way. Their US counterparts ignored the urging of Harry Markopolos to investigate the Ponzi schemer Bernard Madoff, a former chairman of the Nasdaq whose imaginary $65bn fund sent out account statements run off a dot matrix printer. 

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For some long-term investors, to doubt Wirecard was surely to doubt themselves. Darwall first invested in 2007, when the share price was around €9. As it rose more than tenfold, his investment prowess was recognised accordingly, attracting money to the funds he ran for Jupiter Asset Management, and fame. He knew the Wirecard staff, they had provided advice on taking payments for his wife’s holiday rental. Naturally he trusted Braun. 

Darwall did not respond to requests for comment made to his firm, Devon Equity Management. 

In the buildings beyond the shades of Braun’s office, staff rationalised what didn’t fit. Wirecard was a tech company, yet in early 2016 it suffered a tech disaster. On a quiet Saturday afternoon, running down a list of routine maintenance, a tech guy made a typo. He entered the wrong command when decommissioning a Linux server. Instead of taking out the one machine, he watched with rising panic as it killed all of them, pulling the plug on almost the entire company’s operations without warning. 

Customers were in the dark, as email was offline and Wirecard had no weekend helpline, and it took days for services to recover. Following the incident, a small but notable proportion of clients left and new business was put on hold as teams placated those they already had, staff recalled. Yet the pace of growth in the published numbers remained strong. 

Martin Osterloh, a salesman at Wirecard for 15 years, put the mismatch between claims and capabilities down to spin. Only after the fall was the extent of Wirecard’s hackers, private detectives, intimidation and legal threats exposed to the light. Haphazard lines of communication, disorganisation and poor record keeping created excuses for middle-ranking Wirecard staff and its supervisory board, stories to tell themselves about a failure to integrate and start-up’s culture of experimentation. 

It was perhaps not as hard to believe as we might think. Facebook, which has probed the legal boundaries of surveillance capitalism, famously encouraged staff to “move fast and break things”. Business questions often shade grey before they turn black. As Andrew Fastow said of his own career as a fraudster, “I wasn’t the chief finance officer at Enron, I was the chief loophole officer.” 

Braun’s protégé was chief operating officer Jan Marsalek, a mercurial Austrian who constantly travelled and struck deals, with no real team to speak of. Boasting that he only slept “in the air”, he would appear at headquarters from one flight with a copy of Sun-Tzu’s The Art of War tucked under an arm, then leave a few hours later for the next. Questions were met with a shrug, that strange arrangements reflected Marsalek’s “chaotic genius”. As scrutiny intensified in the final 18 months, the fraudulent imitation shifted to problem solving, allowing board members and staff to think they were engaged in procedures to improve governance. 

After the collapse I shared pretzels with Osterloh on a snowy day in Munich and he seemed embarrassed by events. He and thousands of others had worked on a real business, until they were summarily fired and learned it lost money hand over fist. Osterloh spoke for many when he said: “I’m like the idiot guy in a movie, I got to meet all these guys. The question arises, why were we so naive? And I can’t really answer that question.”  

Jordan Peterson: Order and Chaos in 2021

 

Scientific or Pseudo Knowledge? How Lancet's reputation was destroyed

The now retracted paper halted hydroxychloroquine trials. Studies like this determine how people live or die tomorrow writes James Heathers in The Guardian

 

‘At its best, peer review is a slow and careful evaluation of new research by appropriate experts. ... At its worst, it is merely window dressing that gives the unwarranted appearance of authority’. Photograph: George Frey/AFP/Getty Images


The Lancet is one of the oldest and most respected medical journals in the world. Recently, they published an article on Covid patients receiving hydroxychloroquine with a dire conclusion: the drug increases heartbeat irregularities and decreases hospital survival rates. This result was treated as authoritative, and major drug trials were immediately halted – because why treat anyone with an unsafe drug?

Now, that Lancet study has been retracted, withdrawn from the literature entirely, at the request of three of its authors who “can no longer vouch for the veracity of the primary data sources”. Given the seriousness of the topic and the consequences of the paper, this is one of the most consequential retractions in modern history.

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It is natural to ask how this is possible. How did a paper of such consequence get discarded like a used tissue by some of its authors only days after publication? If the authors don’t trust it now, how did it get published in the first place?

The answer is quite simple. It happened because peer review, the formal process of reviewing scientific work before it is accepted for publication, is not designed to detect anomalous data. It makes no difference if the anomalies are due to inaccuracies, miscalculations, or outright fraud. This is not what peer review is for. While it is the internationally recognised badge of “settled science”, its value is far more complicated.

At its best, peer review is a slow and careful evaluation of new research by appropriate experts. It involves multiple rounds of revision that removes errors, strengthens analyses, and noticeably improves manuscripts.

At its worst, it is merely window dressing that gives the unwarranted appearance of authority, a cursory process which confers no real value, enforces orthodoxy, and overlooks both obvious analytical problems and outright fraud entirely.

Regardless of how any individual paper is reviewed – and the experience is usually somewhere between the above extremes – the sad truth is peer review in its entirety is struggling, and retractions like this drag its flaws into an incredibly bright spotlight.

The ballistics of this problem are well known. To start with, peer review is entirely unrewarded. The internal currency of science consists entirely of producing new papers, which form the cornerstone of your scientific reputation. There is no emphasis on reviewing the work of others. If you spend several days in a continuous back-and-forth technical exchange with authors, trying to improve their manuscript, adding new analyses, shoring up conclusions, no one will ever know your name. Neither are you paid. Peer review originally fitted under an amorphous idea of academic “service” – the tasks that scientists were supposed to perform as members of their community. This is a nice idea, but is almost invariably maintained by researchers with excellent job security. Some senior scientists are notorious for peer reviewing manuscripts rarely or even never – because it interferes with the task of producing more of their own research.

However, even if reliable volunteers for peer review can be found, it is increasingly clear that it is insufficient. The vast majority of peer-reviewed articles are never checked for any form of analytical consistency, nor can they be – journals do not require manuscripts to have accompanying data or analytical code and often will not help you obtain them from authors if you wish to see them. Authors usually have zero formal, moral, or legal requirements to share the data and analytical methods behind their experiments. Finally, if you locate a problem in a published paper and bring it to either of these parties, often the median response is no response at all – silence.

This is usually not because authors or editors are negligent or uncaring. Usually, it is because they are trying to keep up with the component difficulties of keeping their scientific careers and journals respectively afloat. Unfortunately, those goals are directly in opposition – authors publishing as much as possible means back-breaking amounts of submissions for journals. Increasingly time-poor researchers, busy with their own publications, often decline invitations to review. Subsequently, peer review is then cursory or non-analytical.

And even still, we often muddle through. Until we encounter extraordinary circumstances.





Peer review during a pandemic faces a brutal dilemma – the moral importance of releasing important information with planetary consequences quickly, versus the scientific importance of evaluating the presented work fully – while trying to recruit scientists, already busier than usual due to their disrupted lives, to review work for free. And, after this process is complete, publications face immediate scrutiny by a much larger group of engaged scientific readers than usual, who treat publications which affect the health of every living human being with the scrutiny they deserve.

The consequences are extreme. The consequences for any of us, on discovering a persistent cough and respiratory difficulties, are directly determined by this research. Papers like today’s retraction determine how people live or die tomorrow. They affect what drugs are recommended, what treatments are available, and how we get them sooner.

The immediate solution to this problem of extreme opacity, which allows flawed papers to hide in plain sight, has been advocated for years: require more transparency, mandate more scrutiny. Prioritise publishing papers which present data and analytical code alongside a manuscript. Re-analyse papers for their accuracy before publication, instead of just assessing their potential importance. Engage expert statistical reviewers where necessary, pay them if you must. Be immediately responsive to criticism, and enforce this same standard on authors. The alternative is more retractions, more missteps, more wasted time, more loss of public trust … and more death.

After the Grenfell fire, the church got it right where the council failed

Giles Fraser in The Guardian

We are an “unsuccessful church”, the exhausted Rev Alan Everett told me, as I persuaded him to take a break and have some lunch. He meant that they only get 30 to 60 people in the pews on a Sunday morning and that it wasn’t one of those whizzy Alpha course churches beloved by London bishops and their growth spreadsheets. Next to us in the church’s sunny courtyard, an extended Muslim family talked openly about their escape from the fire. “Our lungs are full of smoke but at least, thank God, we are all alive.” A church worker told them where to find new shoes and clothes. It felt like a refugee camp. Perhaps it was a refugee camp. And hanging over the whole scene, Grenfell Tower, black and enormous. It stands as a biblical-scale condemnation to a whole society.

In the days after the fire, the church of St Clement’s, Notting Dale, became a hub for grieving families, generous donations of clothes and food – and camera-ready politicians. First Jeremy Corbyn came. Then a furtive Theresa May met a few residents in the church. Then Sadiq Khan was at mass on Sunday morning. I wanted to know from Everett how the church was able to respond so quickly in a way that the council didn’t. “I was woken up at 3am by a priest who lives in the tower, and so I came down to the church, opened the doors and turned the lights on,” he said. It all began from there. People started coming in out of the dark – often passersby looking to help. First they sorted out tea and coffee. By 7am, they had a fully stocked breakfast bar, with volunteers organising themselves into teams. Within hours, local restaurants were delivering food; clothes began to pile high in the church sanctuary – about 40 Transit vans’ worth, the vicar estimates. The place looked like a warehouse.

Listening to Everett, it struck me that “opening the doors and turning the lights on” was precisely the difference between the church and a local authority that had become arms’ length from its residents, continually dealing with local people only through intermediary organisations such as the locally much-hated Kensington and Chelsea Tenant Management Organisation. The nicest thing I heard about the royal borough from local people was that it had outsourced its care for the poor as a cost efficiency. The worst, that it was deliberately running down its stock of social housing so that they could eventually bring in the developers.

Donations inside the church of St Clement’s, Notting Dale. Photograph: Matthew Barrett

In his Sunday morning sermon, Fr Robert Thompson, an assistant priest in the parish and also a local Labour councillor, channelled his anger. Contrasting the good communication of the local volunteers with the bad communication of the authorities, he said: “The people on the lowest incomes of this parish simply do not feel listened to, either this week or in previous years, by those in power. Worse than that, what the whole issue of the cladding and the lack of sprinklers may well highlight is that some people in our society have simply become excess and debris on our neoliberal, unregulated, individualistic, capitalist and consumerist society.” The churchy way of saying “I agree” with all this is “amen”. The church of St Clement was built and paid for in 1867 by Alfred Dalgarno, a philanthropist vicar with deep pockets and a compassion for the poor. Thompson is a councillor for the Dalgarno ward, named after him. “This parish was built pre-welfare state and it is going to be needed as we now enter the post-welfare state,” he told me, chillingly.

Of course, parishes like St Clement are only superficially unsuccessful. Its secularised charity arm, the Clement James centre, helps thousands of local people every year, into work, into university. That’s why the parish is so trusted locally. “We are called to share in the brokenness and the forgottenness of the people we serve,” the vicar explained. In poor parishes, the job is to keep the doors open and the lights on. And this being permanently present is no small thing. Not least because, as Christians believe, the light will always beckon people out of the darkness.

Why bad ideas refuse to die

Steven Poole in The Guardian

In January 2016, the rapper BoB took to Twitter to tell his fans that the Earth is really flat. “A lot of people are turned off by the phrase ‘flat earth’,” he acknowledged, “but there’s no way u can see all the evidence and not know … grow up.” At length the astrophysicist Neil deGrasse Tyson joined in the conversation, offering friendly corrections to BoB’s zany proofs of non-globism, and finishing with a sarcastic compliment: “Being five centuries regressed in your reasoning doesn’t mean we all can’t still like your music.”

Actually, it’s a lot more than five centuries regressed. Contrary to what we often hear, people didn’t think the Earth was flat right up until Columbus sailed to the Americas. In ancient Greece, the philosophers Pythagoras and Parmenides had already recognised that the Earth was spherical. Aristotle pointed out that you could see some stars in Egypt and Cyprus that were not visible at more northerly latitudes, and also that the Earth casts a curved shadow on the moon during a lunar eclipse. The Earth, he concluded with impeccable logic, must be round.

The flat-Earth view was dismissed as simply ridiculous – until very recently, with the resurgence of apparently serious flat-Earthism on the internet. An American named Mark Sargent, formerly a professional videogamer and software consultant, has had millions of views on YouTube for his Flat Earth Clues video series. (“You are living inside a giant enclosed system,” his website warns.) The Flat Earth Society is alive and well, with a thriving website. What is going on?

Many ideas have been brilliantly upgraded or repurposed for the modern age, and their revival seems newly compelling. Some ideas from the past, on the other hand, are just dead wrong and really should have been left to rot. When they reappear, what is rediscovered is a shambling corpse. These are zombie ideas. You can try to kill them, but they just won’t die. And their existence is a big problem for our normal assumptions about how the marketplace of ideas operates.

The phrase “marketplace of ideas” was originally used as a way of defending free speech. Just as traders and customers are free to buy and sell wares in the market, so freedom of speech ensures that people are free to exchange ideas, test them out, and see which ones rise to the top. Just as good consumer products succeed and bad ones fail, so in the marketplace of ideas the truth will win out, and error and dishonesty will disappear.

There is certainly some truth in the thought that competition between ideas is necessary for the advancement of our understanding. But the belief that the best ideas will always succeed is rather like the faith that unregulated financial markets will always produce the best economic outcomes. As the IMF chief Christine Lagarde put this standard wisdom laconically in Davos: “The market sorts things out, eventually.” Maybe so. But while we wait, very bad things might happen.

Zombies don’t occur in physical marketplaces – take technology, for example. No one now buys Betamax video recorders, because that technology has been superseded and has no chance of coming back. (The reason that other old technologies, such as the manual typewriter or the acoustic piano, are still in use is that, according to the preferences of their users, they have not been superseded.) So zombies such as flat-Earthism simply shouldn’t be possible in a well‑functioning marketplace of ideas. And yet – they live. How come?

One clue is provided by economics. It turns out that the marketplace of economic ideas itself is infested with zombies. After the 2008 financial crisis had struck, the Australian economist John Quiggin published an illuminating work called Zombie Economics, describing theories that still somehow shambled around even though they were clearly dead, having been refuted by actual events in the world. An example is the notorious efficient markets hypothesis, which holds, in its strongest form, that “financial markets are the best possible guide to the value of economic assets and therefore to decisions about investment and production”. That, Quiggin argues, simply can’t be right. Not only was the efficient markets hypothesis refuted by the global meltdown of 2007–8, in Quiggin’s view it actually caused it in the first place: the idea “justified, and indeed demanded, financial deregulation, the removal of controls on international capital flows, and a massive expansion of the financial sector. These developments ultimately produced the global financial crisis.”

Even so, an idea will have a good chance of hanging around as a zombie if it benefits some influential group of people. The efficient markets hypothesis is financially beneficial for bankers who want to make deals unencumbered by regulation. A similar point can be made about the privatisation of state-owned industry: it is seldom good for citizens, but is always a cash bonanza for those directly involved.

The marketplace of ideas, indeed, often confers authority through mere repetition – in science as well as in political campaigning. You probably know, for example, that the human tongue has regional sensitivities: sweetness is sensed on the tip, saltiness and sourness on the sides, and bitter at the back. At some point you’ve seen a scientific tongue map showing this – they appear in cookery books as well as medical textbooks. It’s one of those nice, slightly surprising findings of science that no one questions. And it’s rubbish.

 

A fantasy map of a flat earth. Photograph: Antar Dayal/Getty Images/Illustration Works

As the eminent professor of biology, Stuart Firestein, explained in his 2012 book Ignorance: How it Drives Science, the tongue-map myth arose because of a mistranslation of a 1901 German physiology textbook. Regions of the tongue are just “very slightly” more or less sensitive to each of the four basic tastes, but they each can sense all of them. The translation “considerably overstated” the original author’s claims. And yet the mythical tongue map has endured for more than a century.

One of the paradoxes of zombie ideas, though, is that they can have positive social effects. The answer is not necessarily to suppress them, since even apparently vicious and disingenuous ideas can lead to illuminating rebuttal and productive research. Few would argue that a commercial marketplace needs fraud and faulty products. But in the marketplace of ideas, zombies can actually be useful. Or if not, they can at least make us feel better. That, paradoxically, is what I think the flat-Earthers of today are really offering – comfort.

Today’s rejuvenated flat-Earth philosophy, as promoted by rappers and YouTube videos, is not simply a recrudescence of pre-scientific ignorance. It is, rather, the mother of all conspiracy theories. The point is that everyone who claims the Earth is round is trying to fool you, and keep you in the dark. In that sense, it is a very modern version of an old idea.

As with any conspiracy theory, the flat-Earth idea is introduced by way of a handful of seeming anomalies, things that don’t seem to fit the “official” story. Have you ever wondered, the flat-Earther will ask, why commercial aeroplanes don’t fly over Antarctica? It would, after all, be the most direct route from South Africa to New Zealand, or from Sydney to Buenos Aires – if the Earth were round. But it isn’t. There is no such thing as the South Pole, so flying over Antarctica wouldn’t make any sense. Plus, the Antarctic treaty, signed by the world’s most powerful countries, bans any flights over it, because something very weird is going on there. So begins the conspiracy sell. Well, in fact, some commercial routes do fly over part of the continent of Antarctica. The reason none fly over the South Pole itself is because of aviation rules that require any aircraft taking such a route to have expensive survival equipment for all passengers on board – which would obviously be prohibitive for a passenger jet.

OK, the flat-Earther will say, then what about the fact that photographs taken from mountains or hot-air balloons don’t show any curvature of the horizon? It is perfectly flat – therefore the Earth must be flat. Well, a reasonable person will respond, it looks flat because the Earth, though round, is really very big. But photographs taken from the International Space Station in orbit show a very obviously curved Earth.

And here is where the conspiracy really gets going. To a flat-Earther, any photograph from the International Space Station is just a fake. So too are the famous photographs of the whole round Earth hanging in space that were taken on the Apollo missions. Of course, the Moon landings were faked too. This is a conspiracy theory that swallows other conspiracy theories whole. According to Mark Sargent’s “enclosed world” version of the flat-Earth theory, indeed, space travel had to be faked because there is actually an impermeable solid dome enclosing our flat planet. The US and USSR tried to break through this dome by nuking it in the 1950s: that’s what all those nuclear tests were really about.

 

Flat-Earthers regard as fake any photographs of the Earth that were taken on the Apollo missions Photograph: Alamy

The intellectual dynamic here, is one of rejection and obfuscation. A lot of ingenuity evidently goes into the elaboration of modern flat-Earth theories to keep them consistent. It is tempting to suppose that some of the leading writers (or, as fans call them, “researchers”) on the topic are cynically having some intellectual fun, but there are also a lot of true believers on the messageboards who find the notion of the “globist” conspiracy somehow comforting and consonant with their idea of how the world works. You might think that the really obvious question here, though, is: what purpose would such an incredibly elaborate and expensive conspiracy serve? What exactly is the point?

It seems to me that the desire to believe such stuff stems from a deranged kind of optimism about the capabilities of human beings. It is a dark view of human nature, to be sure, but it is also rather awe-inspiring to think of secret agencies so single-minded and powerful that they really can fool the world’s population over something so enormous. Even the pro-Brexit activists who warned one another on polling day to mark their crosses with a pen so that MI5 would not be able to erase their votes, were in a way expressing a perverse pride in the domination of Britain’s spookocracy. “I literally ran out of new tin hat topics to research and I STILL wouldn’t look at this one without embarrassment,” confesses Sargent on his website, “but every time I glanced at it there was something unresolved, and once I saw the near perfection of the whole plan, I was hooked.” It is rather beautiful. Bonkers, but beautiful. As the much more noxious example of Scientology also demonstrates, it is all too tempting to take science fiction for truth – because narratives always make more sense than reality.

We know that it’s a good habit to question received wisdom. Sometimes, though, healthy scepticism can run over into paranoid cynicism, and giant conspiracies seem oddly consoling. One reason why myths and urban legends hang around so long seems to be that we like simple explanations – such as that immigrants are to blame for crumbling public services – and are inclined to believe them. The “MMR causes autism” scare perpetrated by Andrew Wakefield, for example, had the apparent virtue of naming a concrete cause (vaccination) for a deeply worrying and little-understood syndrome (autism). Years after it was shown that there was nothing to Wakefield’s claims, there is still a strong and growing “anti-vaxxer” movement, particularly in the US, which poses a serious danger to public health. The benefits of immunisation, it seems, have been forgotten.

The yearning for simple explanations also helps to account for the popularity of outlandish conspiracy theories that paint a reassuring picture of all the world’s evils as being attributable to a cabal of supervillains. Maybe a secret society really is running the show – in which case the world at least has a weird kind of coherence. Hence, perhaps, the disappointed amazement among some of those who had not expected their protest votes for Brexit to count.

And what happens when the world of ideas really does operate as a marketplace? It happens to be the case that many prominent climate sceptics have been secretly funded by oil companies. The idea that there is some scientific controversy over whether burning fossil fuels has contributed in large part to the present global warming (there isn’t) is an idea that has been literally bought and sold, and remains extraordinarily successful. That, of course, is just a particularly dramatic example of the way all western democracies have been captured by industry lobbying and party donations, in which friendly consideration of ideas that increase the profits of business is simply purchased, like any other commodity. If the marketplace of ideas worked as advertised, not only would this kind of corruption be absent, it would be impossible in general for ideas to stay rejected for hundreds or thousands of years before eventually being revived. Yet that too has repeatedly happened.

While the return of flat-Earth theories is silly and rather alarming, meanwhile, it also illustrates some real and deep issues about human knowledge. How, after all, do you or I know that the Earth really is round? Essentially, we take it on trust. We may have experienced some common indications of it ourselves, but we accept the explanations of others. The experts all say the Earth is round; we believe them, and get on with our lives. Rejecting the economic consensus that Brexit would be bad for the UK, Michael Gove said that the British public had had enough of experts (or at least of experts who lurked in acronymically named organisations), but the truth is that we all depend on experts for most of what we think we know.

The second issue is that we cannot actually know for sure that the way the world appears to us is not actually the result of some giant conspiracy or deception. The modern flat-Earth theory comes quite close to an even more all-encompassing species of conspiracy theory. As some philosophers have argued, it is not entirely impossible that God created the whole universe, including fossils, ourselves and all our (false) memories, only five minutes ago. Or it might be the case that all my sensory impressions are being fed to my brain by a clever demon intent on deceiving me (Descartes) or by a virtual-reality program controlled by evil sentient artificial intelligences (The Matrix).

The resurgence of flat-Earth theory has also spawned many web pages that employ mathematics, science, and everyday experience to explain why the world actually is round. This is a boon for public education. And we should not give in to the temptation to conclude that belief in a conspiracy is prima facie evidence of stupidity. Evidently, conspiracies really happen. Members of al-Qaida really did conspire in secret to fly planes into the World Trade Center. And, as Edward Snowden revealed, the American and British intelligence services really did conspire in secret to intercept the electronic communications of millions of ordinary citizens. Perhaps the most colourful official conspiracy that we now know of happened in China. When the half-millennium-old Tiananmen Gate was found to be falling down in the 1960s, it was secretly replaced, bit by bit, with an exact replica, in a successful conspiracy that involved nearly 3,000 people who managed to keep it a secret for years.

Indeed, a healthy openness to conspiracy may be said to underlie much honest intellectual inquiry. This is how the physicist Frank Wilczek puts it: “When I was growing up, I loved the idea that great powers and secret meanings lurk behind the appearance of things.” Newton’s grand idea of an invisible force (gravity) running the universe was definitely a cosmological conspiracy theory in this sense. Yes, many conspiracy theories are zombies – but so is the idea that conspiracies never happen.

 

‘When the half-millennium-old Tiananmen Gate was found to be falling down in the 1960s, it was secretly replaced, bit by bit, with an exact replica’ Photograph: Kevin Frayer/Getty Images

Things are better, one assumes, in the rarefied marketplace of scientific ideas. There, the revered scientific journals have rigorous editorial standards. Zombies and other market failures are thereby prevented. Not so fast. Remember the tongue map. It turns out that the marketplace of scientific ideas is not perfect either.
The scientific community operates according to the system of peer review, in which an article submitted to a journal will be sent out by the editor to several anonymous referees who are expert in the field and will give a considered view on whether the paper is worthy of publication, or will be worthy if revised. (In Britain, the Royal Society began to seek such reports in 1832.) The barriers to entry for the best journals in the sciences and humanities mean that – at least in theory – it is impossible to publish clownish, evidence-free hypotheses.

But there are increasing rumblings in the academic world itself that peer review is fundamentally broken. Even that it actively suppresses good new ideas while letting through a multitude of very bad ones. “False positives and exaggerated results in peer-reviewed scientific studies have reached epidemic proportions in recent years,” reported Scientific American magazine in 2011. Indeed, the writer of that column, a professor of medicine named John Ioannidis, had previously published a famous paper titled Why Most Published Research Findings Are False. The issues, he noted, are particularly severe in healthcare research, in which conflicts of interest arise because studies are funded by large drug companies, but there is also a big problem in psychology.

Take the widely popularised idea of priming. In 1996, a paper was published claiming that experimental subjects who had been verbally primed to think of old age by being made to think about words such as bingo, Florida, grey, and wrinkles subsequently walked more slowly when they left the laboratory than those who had not been primed. It was a dazzling idea, and led to a flurry of other findings that priming could affect how well you did on a quiz, or how polite you were to a stranger. In recent years, however, researchers have become suspicious, and have not been able to generate the same findings as many of the early studies. This is not definitive proof of falsity, but it does show that publication in a peer-reviewed journal is no guarantee of reliability. Psychology, some argue, is currently going through a crisis in replicability, which Daniel Kahneman has called a looming “train wreck” for the field as a whole.

Could priming be a future zombie idea? Well, most people think it unlikely that all such priming effects will be refuted, since there is now such a wide variety of studies on them. The more interesting problem is to work out what scientists call the idea’s “ecological validity” – that is, how well do the effects translate from the artificial simplicity of the lab situation to the ungovernable messiness of real life? This controversy in psychology just shows science working as it should – being self-correcting. One marketplace-of-ideas problem here, though, is that papers with surprising and socially intriguing results will be described throughout the media, and lauded as definitive evidence in popularising books, as soon as they are published, and long before awkward second questions begin to be asked.

China’s memory manipulators



It would be sensible, for a start, for us to make the apparently trivial rhetorical adjustment from the popular phrase “studies show …” and limit ourselves to phrases such as “studies suggest” or “studies indicate”. After all, “showing” strongly implies proving, which is all too rare an activity outside mathematics. Studies can always be reconsidered. That is part of their power.

Nearly every academic inquirer I talked to while researching this subject says that the interface of research with publishing is seriously flawed. Partly because the incentives are all wrong – a “publish or perish” culture rewards academics for quantity of published research over quality. And partly because of the issue of “publication bias”: the studies that get published are the ones that have yielded hoped-for results. Studies that fail to show what they hoped for end up languishing in desk drawers.

One reform suggested by many people to counteract publication bias would be to encourage the publication of more “negative findings” – papers where a hypothesis was not backed up by the experiment performed. One problem, of course, is that such findings are not very exciting. Negative results do not make headlines. (And they sound all the duller for being called “negative findings”, rather than being framed as positive discoveries that some ideas won’t fly.)

The publication-bias issue is even more pressing in the field of medicine, where it is estimated that the results of around half of all trials conducted are never published at all, because their results are negative. “When half the evidence is withheld,” writes the medical researcher Ben Goldacre, “doctors and patients cannot make informed decisions about which treatment is best.”Accordingly, Goldacre has kickstarted a campaigning group named AllTrials to demand that all results be published.

When lives are not directly at stake, however, it might be difficult to publish more negative findings in other areas of science. One idea, floated by the Economist, is that “Journals should allocate space for ‘uninteresting’ work, and grant-givers should set aside money to pay for it.” It sounds splendid, to have a section in journals for tedious results, or maybe an entire journal dedicated to boring and perfectly unsurprising research. But good luck getting anyone to fund it.

The good news, though, is that some of the flaws in the marketplace of scientific ideas might be hidden strengths. It’s true that some people think peer review, at its glacial pace and with its bias towards the existing consensus, works to actively repress new ideas that are challenging to received opinion. Notoriously, for example, the paper that first announced the invention of graphene – a way of arranging carbon in a sheet only a single atom thick – was rejected by Nature in 2004 on the grounds that it was simply “impossible”. But that idea was too impressive to be suppressed; in fact, the authors of the graphene paper had it published in Science magazine only six months later. Most people have faith that very well-grounded results will find their way through the system. Yet it is right that doing so should be difficult. If this marketplace were more liquid and efficient, we would be overwhelmed with speculative nonsense. Even peremptory or aggressive dismissals of new findings have a crucial place in the intellectual ecology. Science would not be so robust a means of investigating the world if it eagerly embraced every shiny new idea that comes along. It has to put on a stern face and say: “Impress me.” Great ideas may well face a lot of necessary resistance, and take a long time to gain traction. And we wouldn’t wish things to be otherwise.

In many ways, then, the marketplace of ideas does not work as advertised: it is not efficient, there are frequent crashes and failures, and dangerous products often win out, to widespread surprise and dismay. It is important to rethink the notion that the best ideas reliably rise to the top: that itself is a zombie idea, which helps entrench powerful interests. Yet even zombie ideas can still be useful when they motivate energetic refutations that advance public education. Yes, we may regret that people often turn to the past to renew an old theory such as flat-Earthism, which really should have stayed dead. But some conspiracies are real, and science is always engaged in trying to uncover the hidden powers behind what we see. The resurrection of zombie ideas, as well as the stubborn rejection of promising new ones, can both be important mechanisms for the advancement of human understanding.

Why Hawk-Eye still cannot be trusted

Russell Jackson in Cricinfo

Imran Tahir's appeal against Martin Guptill looked straightforward but Hawk-Eye differed © AFP

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I don't trust the data. Don't worry, this isn't another Peter Moores thinkpiece. It's Hawk-Eye or ball-tracker or whatever you want to call it. I don't trust it. I don't trust the readings it gives.

This isn't a flat-earth theory, though flat earth does come into it, I suppose. How on earth can six cameras really predict the movement of a ball (a non-perfect sphere prone to going out of shape at that) on a surface that is neither flat nor stable? A ball that's imparted with constantly changing amounts of torque, grip, flight, speed and spin, not to mention moisture.

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When Hawk-Eye, a prediction system with a known and well-publicised propensity for minor error (2.2 millimetres is the most recent publicly available figure) shows a fraction less than a half of the ball clipping leg stump after an lbw appeal, can we take that information on face value and make a decision based upon it?

During Tuesday's World Cup semi-final, my long-held conspiracy theory bubbled over. How, I wondered, could the ball that Imran Tahir bowled to Martin Guptill in the sixth over - the turned-down lbw shout from which the bowler called for a review - have passed as far above the stumps as the TV ball-tracker indicated? To the naked eye it looked wrong. The predicted bounce on the Hawk-Eye reading looked far too extravagant.

Worse, why upon seeing that projection did every single person in the pub I was in "ooh" and "aah" as though what they were seeing was as definitive and irrefutable an event as a ball sticking in a fieldsman's hands, or the literal rattle of ball on stumps? Have we just completely stopped questioning the authority of the technology and the data?

Later I checked the ball-by-ball commentary on ESPNcricinfo. Here's what it said: "This is a flighted legbreak, he looks to sweep it, and is beaten. Umpire Rod Tucker thinks it might be turning past the off stump. This has pitched leg, turned past the bat, hit him in front of middle, but is bouncing over, according to the Hawkeye. That has surprised everybody. That height has come into play here. It stays not-out."

Why don't we question the authority of a technology that has a well-publicised margin of error?  © Getty Images

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It surprised me, but did it surprise everybody? Probably not. More TV viewers seemed to accept the call than question it. When you've watched enough cricket though, some things just look a little off. To me this one didn't add up. Guptill made another 28 runs, not a trifling matter in the context of the game.

A disclaimer: though I distrust it for lbw decisions, I'm not saying that Hawk-Eye is all bad. It's great for "grouping" maps to show you where certain bowlers are pitching the ball, because tracking where a ball lands is simple. What happens next I'm not so sure on, particularly when the spinners are bowling.

To be fair, Hawk-Eye's inventor Paul Hawkins was a true pioneer and has arguably made a greater contribution to the entertainment factor of watching cricket on TV than many actual players manage. That's the thing though: it's entertainment. In 2001, barely two years after Hawkins had developed the idea it had won a BAFTA for its use in Channel 4's Ashes coverage that year. It wasn't until 2008 - seven years later - that it was added as a component of the Decision Review System. Quite a lag, that.

On their website, admittedly not the place to look for frank and fearless appraisal of the technology, Hawk-Eye (now owned by Sony) claim that the fact TV viewers now expect a reading on every lbw shout is "a testimony to Hawk-Eye's reputation for accuracy and reliability". But it's not, is it? All that it really tells us is that we are lemmings who have been conditioned to accept the reading as irrefutable fact upon which an umpiring decision can be made. But it's a prediction.

Not even Hawk-Eye themselves would call it a faultless system. Last December the company admitted they had got a reading completely wrongwhen Pakistan's Shan Masood was dismissed by Trent Boult during the Dubai Test. In this instance, the use of only four cameras at the ground (Hawk-Eye requires six) resulted in the operator making an input error. Why it was even being used under those conditions is more a question for the ICC, I suppose.

It's not all bad: Hawke-Eye gives great insight into where bowlers are pitching their deliveries  © Hawk-Eye

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The Masood debacle highlights an interesting issue with regards to the cameras though. Understandably given the pay cheques at stake and that Hawk-Eye is a valuable component of their coverage, TV commentators rarely question the readings even in cases as puzzling as the Masood verdict. Mike Haysman is one who stuck his neck out in a 2011 Supersport article. Firstly, Haysman echoed my earlier thought: "The entertainment factor was the exact reason they were originally introduced. Precise decision-making was not part of the initial creative masterplan." The technology has doubtless improved since, but the point remains.

More worryingly though, Haysman shone a light on the issue with the cameras upon which Hawk-Eye depends. At that point an Ashes Test, for instance, might have had bestowed upon it a battalion of deluxe 250 frame-per-second cameras, whereas a so-called lesser fixture might use ones that captured as few as 25 frames-per-second. Remember: the higher the frame rate the more accurate the reading. Put plainly, for the past five years the production budget of the rights holder for any given game, as well as that game's level of perceived importance, has had an impact on the reliability of Hawk-Eye readings. Absurd.

As a general rule, the more you research the technology used in DRS calls, the more you worry. In one 2013 interview about his new goal-line technology for football, Paul Hawkins decried the lack of testing the ICC had done to verify the accuracy of DRS technologies. "What cricket hasn't done as much as other sports is test anything," he started. "This [football's Goal Decision System] has been very, very heavily tested whereas cricket's hasn't really undergone any testing." Any? Then this: "It's almost like it has tested it in live conditions so they are inheriting broadcast technology rather than developing officiating technology." Does that fill you with confidence?

Hawkins and science-minded cricket fans might bray at the suggestion that Hawk-Eye can't be taken as law, but in lieu of any explanation of its formulas, machinations and the way it's operated (also known as proprietary information) it's hard for some of us to shake the doubt that what we're seeing with our eyes differs significantly from the reading of a computer.