The law has 'bright-line' rules. They are unambiguous. You had sex with a person under the legal age of consent. That's statutory rape. You may have a defence in law- e.g. you had good reason to believe the person was of age- but that is a different matter.
There are things which are legal but repugnant- e.g. farting noisily during a fancy dinner party. Norms in this respect may evolve or apply differently in different milieus. However, in the Jeffery Epstein case, once he was convicted, a bright-line rule came into operation. As a matter of abundant caution, institutions or people with institutional responsibilities needed to give the fellow a wide berth. There are such things as 'know your customer' rules and 'moral clauses' in contracts and, in the UK, criminal penalties for 'misconduct in public office'.
Epstein's mistake was to procure girls himself or through his associate. He should have 'outsourced' to an Escort Agency which promised to provide only elderly Math Professors for the purpose of stimulating small talk about Zorn's lemma.
Economic theory has always been more comfortable analyzing markets than the people who make markets possible.
There is a supply of and demand for arbitrageurs or market makers. A man who, when affluent, went to gambling 'hells' might, if he becomes indigent, hold gambling sessions in his own house. In other words, the supply of a 'repugnancy market' has negative Income elasticity- i.e. more enter the market when their income falls.
Textbook exchange is clean, synchronous, and explicit: a buyer meets a seller,
No. On open markets, everybody is a price taker. Buyers don't meet sellers. There are arbitrageurs who reduce price volatility & create a futures market.
a price clears supply and demand, and the transaction is complete.
Economics has no problem with administered pricing & markets which don't clear. Instead, inventories rise or fall or, in the case of labour, unemployment fluctuates.
Yet much of real economic life proceeds otherwise. Buyers and sellers often do not meet directly. Information is fragmented.
Which is why there are screening and signalling mechanisms and those who provide such services.
Trust is uneven.
Which is why you have third party guarantors or 'factors'.
Transactions are staggered in time.
Which is why there are inventories.
Under such conditions, intermediaries—middlemen, brokers, fixers—emerge not as incidental features of exchange, but as central institutional actors.
They emerge anyway. For there to be markets, there have to be market-makers and brokers and so forth.
The economics literature offers several ways of understanding why. In the theory of search and matching, intermediaries arise because finding a counterparty is costly and uncertain.
Intermediaries may be 'Schelling focal' solutions to coordination games. The pimp stands out because of the way that he is dressed.
Buyers and sellers may exist in the same economy but never meet at the same moment. A middleman, by standing ready and cultivating contacts on both sides of the market, increases the effective rate at which trades occur.
There is a difference between a 'middleman' or agent and an arbitrageur or market-maker. Loury conflates the two.
In canonical models of intermediation, the middleman does not produce the good being traded; he produces access.
He provides a service.
His profit comes from reducing search frictions and exploiting his position as a node through which others must pass.
An 'obligatory passage point' may be legal or customary. It may be wholly unconnected with any type of middleman or arbitrageur.
A related strand of work emphasizes that exchange need not be synchronous.
Even if they are, the same problems arise. What if the good is not of merchantable quality?
Transactions can be separated in time, with obligations accumulating and being discharged later.
This is true of most contracts- including contracts of adhesion- in a multiple period economy.
This is where the language of “credit” becomes metaphorical but precise.
No. The language remains the same. A contract or other agreement stipulates when, where and to whom credit should be given.
An intermediary who performs favors—making introductions, smoothing conflicts, providing information—accumulates informal claims on others.
They may be formal and embodied in a contract. A 'rain-maker' may, under the terms of a contract with an enterprise, take a percentage of the fees paid by people or organizations who become clients of the enterprise thanks to her actions.
These claims are not legally enforceable and often not even explicit, yet they are real.
They may be per se illegal and anyone involved in 'enforcing' them may be guilty of a crime.
They are backed by reputation, repeated interaction, and the threat of exclusion from future opportunities. Economics describes this as relational contracting: cooperation sustained not by courts, but by expectations about the future.
People may pay money to a shaman or charlatan believing this will improve their future.
Network theory sharpens the picture further. Brokers occupy positions that bridge otherwise disconnected groups.
There are discoordination games and arbitrage between them and coordination games (pooling equilibria) may occur because of hedging or 'income effects'.
Their value lies not simply in knowing many people, but in knowing people who do not know one another.
If this is 'common knowledge' then such people are 'Schelling focal'. I want to meet a person unlike me. I look around to see the one guy I know who also knows a lot of people unlike me. Just as I approach him, another person who wants to meet someone like me, approaches him.
By spanning these “structural holes,” intermediaries control the flow of information and opportunities.
No. They merely solve a coordination problem.
They decide who meets whom, in what setting, and on what terms.
No. They have to compete with others. If they make bad decisions they get disintermediated.
Such control confers power even when the broker owns little in the conventional sense. His capital is social rather than physical, positional rather than productive.
This was not the case with Epstein. He was doing something shady for clients who paid him vast sums of money. Did it have to do with insider trading or tax evasion or was it simply blackmail and pimping?
These ideas are often illustrated with benign examples. Merchant houses in early modern trade facilitated long-distance exchange when communication was slow and legal enforcement weak.
It appears that Epstein was indeed 'matching' pretty girls to rich, older, men. But was he getting paid to do it?
Real-estate agents match buyers and sellers who would struggle to find one another on their own. Financial intermediaries transform maturity,
i.e. transform short term liabilities (e.g. savings accounts) into long term assets (e.g. mortgages).
pool risk, and make illiquid assets tradable. In each case, the intermediary is welfare-enhancing, at least in principle, because he lowers transaction costs and enables mutually beneficial exchange.
unless it is a repugnancy market- e.g. prostitution.
Yet the same theoretical tools also illuminate less comfortable cases. When transactions are informal, opaque, or morally ambiguous, intermediaries can do more than reduce search costs. They can reduce moral costs.
No. Even if the brothel you visit is real fancy, you are still a low down hound dog.
This is a point emphasized by Kaushik Basu in his work on norms, corruption, and informal exchange. Many activities persist not because participants are ignorant of their dubious nature, but because intermediaries diffuse responsibility, normalize deviance, and make transgression feel routine.
No. What is happening here is that the norm has weakened. People feel it is stupid or harmful. One may say that the ubiquity of drug dealing reduced the stigma attached to drug use and this in turn reduced the willingness shown by authorities to enforce the law.
The broker allows each participant to tell himself that he is not really choosing; he is merely going along with how things are done.
Only, if the norm has already weakened with the result that the enforcement is neglected.
Once such a system is in place, it can become self-reinforcing.
Basu puts the cart before the horse. The norm weakens. More and more people enter the market. Enforcement is neglected. The law may be changed or judges may decide it has fallen into desuetude.
It must be said that in the Seventies, norms re. paedophilia weakened. Those on the Right pointed out that the traditional age of consent was pretty much set at puberty. The Left pointed out that taking drugs and raping babies helped subvert bourgeois patriarchy & Ordo-liberalism.
Individually, each participant may find it rational to rely on the intermediary.
No. It is rational to try to get around the intermediary. The prostitute would prefer to deal with the client directly rather than pay a percentage to the pimp. This means the pimp has an incentive to stab a prostitute from time to time too keep the rest in line.
Collectively, the arrangement can be destructive.
If it involves a negative externality or repugnancy market, it is likely that there are laws against it. Organized crime may be able to get around this by bribing police officers, judges, politicians etc.
The intermediary becomes indispensable precisely because he sits at the intersection of multiple relationships, none of which fully sees the whole.
Everyone sees the whole. It's just that they feel there should be an equitable exception in their own case. Prohibition may be good for the country but what's the harm if I have a little drink at the speakeasy? Prostitution is a ghastly business but, the fact is, prostitutes have so little joy in their lives that they deserve the chance to experience orgasms from my needle-dick.
No single actor has enough information—or incentive—to dismantle the system.
This cretin hasn't heard of the Police Commissioner orr the Parliament which makes the laws.
Economics describes this as a norm-based equilibrium: stable, persistent, and resistant to reform, even when widely suspected to be rotten.
No. Some stupid economist may have uttered this nonsense. There is no 'norm based equilibrium'- i.e. a fixed point in the relevant configuration space- because violation of norms is not associated with a well defined vector (similar to the price vector). Basu has shit for brains.
It is against this theoretical backdrop that the Epstein scandal acquires its deeper significance.
No. Its significance is political. 'Me-too' changed the moral climate. Fifteen years ago people may have said 'them hookers got paid. What's the big boo hoo?' Now we don't see those girls as hookers. They were targeted, they were groomed, their lives were ruined. Epstein cheated justice by topping himself. But there were others who got away scot-free.
Treated narrowly, it is a story of horrific sexual abuse and criminal failure. Treated analytically, it is also a case study in extreme relational intermediation.
No. It is a case of the exchange of vaguely defined services not normally fungible- e.g. an invitation to Buckingham Palace or a private office in a Research Institute which is part of Harvard University. It is noteworthy that people like Prince Andrew say their relationship with Epstein wasn't transactional. It was genuine friendship. This may be a defence in law- if you have a really good lawyer.
Jeffrey Epstein’s economic role was never easy to specify.
He was obliged to specify it for tax purposes. He was a money manager & tax & estate planning adviser. It looks as though he was using his Virgin Islands residency to help others avoid tax. One guy who paid him 150 million, has agreed to pay The Virgin Islands some 60 million to avoid prosecution. So, this is a story about insider trading, tax evasion and embezzlement or fraudulent conversion.
He was not a conventional financier, nor simply a socialite. His apparent value lay in his position as a connector across domains that ordinarily remain separate: finance, philanthropy, academia, politics, and private life.
This could be said of Bill Gates. But Gates isn't a pimp.
He brokered access.
No. There are P.R companies which do that. An Epstein can't compete with Hill & Knowlton.
He made introductions.
The host of a party tends to do so. But seeking social acceptance or 'face' is not a business. P.R is a business.
He hosted, facilitated, and normalized encounters whose purpose was often left conveniently vague.
Everybody does this when they throw a party. Only if you are a PR professional or party arranger is this an economic transaction.
Loury thinks reportage on Epstein paints-
a picture of asynchronous exchange.
not of an economic kind
Favors are performed without immediate return.
Unless it is common knowledge that you do favours. This has an immediate reputational benefit.
Access is granted without explicit price.
Because the thing isn't fungible. Indeed, it may not be 'economic' (i.e. scarce or involve an opportunity cost).
Obligations are left open-ended.
as often happens under incomplete contracts. One might say there is a contingent obligation to repay the favour, ceteris paribus, if you are able to do so.
Epstein introduced people to one another, offered hospitality, facilitated meetings, and positioned himself as someone who could “make things happen,” often without specifying when or how any return might be expected.
In other words he behaved in the manner expected of a successful businessman who can give advise or broker deals of a particular sort. This is just a matter of signalling.
In economic terms, this is not spot exchange but relational contracting at scale.
No. It is mere signalling. Why do merchant bankers wear expensive suits? It sends a certain signal. Why do billionaires wear casual clothes? It sends a different signal. Epstein didn't have a degree. But he wanted people to think he was a mathsy 'quant'. That's why he was happy to fund genuine mathematicians like Nowak and to be seen as Ehud Barak's pal (Barak has a mathsy MSc from Stanford).
These 'signals' were good for his primary business which was managing money & doing estate planning (which is how he came to help Chomisky
Epstein’s power derived from his ability to remember who owed what to whom,
No. What a guy owes is irrelevant unless you can break his legs.
and from the widely shared belief that future access flowed through him.
He had no power. That's why he ended up in jail.
The reporting also underscores how this system depended on repetition and routinization.
He was being sociable in a manner which would be beneficial to his core business. The problem was that he was breaking the law. He should have used an Escort Agency and thus gained plausible deniability.
Interactions that might have raised alarms in isolation became normalized through frequency and social embedding.
Precisely the opposite happened. Why? Epstein didn't outsource the procuring of girls. He should have used a middle-man. At the end of the day, he was a cheapskate whose social life was amongst has-beens or greedy clowns like Andrew & Fergie.
Being present at a dinner, a conference, a private meeting, or a flight was rarely framed as a decisive act; it was one more node in an ongoing relationship.
But only the sexual node was illegal. That's what should have been outsourced. You say 'I genuinely thought the little girl was an elderly Professor of Mathematics. She raped me using Zorn's lemma. I was too traumatized to say anything.'
The intermediary structure allowed participants to treat each encounter as marginal, even as the cumulative pattern was anything but.
Some people actually did do business with Epstein. If that business involved tax evasion, they may have to pay a lot in fines or even go to prison.
This helps explain a puzzle that has long surrounded the case: why so many institutions and individuals tolerated proximity to someone widely rumored to be dangerous.
He wasn't rumoured to be dangerous. True, abundance of caution under 'know your customer' rules, militated for giving the fellow a wide berth.
The answer need not be mass depravity or collective blindness.
There was individual wrong-doing. Andrew genuinely is a sleazy, greedy, horn dog.
It can be the quieter logic of intermediation.
No. If you fuck an underage girl you may be sent to jail. True, you may have a defence in law if you relied on a reputable match-making agency. You thought the 15 year old was actually a 55 year old Maths Professor because the Agency certified her as such. Then she raped you using Zorn's lemma. You were so traumatized that you entered a fugue state and embezzled a couple of billion dollars from the pension fund you were managing.
Each actor interacted with Epstein for reasons that, taken in isolation, seemed defensible or banal: a donation discussed, an introduction offered, a connection maintained.
All of which is perfectly legal.
DropSite’s reporting shows how responsibility was dispersed across institutions and across time, making disengagement costly and coordination against the intermediary difficult.
No. Everyone had a duty to obey the law. In the case of J.P Morgan, red flags arose in 2006- i.e. 2 years before Epstein's conviction. It appears that the Bank may be legally liable for waiting till 2013 to drop him as a client.
The intermediary structure ensured that no one had to confront the system as a whole.
They all had to confront the law. Those who broke it may have to pay a lot of money in fines or damages. Some may also go to jail. There is also the reputational cost.
Moral costs were lowered by diffusion, ambiguity, and routine.
No. Moral costs were ignored by greedy, sleazy, has-beens and neverwozzers.
In this sense, the Epstein scandal exposes the dark underside of informal exchange.
There is no such dark underside unless the law is broken in which case there is a criminal conspiracy in addition to individual criminal acts.
The same mechanisms that allow trade to flourish in the absence of formal contracts—trust, reputation, favors, and brokers—can also shield exploitation.
No. The mechanisms are different. The former are legal. The latter are per se illegal. I won't go to jail for buying on Ebay. I may go to jail for buying on the dark-web.
When intermediaries operate in the shadows, when their capital consists of secrets and access rather than transparent prices, the line between facilitation and corruption blurs.
Not for the law. There is a 'bright-line'.
The intermediary becomes not just a market maker,
a 'broker' can be a 'jobber' (i.e. buy and sell on his own account) but there is an obvious agent-principal hazard here. Still, a big institution may be able to maintain effective 'Chinese walls'.
but a norm-manager, shaping what participants come to regard as acceptable.
This may be a good thing. The Central Bank may improve banking practice.
DropSite’s contribution is to show how deeply embedded such an intermediary can become before the system collapses.
Epstein was a bit player. There definitely was systemic risk in finance which is what caused the Financial crisis.
The reporting makes visible how institutions that otherwise prize transparency and ethical conduct can nonetheless rely on informal channels when those channels appear to deliver scarce resources—money, access, influence—at low apparent cost.
No. All we can say is that JP Morgan wanted to cut Epstein loose from 2006 onwards (probably because of pay-outs to victims) but Jes Staley protected his good buddy.
What economics predicts, and what the Epstein case tragically confirms, is that such arrangements can persist long after warning signs accumulate.
Economics predicts that people will commit crimes if the expected gain exceeds the expected cost. Improving enforcement means expected cost rises with the result that less crime is committed. Within any enterprise, there will be guys who say 'associating with this dude is a reputational and legal risk'. Others may have an incentive to say 'he's making us a lot of money. Who cares if he pimps his own mother?' Increase penalties and probability of punishment and, voila!, behaviour changes.
Economics does not absolve anyone of responsibility.
Loury was arrested for drugs. His girlfriend dropped charges of assault.
But it does insist that behavior is structured by institutions, including informal ones.
Institutional economists may do so. The mainstream thinks only the incentive matrix matters because institutions can be disintermediated or else factors of production flee the jurisdiction.
The lesson of the Epstein affair is not merely that monsters exist,
some dudes take drugs and beat their girl-friends. Others groom or otherwise procure young girls for sex.
but that certain forms of brokerage
Epstein wasn't a broker. So far as we know, he was a paedophile who wanted others to participate so as to lower his own cognitive dissonance. He made his money through some combination of embezzlement, insider trading & tax evasion. We don't know of any big deal he brokered. Still, by being socially active he maintained visibility in a potentially very profitable space. The problem was his criminal conviction. He was damaged goods. Still, if he had won over the Musk brothers and one or two other such big hitters, then he might have regained currency.
create environments in which monsters can operate for a long time without being confronted.
Lowry could have been part of the Reagan Cabinet. Beating your g.f and taking a lot of drugs isn't good for your C.V- if you get caught.
The scandal forces into view a world of informal exchange
e.g. buying drugs
that is usually hidden behind euphemism and discretion—a world that standard economic models acknowledge only abstractly, but which, when illuminated, raises uncomfortable questions about how much of elite social and economic life depends on intermediaries whose value lies precisely in their opacity.
The Eighties would have been very dull had it not been for crack-cocaine.
Seen this way, the Epstein case is not an anomaly.
Epstein should have had an arms length relationship with a Madam or other procurer. He cheaped out. This cost him dear.
It is a pathological extreme of a general phenomenon. Middlemen make markets possible.
Nonsense! A price discriminating monopolist may not permit middle-men to prevent 'leakage'.
They also make some abuses easier to sustain.
They make abuse easier to detect and punish. If you pick up a prostitute and pay cash, you are at less risk of being discovered than if you use an Agency and pay with your credit card.
The challenge, for economics as much as for society, is to understand when relational intermediation serves cooperation—and when it becomes the infrastructure of moral catastrophe.
There is no challenge. The answer has to do with externalities & repugnancy markets vs merit goods. A Marriage Agency is, speaking generally, a good thing because marriage has positive externalities. An 'Escort' Agency which provides underage prostitutes is a very bad thing. Harming young people imposes a huge cost on society besides being deeply repugnant.
What the Epstein scandal ultimately exposes is not merely individual depravity, but an institutional vulnerability.
In what respect? I suppose Loury means the deal Acosta made with Epstein which a Federal Judge found violated the Crime Victims' Rights Act. Acosta was in Trump's Cabinet but had to resign as the Epstein case resurfaced.
Informal exchange is powerful precisely because it operates below the threshold of formal scrutiny.
There is no such distinction in the law. It doesn't matter if I formally or informally rape a child.
When access, favors, and reputation substitute for contracts and prices, accountability becomes diffuse and responsibility evaporates.
In law, it doesn't matter if there is no contract or stipulation re. price. What matters is whether the intention or outcome is criminal in nature.
Economics teaches that such systems can be efficient under constraint—but it also teaches that efficiency is not innocence.
No. Economics has a notion of Pareto efficiency. If some third party is affected or the transaction is unconscionable, then there is inefficiency.
The deeper warning is that elite institutions, confident in their norms and insulated by prestige, may be especially prone to relying on opaque intermediaries, mistaking discretion for trustworthiness.
No. Elite institutions are at greater risk. Nobody cares if I sold Epstein my dirty underwear for him to sniff even though I am not, as I describe myself, a 14 year old blonde virgin. But if JP Morgan kept Epstein as a customer till 2013, they may have to pay a lot of money in damages. In law, there is a concept of ' Culpa Levis in Abstracto' by which the 'bonus paterfamilias'- i.e. person of high reputation and worldly knowledge- has a higher duty of care.
Epstein’s role, as illuminated by investigative reporting, forces a reconsideration of how much of modern economic and social life still depends on shadow markets of access and obligation
Not as far as we know. The plain fact is, the Trump family is making a lot of money out of crypto in a manner which suggests that certain foreign countries are buying influence. The problem is that Trump may not hold up his side of the bargain- because there is no fucking bargain.
—and how easily those markets can turn predatory when brokerage becomes unmoored from moral constraint.
Is Loury talking of the financial crash? Something like that may now be brewing and we can make an educated guess as to the open, rather than occult, manner in which the regulatory framework was undermined.
My argument is not that Epstein created no value; it is about how whatever value he created was institutionally organized.
He created his own investment bank in 1982. That's 'institutional organization'.
Even highly valuable expertise is ordinarily embedded in transparent, replicable, and professionally accountable forms—firms rather than individuals, contracts rather than open-ended obligations, compliance rather than discretion.
If limited liability is permitted, why not avail of it. But reporting requirements for private, closely held, companies are lax. The auditor can just rely on Director's evaluation.
What is analytically striking to me in Epstein’s case is that his role consistently took the form of personalized, opaque, cross-domain brokerage, persisting even after his criminal conviction, and operating outside standard governance structures.
This is nonsense. Whatever companies he owned weren't significant enough to attract much regulation. Consider Andrew's money-man- David Rowland- whose private bank has had its licence revoked. He is appealing this. There may be an innocent explanation of money movements which prima facie look like tax evasion or money laundering. There is no suggestion that Rowland engaged in any sexual impropriety. Still, he must regret his association with Andrew and thus his name getting dragged into the mud that is the Epstein case. It may be that some very rich people got involved with Epstein because they wanted to pay less in tax. Penny-wise, pound-foolish.
Intermediaries can be efficient under constraint while simultaneously generating serious moral hazard.
You can't fuck an underage girl by proxy. If you help procure a girl or keep silent about such illegal activities, you have acted directly to break the law even if you made payments through an intermediary.
The question I am raising is not whether Epstein was smart, but why so many elite actors relied on an intermediary
you can pay a guy to help you evade taxes. This is a direct connection. You have evaded taxes. What if you hired a guy who hired another guy to help you evade taxes. Your culpability is the same. You have evaded taxes. You may have a defence in law which reduces the penalty but that is a different matter.
whose comparative advantage lay in
tax & estate planning
discretion,
this is assumed where there is a fiduciary relationship
access,
which is greater with a PR professional. Epstein was a two-bit player. He had Ghislaine- daughter of a disgraced financier- and he had Fergie & Andrew- the two runts of the Royal litter. And then there was Mandelson...
and relational insulation rather than in formal professional accountability—
there was talk of law suits for theft against Epstein but nothing stuck.
and what institutional vulnerabilities that reliance exposed.
Nothing that wasn't fucking obvious to any CPA or Corporate lawyer. Lowry, being an economist, is completely ignorant of how the world works.
