In a photograph taken in Moscow when he was six, Andrei Shleifer (b. February 20, 1961) wears the uniform of a Soviet Army general. The costume fit the boy. When a friend moved to one of the best schools in the city, Shleifer rode his bicycle to the gates and stayed until the principal agreed to admit him too. His parents were engineers. The state had chosen the profession for them, as the state chose most things in the lives of Soviet Jews in those years.
The family left in 1976 with help from the Hebrew Immigrant Aid Society and settled in Rochester, New York. Shleifer was fifteen and spoke little English. He later said he learned most of it from Charlie’s Angels. He was good at mathematics, good enough that Harvard admitted him, and in his sophomore year he walked into the office of a young assistant professor named Lawrence Summers (b. 1954) and told him his paper contained errors.
Summers was the nephew of two Nobel laureates in economics. He had won tenure at Harvard younger than almost anyone before him. He did not throw the sophomore out. He took him on. The friendship that began in that office shaped both careers, and twenty years later it cost Summers the presidency of the university and cost Shleifer something harder to name.
Shleifer finished his A.B. in 1982 and went to MIT for the doctorate, which he completed in 1986 under Franklin Fisher (1934–2019), with Robert Solow (1924–2023) and Stanley Fischer down the hall. He taught at Princeton, then at the University of Chicago business school, and in 1991 he came back to Harvard and stayed. He holds the John L. Loeb chair in economics. By the RePEc citation count he ranks, in most recent years, as the most cited economist alive.
The work came in waves, and each wave attacked a comfortable assumption.
The first assumption was that financial markets price assets right. The efficient market hypothesis held that any gap between price and value gets closed by traders who smell the profit. Shleifer, working mostly with Robert Vishny (b. 1959), asked who those traders are and what constrains them. They run other people’s money. They face redemptions when they are down. They cannot wait forever for the market to come to its senses, and the market can stay senseless longer than they can stay solvent. Their paper “The Limits of Arbitrage” (1997) put a name to the problem and became a founding text of behavioral finance. Mispricing persists, the paper argued, because the smart money is not free to act. The book that followed, Inefficient Markets: An Introduction to Behavioral Finance (2000), carried the case to a wider room.
The second assumption was that managers serve shareholders. Shleifer and Vishny’s survey of corporate governance, published the same year, asked a blunter question. How does an investor in Boston ever get his money back from a manager in Moscow or Milan who controls the assets and writes the books? Their answer was concentrated ownership. A large shareholder has the motive to watch the manager. He also has the motive to rob the small shareholders sitting beside him. The trade is real and has no clean solution, and saying so reframed the field.
The third assumption was the largest. With Rafael La Porta, Florencio López-de-Silanes, and Vishny, Shleifer built what came to be called legal origins theory. They gathered data on dozens of countries and asked why some protect investors and some do not. The pattern they found ran along an old fault line. Nations that inherited English common law tended to give shareholders and creditors stronger rights, courts more independence, and regulators a lighter hand than nations built on French civil law. Those protections, they argued, deepen capital markets and speed growth across generations. The claim turned legal tradition into a number a regression could use, and the regressions multiplied. So did the objections. Legal historians said the categories were too crude, the traditions too tangled, the causation too convenient. Shleifer and his coauthors answered with more data and held their ground.
A single proposition runs under all of it. Prosperity comes not from rational men but from institutions that channel imperfect men toward useful work. Markets beat governments where property is secure, contracts hold, and the powerful are fenced in. He carried the same suspicion to the state itself. With Vishny and others he showed how licensing rules and entry barriers protect the established firm and feed the bribe-taking clerk rather than the consumer. The fullest statement is The Grabbing Hand: Government Pathologies and Their Cures (1998), which treats the politician the way the governance work treats the manager, as a man who serves himself unless something stops him.
He would soon test the proposition in his own conduct, in the one country he knew from the inside.
The Soviet Union came apart in 1991, and Harvard came to Moscow. The Kennedy School sent men. So did the Russian Research Center, the economics department, and the Harvard Institute for International Development. Jeffrey Sachs (b. 1954), fresh from advising Poland, was the loudest of them. Shleifer arrived by a different road. The World Bank sent him, and the World Bank’s chief economist that year was Summers. Shleifer held an advantage no other American could match. He was born there. He spoke the language. He could sit with the young reformers around Yegor Gaidar (1956–2009) and Anatoly Chubais (b. 1955) and catch the meaning under the words.
The city was full of foreigners chasing the same opening. Consultants, bankers, missionaries of the market, and a layer of swindlers underneath them. Money moved in cash. Kidnappings were common. The reformers worked against the clock, certain that a slow privatization would hand the country back to the Communists. Gaidar called his planners the kamikaze team. They issued vouchers to a hundred and forty-eight million citizens and pushed state firms into private hands by the thousands, fast, on the theory that speed itself was the only safe policy. Shleifer advised Chubais and his lieutenant Dmitri Vasiliev, and he wrote the logic down later in Privatizing Russia (1995) and Without a Map (1999). Summers blurbed the first book and said the authors had done remarkable things in Russia.
To run the day to day, Shleifer hired a lawyer named Jonathan Hay, an Idaho native and Rhodes Scholar just out of Harvard Law. Hay had unruly hair, oversize horn-rim glasses, and a high tolerance for chaos. He set up the Harvard operation inside Chubais’s privatization agency, in a cold government building near Red Square. He told a reporter later that they had no heat, no Xerox, no fax, no food. A Russian lawyer summed up Hay’s method in three words. Don’t worry, be happy.
The work carried a hard line through the middle of it. The contract that Harvard signed with the United States government barred everyone on the project, their families, and anyone acting for them from investing personal money in Russia or holding a stake in any Russian business. Even a savings account in a Russian bank was off limits. The line existed because the conflict it guarded against was plain to anyone who paused over it. The institute’s own human resources officer, Louisa French, described under oath the test the staff was supposed to run on every decision. They asked how it would look on the front page of the New York Times. The mantra, she said, was that if you had to ask, you were too close to the line.
In July 1994, Shleifer and his wife began to invest in Russia.
Nancy Zimmerman ran a hedge fund out of Cambridge. She had left Goldman, Sachs to start it, and she out-earned her husband by a wide margin, more than a million dollars to his hundred and ninety thousand the year the investing began. She called him Boss. With the help of Leonard Blavatnik (b. 1957), a Russian émigré on the Forbes 400, the couple put two hundred thousand dollars into a vehicle that held shares of Russian firms being privatized under Shleifer’s own guidance, among them Gazprom and a set of aluminum smelters. When Blavatnik later merged those smelters, Hay’s American lawyers, paid by the United States, worked the merger papers for free.
That same season the Shleifers went into Russian oil with the hedge fund Farallon. On August 11, 1994, Shleifer wired a hundred and sixty-five thousand dollars to a bank account in the Channel Islands to buy thirty thousand shares of an oil company called Purneftegas. By early November more than four million dollars sat in Russian oil stocks, most of it Farallon’s, a tenth of it the Shleifers’. The shares were registered in the name of Zimmerman’s father, a Chicago man with racehorses and a stake in a small bank. A Farallon partner, David Cohen, told the grand jury what they were buying with Shleifer’s name. Russia then was the Wild West, he said, and they were petrified. There was incredible crookery, and they wanted all the protection they could get, and they thought Andrei provided some of it. People might think twice before crossing Andrei Shleifer. His closeness to Chubais was one of the reasons.
To work out which oil stocks to buy, Hay sent a first-year Harvard law student in Moscow to study the market. The student posed as the Russian agent of a foreign investor. He testified later that Hay told him to look at oil and gas because they sat at the front of privatization, and that those would be the most valuable assets in the economy, so of course they would be the most wanted.
In October 1994, the chairman of Harvard’s economics department, Dale Jorgenson (1933–2022), gave a cocktail party at his home. The room held economics stars, among them two men who had won the John Bates Clark Medal, Jorgenson himself and Martin Feldstein (1939–2019), once Ronald Reagan’s chief economic adviser. Shleifer and Zimmerman talked about their Russian investments in front of all of them. Feldstein grew interested and telephoned Shleifer afterward for an introduction to Blavatnik. He looked at Russia and decided against it. Shleifer stood in a room full of his peers and spoke freely about the thing his contract forbade, and no one in the room thought to stop him.
By 1996 the project had folded a love affair into its finances. Hay had fallen for Elizabeth Hebert, an American who wanted to launch the first licensed mutual fund company in Russia. She arrived at meetings on time in a trim suit with a leather portfolio of notes. Hay arrived late with his hair flying and no pen. He let her use his government car. He pressed the Russian regulators, who were his own advisees, to register her company ahead of larger and more seasoned rivals like Credit Suisse and Pioneer. When the registration came through first for Hebert, the Moscow financial community understood at once what it meant. Zimmerman moved to invest in the venture, an investment the conflict rules barred her from making.
The pressure on the Russians was real. Yeltsin had staked his reelection on mutual funds, and his prime minister told Vasiliev to his face that he was a failure. Hebert’s back-office partner, a Russian-born American named Julia Zagachin, told colleagues that if they did not get the thing running she would end up in jail. When an honest competitor refused to make room for her, a Russian official told the man, with Hay translating, that Zagachin was a grain of sand, an irritant, that they would get rid of her later, and that for now he had to take her into his company.
In late August 1996, Shleifer and Zimmerman went to Cape Cod, to the stretch of beach at Truro where they summered with Summers. By then Summers was deputy secretary of the Treasury and the architect of American aid to Russia. He knew the couple were investing there. He did not know they were hiding the oil shares behind Zimmerman’s father or routing bond profits through an Illinois bank to dodge Russian tax. He knew enough to worry. He told Shleifer to be careful, that there was a lot of corruption in Russia. He told Zimmerman there might be a scandal, that her husband could be pulled into it, that she should make sure she was clear with everyone. People might want to make Andrei a problem some day, he said. The world’s a shitty place. He told Shleifer to check what his Harvard contract said, and told Zimmerman to think hard about what she was doing.
Zimmerman had already named the problem herself, to a young aide, in a sentence that survives in the record. What was she supposed to do, she had asked, build a Chinese wall between herself and her husband through their bedroom. When she brought Summers’s warning home, Shleifer’s answer was a lawyer. They could use Michael Butler, he said, if they were worried about specific things.
The first person inside the project to sound an alarm was Holly Nielsen, a lawyer running the legal-reform secretariat. The favoritism toward Hebert’s fund shocked her. She wanted to reach Shleifer and barely knew him, so she took a colleague to breakfast at the Aerostar Hotel and poured out the story while he scribbled on a napkin. She asked him to keep it quiet, to use a code in any message, that the appointment with the pediatrician was confirmed. The colleague flew home, called Shleifer, and said that if what Nielsen described was true, Hay should be fired at once.
Shleifer met Nielsen in Cambridge that December. They lunched at the Faculty Club, and the next morning she came to his office in the Littauer Center and laid it out. Hay and Hebert were being stupid and arrogant, she said. If they had quietly taken the third or fourth registration, no one would have noticed. They had to have the first, and the first caused a sensation. Shleifer’s reply is in her deposition. He said he could not control who Jonathan slept with. As she left, he told her he was promoting Hay to run the secretariat. The man Nielsen had come to warn him about would now be her boss.
Others tried. A Pioneer executive named Timothy Frost took Hay to a diner off the Garden Ring and praised the good he had done, then told him there was a real problem, an odor of conflict of interest, and that he should lean over backwards to guard against it. Frost testified that Hay answered with a threat, that he could see to it that Pioneer’s business in Russia stalled. A New York Stock Exchange lawyer warned Vasiliev that the Harvard men would bring him public embarrassment. Vasiliev listened and protected Hebert anyway. He told an aide why. The first Russian mutual funds could carry no scandal, and the only way to be sure of that was to put them in the hands of someone close, someone they could trust.
The investigation came from the bottom of the agency, not the top. In early 1997 a Moscow staffer of the aid agency told the mission director that Hay’s girlfriend had been handed an unfair advantage. The director called the inspector general in Washington, who reports to Congress and not to the agency, and the inspector general sent two agents to Moscow. They worked quietly for six weeks, then the director telephoned Sachs at Harvard. Don’t say anything, she told him. We have a statement.
Sachs was furious. He had warned Shleifer about Russian corruption and had not imagined the corruption would be Harvard’s. When he reached Shleifer, Shleifer tried to call the investigation a vendetta by jealous rival universities. Sachs told the grand jury later that such investments by an HIID adviser were a conflict of interest and would damage the institute. Shleifer fired off a nine-page letter to the Harvard provost calling the inquiry zealous, outrageous, and vicious, and urging the university to cancel the whole Russia program. It was a great time, he wrote, for Harvard to send the aid agency straight to hell.
The agency reached the same destination on its own. On May 20, 1997, after Chubais himself demanded it, the United States killed the project. The termination letter used language a federal agency rarely uses. Shleifer and Hay, it said, had abused the trust of the United States government by using personal relationships for private gain, and had sent the Russians exactly the wrong message while American equipment and staff paid for it. Harvard fired both men from the institute two days later. Shleifer kept his tenured chair in the economics department.
Peter Aldrich, a Boston investor who had put money into Hebert’s fund as a favor to the Shleifers, wanted the truth from Hay. He called Hay to his office and sat him in a chair facing his own. He told Hay he had to know the truth, that he was a fiduciary with other people’s money. Then he asked whether Hay had invested in Russian securities. Hay said no. Aldrich asked if that was his truthful answer. Hay said he had invested for his father, that it was not much. Aldrich pressed. How much. Fifty thousand. Anything else they could hang him on. Nothing else. Aldrich did not believe him. He had reason not to.
Shleifer took the same posture to dinner at the Charles Hotel. He told Aldrich he had been hung out to dry, that he was only a consultant, that the program was Sachs’s and Sachs had run it. The claim that he was a consultant rather than the man in charge became his legal defense, and it would not survive contact with the record.
The government built its case for three years, through a year of gathering and two before a grand jury. The prosecutors wanted a criminal indictment. In the end the United States filed civil charges only. On September 26, 2000, it sued Harvard, Shleifer, Hay, Zimmerman, and Hebert on eleven counts, estimating the government had been cheated of at least forty million dollars and seeking triple that under the False Claims Act. The judge, Douglas Woodlock (b. 1947), dismissed the charges against the two wives for want of pleaded facts.
On June 28, 2004, Woodlock ruled against the two men. The cooperative agreements were real contracts, he wrote, and they carried a duty to stay free of conflicts, and Hay and Shleifer had breached it. He took apart the consultant defense in a sentence. Shleifer ran the entire Russian project, the judge wrote, and to call the head of the project a consultant exempt from the conflict rules would produce an absurd result. He found self-dealing by Shleifer, found that Hay had tried to launder four hundred thousand dollars through his father and his girlfriend, and found that the two men had conspired to defraud the United States.
The money came due in stages. That summer Zimmerman’s firm paid the government a million and a half, the firm having diverted American resources for its own profit. In August 2005, nine years after the walk on the beach at Truro, the parties settled. Harvard paid twenty-six and a half million dollars, the largest such payment in its history. Shleifer paid two million. Hay owed between one and two million, scaled to his future earnings. Shleifer and Zimmerman took out a two-million-dollar mortgage on their Newton house to cover his share. No one admitted liability. Shleifer issued a statement. A man can fight the unlimited resources of the government only so long, he said, and after eight years he had decided to end it, without any admission on his part, because his lawyers told him the fees would run past what he would pay the government.
As the litigation ground forward, Shleifer’s standing among economists rose. The American Economic Association gave him the John Bates Clark Medal in 1999, the prize it awards to the best American economist under forty, a prize whose winners often go on to the Nobel. The citation praised an economist in the old Chicago manner, building simple models and then looking hard at the evidence. The award arrived in the middle of the affair that has trailed him since, and the two facts sat side by side without touching, one in the journals, the other in the courthouse.
His friend rose too. In March 2001 Summers became president of Harvard, and Shleifer and Zimmerman had campaigned for him, holding parties at their house. Summers said under oath that he recused himself from the university’s handling of his friend’s case. He stayed in it anyway. Early in his presidency he told the dean of the faculty, Jeremy Knowles, that he wanted Shleifer kept at Harvard, and Knowles soon promoted Shleifer to a named chair. Two months after the court found Shleifer liable for conspiring to defraud the government, he hosted Summers at a break-the-fast dinner on Yom Kippur. Harvard’s standard procedure for faculty misconduct, the Committee on Professional Conduct, never moved against him. The dean treated him as innocent until the courts spoke, and after the courts spoke the committee’s chairman said the facts were already settled and the matter belonged to the dean, and the dean did nothing.
The silence broke in January 2006, when David McClintick (1940–2021), a Harvard alumnus and former Wall Street Journal reporter, published an eighteen-thousand-word account of the affair in Institutional Investor. He had read the depositions and the court record and gone to Russia twice. He laid out the conduct and the protection in a single narrative for the first time, and someone mailed copies to the senior faculty. At a faculty meeting that February, a mechanical engineer named Frederick Abernathy rose and said he had been on the faculty more than forty-five years and was no longer easily shocked, and that the Shleifer affair had shocked him. He asked the president for his opinion of it. Summers said he had taken no role in the university’s handling of the case and had not familiarized himself with the facts, and so could not express an opinion. The room murmured. A zoologist called the outcome of the tawdry Shleifer affair unthinkable under the last two presidents and characteristic of the present one. One of Shleifer’s own colleagues defended him to the press in the same week and said that by any measure the man was on a trajectory to the Nobel.
Summers resigned the presidency weeks later. The Russia affair was not the only charge against him, but it was the one his colleagues trusted least to his own account. The institute Shleifer had run did not survive either. Harvard dissolved it and folded its pieces into the schools. Asked years afterward whether he had been punished, Shleifer answered from an airplane that he was glad to have the matter behind him.
He returned to his work and never left it. He kept the chair, the citations, and the editorship of the Quarterly Journal of Economics, which under his hand became a main venue for the empirical economics he favored. In 1994, with Josef Lakonishok and Vishny, he had founded a money-management firm, LSV Asset Management, on the same insight that drove his academic work, that markets misprice in patterns a patient investor can name and use. The firm grew to manage tens of billions.
His later work turned toward the mind. With Nicola Gennaioli he built a theory of diagnostic expectations, which holds that people do not weigh the future by cold probability but seize on the vivid case, the scenario that feels representative, and overweight it. Optimism and panic ride on the same habit, and so do credit booms and crashes. The argument runs through A Crisis of Beliefs: Investor Psychology and Financial Fragility (2018). Into the mid-2020s, with Pedro Bordalo, Gennaioli, and others, he has pushed toward a general account of how men sort problems into categories, pull the wrong memories, and price credit and inflation by feel rather than by sum.
Four decades of work return to one idea. Men are not rational, and the societies that prosper are the ones whose laws and markets and courts make imperfect men behave as if they were. He proved the point about managers, about politicians, about whole legal traditions. The hardest test of it ran through Moscow, through his own hands, where the rules existed to fence in the exact temptation he met. His own institute had named the test years before he failed it. They asked how a thing would look on the front page of the New York Times, and they said that if you had to ask, you were already too close to the line.
Notes
What carries the scenes. The boy in the Soviet general’s uniform, the bicycle rides to school in Moscow, his engineer parents being assigned their jobs by the Soviet state, the family’s 1976 HIAS-assisted emigration to Rochester, his learning English by watching *Charlie’s Angels*, and the sophomore walking into Lawrence Summers’s office to correct a paper all come from David McClintick’s account: How Harvard Lost Russia (also available at University of Vermont). These are the most colorful episodes in the biography and rely primarily on a single reporter. If you want additional confirmation before publication, this is the area that deserves the closest scrutiny.
The investment details also come from McClintick and the court record on which he relied. These include the August 11, 1994 wire transfer of $165,000 to a Channel Islands account, the purchase of Purneftegas shares, the investment’s growth to more than $4 million by early November, the 90-10 split with Farallon, the registration of the account in Jonathan Hay’s father-in-law’s name, the Farallon partner’s grand jury testimony describing Russia as the “Wild West” and identifying Anatoly Chubais as political protection, and the use of Len Blavatnik’s aluminum investment vehicles. The same two links above document these details. Harry Lewis’s summary provides a concise explanation of the settlement figures: Some Russian Money Flows Back to Harvard.
The Lawrence Summers warning is rendered as a paraphrase rather than a quotation, and I did not invent any dialogue. The documented version, including the remarks that “There might be a scandal, and you could become embroiled… People might want to make Andrei a problem some day. The world’s a shitty place,” appears in McClintick’s article. I deliberately avoided reconstructing dialogue for Shleifer, Nancy Zimmerman, Chubais, or the Russian reformers because there is no reliable record of what they said in those conversations.
The settlement and its aftermath are documented by multiple sources. Harvard ultimately paid $26.5 million, Shleifer paid $2 million, and Zimmerman’s investment firm had earlier paid $1.5 million, for a total of at least $31 million. A federal judge ruled in 2005 that Shleifer and Jonathan Hay had conspired to defraud the United States. Shleifer mortgaged his house to help finance the settlement. There was no admission of liability and no criminal prosecution. Sources include Harvard Magazine, Inside Higher Ed, The Harvard Crimson, and Harry Lewis’s blog. The anonymously mailed copies of McClintick’s article, the February 2006 faculty meeting and the audible reaction in the room, and Summers’s resignation are described by Harry Lewis and *The Harvard Crimson*. Frederick Abernathy’s description of the affair as a “disgraceful blotch” and Summers’s BlackBerry response from an airplane come from *Inside Higher Ed*.
The scholarship and honors are drawn from multiple standard sources. These include the John Bates Clark Medal in 1999, RePEc’s ranking of Shleifer as the world’s most-cited economist, including his position at the top in 2024, the “old Chicago tradition” description of his scholarship, his seven books, his editorship of the *Quarterly Journal of Economics*, and the founding of LSV Asset Management in 1994 with Josef Lakonishok and Robert Vishny. Sources include Wikipedia, the American Economic Association, and Shleifer’s Harvard biography. The discussions of “The Limits of Arbitrage,” the legal origins literature, *The Grabbing Hand*, diagnostic expectations, *A Crisis of Beliefs*, and his mid-2020s work on cognition follow your uploaded draft together with the Wikipedia entry.
If John J. Mearsheimer’s anthropology is right, the career, economic theories, and policy record of Harvard economist Andrei Shleifer serve as a devastating empirical proof of realism, disguised as a tragedy of failed liberal planning.
Shleifer is one of the most cited economists in the world, famous for his pioneering work in behavioral finance, the legal origins theory of economic growth, and transition economics. During the early 1990s, he led the Harvard Institute for International Development (HIID) project in Moscow, serving as a primary advisor to the Russian government. Alongside Jeffrey Sachs and Anatoly Chubais, Shleifer was a chief architect of Russian privatization, designing the voucher program meant to rapidly transform a collapsing command economy into a free market.
Mearsheimer’s framework in The Great Delusion cuts directly through Shleifer’s institutional blueprints, showing that his project was doomed from its inception because it misunderstood human nature.
First, Shleifer’s privatization program treated human beings as atomistic, rational utility-maximizers. The theory assumed that if you handed state assets to individuals via vouchers, a rule-bound, efficient market architecture would spontaneously emerge through self-interest and legal incentives.
Mearsheimer’s anthropology counters that humans are fundamentally social and tribal beings whose moral frameworks are shaped by intense early socialization. They do not operate as isolated economic units in a historical vacuum. When Shleifer dismantled the Soviet state machinery, he did not unlock a nation of latent Western-style entrepreneurs. Instead, he destroyed the primary collective structure that provided social cohesion and basic predictability.
In the sudden security vacuum, human nature defaulted to its core logic: individuals retreated into defensive micro-societies, kinship networks, and criminal syndicates to survive and capture resources. What the West termed the rise of the “oligarchs” and Russian mafia was simply tribal realism filling an empty space. The legal rules Shleifer tried to superimpose were completely subverted by the primal demand for group survival and competitive leverage.
Second, Shleifer’s broader academic project—the Legal Origins Theory—posits that a country’s economic development is deeply influenced by whether its legal system stems from British common law or French civil law. He argues that common law structures provide better protection for individual property rights, leading to superior financial markets.
Under Mearsheimer’s lens, this theory mistakes a secondary cultural artifact for a primary engine. Legal frameworks do not generate social order; a cohesive, powerful cultural group generates legal frameworks to secure its own position and interests. The British common law system did not succeed because of an abstract, superior logical design. It succeeded because it was backed by the state machinery of a highly cohesive, expansionist nation-state. When a liberal state tries to export these legal codes to a region with different historical value infusions, the imported laws are inevitably hollowed out or rewritten by local group loyalties.
Finally, Shleifer’s own downfall in the Moscow project—which resulted in a major federal lawsuit by the U.S. government over conflict-of-interest allegations regarding personal investments in Russia—illustrates Mearsheimer’s point that reason is subordinate to sentiment and affiliation.
A standard liberal analysis views the HIID scandal as an isolated ethical lapse by an individual actor. Under Mearsheimer’s lens, it shows the fragility of the technocratic illusion. Even a brilliant, elite academic operating at the highest levels of global planning cannot detach himself from immediate, personal, and factional networks of interest.
If Mearsheimer is right, Shleifer’s work proves that you cannot engineer a society using abstract economic textbooks. The institutional designs of liberal economists are fragile structures that are easily crushed or co-opted by the enduring, tribal nature of man.
If David Pinsof is right, the foundational research of Andrei Shleifer in behavioral finance, law and economics, and transition economics represents a highly optimized system for converting chaotic, raw power struggles into neat, academic models of institutional and psychological deviation. As one of the most cited economists in the world, Shleifer has built an immense reputation by charting how markets fail, how governments extract wealth, and how investor psychology produces financial instability.
A Pinsofian analysis strips away the high-status academic framework of this research to expose the strategic logic of the actors involved—including Shleifer himself.
Consider his influential work on political economy and transition economics, particularly his 1998 book with Robert Vishny, The Grabbing Hand: Government Pathologies and Their Cures. Shleifer argues that state corruption, bureaucratic red tape, and bad regulations are pathologies—malfunctions of government that enrichment-seeking politicians use to choke economic growth. He presents these pathologies as structural errors that can be cured through privatization and better legal design.
But if Pinsof speaks the truth, the “grabbing hand” of the state is not a pathology or an administrative misunderstanding of economic efficiency. The state is the ultimate coercive apparatus. Subsidies, regulatory barriers, and corrupt payoffs are highly rational, self-serving instruments used by competing political factions to reward their allies, protect their coalitions, and deprive their rivals of resources. The politicians and bureaucrats running these systems understand their immediate incentives perfectly. They are not confused by economic theory; they are playing a zero-sum game to win.
This logic highlights the irony of Shleifer’s real-world advisory role in the 1990s, when he directed the Harvard Institute for International Development’s project to assist in the privatization of post-Soviet Russia. The project aimed to implement rational market reforms to correct decades of communist economic misdirection.
Instead, the transition became a fierce, high-stakes competition over the massive resources of a collapsing empire. Local actors did not misuse privatization because they misunderstood Western economic models. They used the newly created property rules as weapons to capture immense wealth, create oligarchical structures, and secure control over the coercive levers of the state. They responded to immediate incentives as rational primates would.
Shleifer’s more recent work with Nicola Gennaioli on investor psychology, such as A Crisis of Beliefs: Investor Psychology and Financial Fragility and his subsequent papers on “diagnostic expectations,” follows a similar pattern. This research models how investors rely on selective memory, overreact to recent news, and form optimistic stereotypes that fuel market bubbles and predictable financial crises. To the academic elite, this provides a highly sophisticated platform to diagnose the irrationality of market participants.
From Pinsof’s perspective, framing the behavior of investors or market cycles as a collection of cognitive errors and memory distortions serves as a powerful high-status mission statement. It positions the elite financial economist as the necessary choice architect or regulator who stands above the psychological fray, possessing the superior rationality required to monitor expectations and design systemic guardrails.
Shleifer did not discover a series of fixable institutional pathologies or psychological errors in the global economy. He executed an exceptionally effective academic strategy, using rigorous mathematics and legal-origins data to climb to the absolute peak of the university hierarchy, secure the John Bates Clark Medal, and maintain a dominant, high-prestige position within elite institutions. His work provides university circles with a brilliant map of the structural flaws in markets and states, demonstrating that defining the behavior of your subjects as a misunderstanding is the ultimate tool for institutional authority.
David McClintick writes Jan. 13, 2006:
The best and brightest of America’s premier university came to Moscow in the 1990s to teach Russians how to be capitalists. This is the inside story of how their efforts led to scandal and disgrace.
Since being named president of Harvard University in 2001, former U.S. Treasury secretary Lawrence Summers has sparked a series of controversies that have grabbed headlines. Summers incurred the wrath of African-Americans when he belittled the work of controversial religion professor Cornel West (who left for Princeton University); last year he infuriated faculty and students alike when he seemed to disparage the innate scientific abilities of women at a Massachusetts economic conference, igniting a national uproar that nearly cost him his job; last fall brought the departure of Jack Meyer, the head of Harvard Management Co., which oversees the school’s endowment but had inflamed some in the community because of the multimillion-dollar salaries it pays some of its managers.
Then, in quiet contrast, there is the case of economics professor Andrei Shleifer, who in the mid-1990s led a Harvard advisory program in Russia that collapsed in disgrace. In August, after years of litigation, Harvard, Shleifer and others agreed to pay at least $31 million to settle a lawsuit brought by the U.S. government. Harvard had been charged with breach of contract, Shleifer and an associate, Jonathan Hay, with conspiracy to defraud the U.S. government.
Shleifer remains a faculty member in good standing. Colleagues say that is because he is a close longtime friend and collaborator of Summers.
In the following pages investigative journalist David McClintick, a Harvard alumnus, chronicles Shleifer’s role in the university’s Russia Project and how his friendship with Summers has protected him from the consequences of that debacle inside America’s premier academic institution.
The man who had guided Poland’s economic reform, Jeffrey Sachs, an economics professor at Harvard University, was a boyish-looking 35-year-old with explosive energy and little patience. An economic wunderkind, Sachs had passed the general examinations for his Ph.D. and was invited to join the rarefied Harvard Society of Fellows while he was still a Harvard undergraduate. He won tenure in the department of economics at age 29.
Sachs had begun advising the Polish Solidarity Movement before it took control of the government in August 1989. He invited another Harvard-trained economist, David Lipton, to work with him. Lipton, who had been Sachs’ student, had spent most of the 1980s at the International Monetary Fund. On January 1, 1990, following Sachs’ and Lipton’s advice, the Polish government introduced what came to be known as “shock therapy” — the rapid conversion of all property and assets from public to private ownership. After initial shortages and inflation, goods and services soon were flowing through the economy in unprecedented varieties and quantities; prices stabilized.
Though envious of Poland’s success, Russian reformers knew their task would be much more difficult. “When socialism collapsed in Poland, an entire generation of people still remembered what markets, market institutions and private ownership were,” Gaidar wrote in State and Evolution: Russia’s Search for a Free Market, published in 2003. “In Russia there was no such experience to be had. In 1991 the vast majority of Russian citizens had never seen a normal retail shop.”
Still, the Polish experiment was getting worldwide publicity, and it wasn’t long before Moscow reached out to Sachs, who began formally advising the Russians in late 1991, simultaneously with the official dissolution of the Soviet Union. In November, Gaidar invited Sachs and Lipton to work with the new economic team.
Moscow by then was crowded with foreigners eager to help Russia and get in on the ground floor of a great social and economic change. Entrepreneurs, consultants, lawyers, bankers and academics with foundation grants, as well as fast-buck artists and swindlers from all over the world, swarmed across Russia looking for a piece of the action. The atmosphere was charged with possibility and fraught with danger. Financial transactions were mostly conducted in cash; cities were awash in rubles. Kidnappings were common, as was gunfire and even bombings. Organized crime darkened the already grim picture.
Russia’s leaders felt a near-apocalyptic sense of urgency. They understood that to prevent chaos they had to quickly lay the foundation for a Russian-style capitalism or face a return to authoritarianism couched as a restoration of law and order. Even as Yeltsin’s reformers got to work, they faced strong opposition from reactionary former Communists who protested the speed and cost of change.
Sachs wasn’t the only Harvard professor in Moscow in the summer and fall of 1991. No fewer than four university affiliates — the John F. Kennedy School of Government, the Russian Research Center, HIID and the economics department — were represented. Graham Allison, the founding dean of the Kennedy School, was pushing an updated version of the 500 Days plan with its co-author, liberal economist Grigory Yavlinsky. Marshall Goldman, the director of Harvard’s venerable Russian Research Center and a frequent visitor to the Soviet Union for decades, was providing counsel to various parties. Sachs, thanks to his experience in Poland, emerged as the leading figure among these notables. In Moscow he encountered yet another Harvard colleague, Andrei Shleifer. Shleifer had been sent to Moscow by the World Bank, where Summers, on leave from Harvard, was serving as chief economist. Shleifer possessed a distinct advantage over other Westerners: He was a native of Russia and fluent in the language, having been born there in 1961. His parents were engineers, a profession the state chose for them. Shleifer revealed at an early age that he was ambitious; in a photograph taken when he was six, he is dressed as a Soviet Army general. When a friend transferred to one of the best schools in Moscow, Shleifer bicycled there and didn’t leave until he had persuaded the principal to admit him as well.
The Shleifers left Russia in 1976 with the help of the Hebrew Immigrant Aid Society and moved to Rochester, New York. Andrei later claimed he learned most of his English by watching the popular television show Charlie’s Angels. He excelled in mathematics and was admitted to Harvard College. In his sophomore year he went to see Summers and pointed out errors in a paper the young assistant professor had written. Summers, the nephew of two Nobel laureates in economics, soon took Shleifer under his wing. Like Sachs, Summers was one of the youngest economists ever granted tenure by Harvard — they had made it the same year. Summers guided Shleifer onto a similar path, and the friends maintained their close relationship after Summers went to the World Bank in 1991.
There was no love lost between Sachs and Summers, who had been rivals as newly tenured prodigies. Each had to be the smartest man in the room; their presence at faculty meetings ensured lively debate tinged with animosity. Shleifer had a similar personality, and when the confident upstart encountered Sachs in Moscow, he didn’t get along any better with Sachs than his mentor did.