A Theory of Consumer Fraud in Market Economies
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A THEORY OF FRAUD IN MARKET ECONOMIES ADISSERTATIONIN Economics and Social Science Presented to the Faculty of the University of Missouri-Kansas City in partial fulfillment of the requirements for the degree DOCTOR OF PHILOSOPHY by Nicola R. Matthews B.F.A, School of Visual Arts, 2002 M.A., State University College Bu↵alo, 2009 Kansas City, Missouri 2018 ©2018 Nicola R. Matthews All Rights Reserved A THEORY OF FRAUD IN MARKET ECONOMIES Nicola R. Matthews, Candidate for the Doctor of Philosophy Degree University of Missouri-Kansas City, 2018 ABSTRACT Of the many forms of human behavior, perhaps none more than those of force and fraud have caused so much harm in both social and ecological environments. In spite of this, neither shows signs of weakening given their current level of toleration. Nonetheless, what can be said in respect to the use of force in the West is that it has lost most of its competitiveness. While competitive force ruled in the preceding epoch, this category of violence has now been reduced to a relatively negligible degree. On the other hand, the same cannot be said of fraud. In fact, it appears that it has moved in the other direction and become more prevalent. The causes for this movement will be the fundamental question directing the inquiry. In the process, this dissertation will trace historical events and methods of control ranging from the use of direct force, to the use of ceremonies and rituals and to the use of the methods of law. An additional analysis of transformation will also be undertaken with regards to risk-sharing-agrarian-based societies to individual-risk-factory-based ones. The structural conditions of each will be assessed along with their a↵ects on human be- havior and in particular the behavior of deception. The latter will be assessed histor- iii ically through two frames: (1) buying and selling proper and (2) buying and selling within centralized work, i.e., the corporate form. Following Thorstein Veblen, it is hypothesized that as the West evolved from one to the other productive form (from risk-sharing-agrarian-based to individual-risk-factory-based), multiple degrees of sep- aration between individuals emerged. These degrees stretched human relations first when buying and selling broadly entered into communal farming, then when buying and selling broadly entered into factory work and finally when managerial control and absentee ownership became the dominant model for business. And it is postulated that the attitudes and behaviors arising from these degrees facilitate the expression of human deception. Lastly, an analysis of transaction fraud will be undertaken from the disparate behavioral theories developed in the discipline of psychology and economics over the past century. This will include theories from the psychoanalytical approach, the structuralist and behaviorist approaches, the standard economic approach and from the functional and original institutionalist economic approaches. The contemporary dual-process model of the mind along with William Powers control theory of behav- ior will also be discussed in relation to the approach of the original institutionalist economists. iv APPROVAL PAGE The faculty listed below, appointed by the Dean of the School of Graduate Stud- ies have examined a dissertation titled A Theory of Consumer Fraud in Market Economies, presented by Nicola R. Matthews, candidate for the Doctor of Philos- ophy degree, and certify that in their opinion it is worthy of acceptance. Supervisory Committee James I. Sturgeon, Ph.D., Committee Chair Department of Economics L. Randall Wray, Ph.D. Department of Economics Mathew Forstater, Ph.D. Department of Economics William K. Black, Ph.D. Department of Economics and Law Douglas Bowles, Ph.D. Department of Economics and Social Science John F. Henry, Ph.D. Department of Economics and Social Science v Contents ABSTRACT .................................. iii LISTOFILLUSTRATIONS . viii 1 INTRODUCTION 1 1.1 Defining Fraud . 4 1.2 Reporting and Frequency of Fraud . 9 1.3 Modern Theories of Fraud . 12 2 MEDIEVAL EUROPE AND THE RULING TEMPERAMENT OF VIO- LENCE 24 2.1 Early Conditions . 25 2.2 Competitive Force, Status and its Preservation . 31 2.2.1 Feudalism and the Warrior Class of Knights . 32 2.3 The Role of the Church in Feudal Warrior Society . 42 2.3.1 The Growth of the Papal Institution . 44 3 JURISDICTIONAL RIGHTS, SECULAR LAW AND THE TRANSFOR- MATION FROM OBLIGATORY TO CONTRACTUAL RELATIONS 60 3.1 Governance Before Secular Law . 62 3.2 TheAscentofSecularLaw........................ 65 3.2.1 Intellectual Foundations of Western Social Order . 75 3.3 Legal Society, the Law as Instrument View and its Significance for Fraud 97 vi 4 A HISTORICAL AND EVOLUTIONARY ACCOUNT OF PRIVATE RISK AND CONTROL AND ITS RELATION TO FRAUD 116 4.1 TheEvolutionoftheMarketSociety . 122 4.1.1 Private – Legal Farming for Commerce . 128 4.1.2 Risk and Control in Competitive Trading Towns . 135 4.2 FraudBeforeCentralizedWork . 148 4.3 Fraud and Centralized Work . 159 4.3.1 Veblen’s Degrees of Separation and Fraud . 173 5 DECEPTION FROM A BEHAVIORAL AND THEORETICAL POINT OF VIEW 188 5.1 Inner Biological Conflicts as Behavioral Determinants: The Psychoan- alyticalApproach............................. 197 5.2 Stimuli as Behavioral Determinants: Structuralism and Behaviorist Approaches ................................ 201 5.3 Satiation and Calculation as Behavioral Determinants: The Standard EconomicApproach............................ 205 5.3.1 Heuristics-Biases as Behavioral Determinants: Behavioral Eco- nomicApproach.......................... 218 5.4 Learning Capacities, Values (Goals) and Emergence as Behavioral De- terminants — The Functional & Original Institutional Approach . 227 5.4.1 Contemporary Dual-Process Models of the Mind . 239 6 CONCLUSION 257 REFERENCES 273 VITA 316 vii LIST OF ILLUSTRATIONS Figure Page 1FraudDiamond..............................17 2 HonestyistheBestPolicy ........................ 171 3 Stanovich’sTripartiteSchematic. 242 4ControlSystem&DataMatrix.....................244 5 TriarchicModel.............................. 246 viii ACKNOWLEDGMENTS This body of work, though researched and originally written alone, is not of my own making. It is instead the result of centuries long work by scholars who preceded me and it is the culmination of the teachers who inspired, taught and supported me through this years-long journey. I would like to thank my committee chair Dr. James Sturgeon for the many suggestions and for the time spent reviewing and editing the manuscript. I would also like to thank the committee members Dr. L. Randall Wray, Dr. John F. Henry, Dr. Douglas Bowles, Dr. William K. Black and Dr. Mathew Forstater, many of whom were instrumental in my development as a scholar. In particular, I would like to thank Dr. Henry for his thorough comments. Lastly, I would like to thank the late Dr. Fred Lee as well as Dr. Tae-Hee Jo both of whom encouraged and supported me in the earliest and most uncertain stage of this process and without which this body of work may have only existed as a rudimentary speck of an idea in the back of my mind. ix CHAPTER 1 INTRODUCTION Scope and Method Of the many forms of human behavior, perhaps none more than those of force and fraud have caused so much harm in both social and ecological environments. In spite of this, neither shows signs of weakening given their current level of toleration. Nonetheless, what can be said in respect to the use of force in the West is that it has lost most of its competitiveness. While competitive force ruled in the preceding epoch, this category of violence has now been reduced to a relatively negligible degree. On the other hand, the same cannot be said of fraud. In fact, it appears that it has moved in the other direction and become more prevalent. The causes for this movement as well as an explanation regarding the human capacity for the behavior will be the fundamental questions directing the inquiry. In the process, an attempt will be made to develop a theory that explains both phenomena. The research will be guided by a working hypothesis, namely that systemic behav- ior emerges from the structural properties of the dominant institutions of society. It is hypothesized that the two modern and dominant institutions are the state and the business enterprise. Thus, in an e↵ort to discover the causes of fraud, an inquiry into 1 these two institutions along with their structural properties will be constructive. It is further postulated that as a result of the business enterprise’s hierarchal organization and minority legal control, defined as the ability of an individual or small group to directly or indirectly determine the law irrespective of the larger community’s input, impediments were created that e↵ectively obstruct the growth in personal relations and magnify the degrees of separation between individuals where it is principally these degrees of separation that allow for the systemic expression of fraudulent behavior. In conjunction with this approach, an investigation will also be made into the values, the narrative(s) and the quality of control within the dominant institutions. It is surmised that the current and ruling value-claims are status-seeking, competi- tion (in economic form), individualism and pecuniary emulation. While it is probable that all four claims may have existed in di↵erent degrees over distinct time periods, the last three, and in their ruling form, are likely a recent phenomena in the his- tory of the West. If this is true, the dominant institutions of the past era, such as the Papal church and monarchy, their values, narrative(s) and the quality of control would be markedly di↵erent and can not only be used comparatively to define mod- ern institutions more sharply but through a process of historical and evolutionary documentation, they may serve as a method to locate markers of change and in so doing assist in locating causes for fraud. Chapters two, three and four will attempt to do just this.