By Boz

Fiona also had a good knowledge of the history of London and her particular profession. Prostitution has had a strange history in almost all civilizations. Moves to ban, regulate, licence, and allow it without hindrance have been its defining feature, in repeated cycles. The Church, especially the Roman Catholic Papacy, has been the most hypocritical of all institutions.

The Vatican decreed any form of prostitution as sinful even as an unabashed history of the Vatican admits to five Popes succumbing to STDs. Ironically, two of them go by the remarkable name Pope Innocent.

Prostitutes, Fiona told me, were an integral part of London’s social fabric, and historians have recorded that many monarchs favoured them, and accorded them the status of official mistresses. Mary Boleyn was a prostitute who found favour with King Henry VIII, before he took in her younger Sister, Ann to be his wife. By 1700, it is estimated that one in five women in London were prostitutes[1]. Nell Gwyn, a prostitute around the 1670s, was a favourite of King Charles II. She used her favour with the King and people of England to secure a dukedom for her son and convinced Charles to build a Royal Hospital for Ex Servicemen in the City of London, which stands as a model of a Veterans Hospital even today.

Interestingly, the area that now comprises of Aldwych and LSE was earlier called the Clare Market, and was notorious for its brothels till the late 1880’s. Makes one wonder how the Webbs found themselves a house there. The largest Red Light district was Southwark, which in the Middle Ages was owned by the Bishop of Winchester.

Fiona told me about the Profumo Affair, when the British Secretary for Defence John Profumo was sleeping with a high end call girl, Christine Keller, who was also involved with the military attaché of the USSR Embassy. MI5 feared that sensitive defence secrets may have been unwittingly conveyed by Mr. Profumo to Ms. Keller, who might have passed it on to the Soviets. Gently quizzed by the Prime Minister, John Profumo first denied the affair, but later, in the face of overwhelming proof, admitted to it and resigned. Harold Mcmillan, the Prime Minister, told a gathering that he accepted Profumo’s resignation, not because he consorted with a call girl or proved to be a defence liability, but because Profumo had lied to him. Difficult to argue with Etonian logic! In any case, both Ms. Keller and her friend Mandy Rice–Davis had a long tenure at the top, and according to Fiona, John Profumo was neither the first, nor the last Minister of the Crown to patronise her.

Fiona also informed that the top market segment had always been British, but for the first time this segment was facing competition from an outsider.

She was Indian, and her name was Pramila Cordes, not that the name rang a bell.

The short Christmas holidays descended and passed, and we found ourselves in the Lent term with examinations looming just after Easter. There was just that little bit more of urgency in everyone’s steps. Fiona informed me that since Christmas the market in the trade was very uneasy. This uneasiness permeated to other attendant branches of the street-economy, such as drugs, and even the bribes paid to the police. A fortnight later, she told me that the market had bottomed out like nothing in her past ten years of experience. With the collapse of the erstwhile USSR and its satellites, there had been a deluge of women pouring into the UK, absolutely penniless and with no immediate avenues of legal livelihood. Young girls and women from Lithunia, Ukraine, Serbia, and Croatia had come in fair numbers and were trying to enter the only trade that they could ply. The common immigrant streetwalker was willing to charge a mere 20 percent of the going rate. The entrenched UK streetwalkers retaliated by sharply reducing their prices. But rather than spurring demand, the market for streetwalkers had totally collapsed. There were just no takers for whores. Never had London seen such a phenomenon, not even when French call girls and prostitutes swamped London in the immediate post-war years to escape the notorious Marthe Richard[2] laws.

With the collapse of the erstwhile USSR and its satellites, there had been a deluge of women pouring into the UK, absolutely penniless and with no immediate avenues of legal livelihood.

We, in turn, tried to explain why the market had collapsed even when the going prices had been more than halved. At first, we tried explaining this phenomenon though Gresham’s Law of “Bad Money chasing out Good”. Gresham‘s Law, however had no answer as to why there would be no takers for either the ‘Bad’ (understood here to be the immigrants) or the ‘Good’. So, obviously, that was not the answer.

It was one morning, in the shower, that an idea struck me. I remembered my Undergraduate years at St Stephen’s College in Delhi. I was the Secretary of the Economics Society in 1971, and we often invited speakers to deliver talks on a variety of economic issues. On one occasion, we had a young American economist from Berkley, who was also visiting Professor at the Indian Statistical Institute, New Delhi. The topic of discussion was something incomprehensible to us at that stage. It was simply titled “The Market for Lemons”[3]. Now, in the early seventies, most students in leading Indian colleges thought it fashionable to be left-wing. American scholars were viewed with the greatest of suspicion. So, poor George Akerlof (such was his name) had already been labelled as a CIA agent on a recruitment drive. When I met Akerlof just prior to his talk, I was struck by two factors. First, he was not all that much older than I was. Second, he had a resemblance similar to the actor, Woody Allen. He was accompanied by a slight, blonde, tow haired woman, Janet, probably his girlfriend. With a sense of foreboding, I escorted George and Janet to the auditorium, where he was greeted with an ominous silence. I only hoped the mob wouldn’t start pelting us with rotten tomatoes. I was in my only decent formal attire, a venerable pair of Harris Tweeds , a hand-me-down from my father. No sooner had I started introducing Mr Akerlof to the audience, than a shrill piping voice from the back, started shouting:

‘Ho Ho Ho Chi Minh

We shall fight and we shall win!’

Now, another voice from the other extreme of the hall broke out:

‘Hey, Hey, LBJ…Hey Hey LBJ

How many children did you kill today?’

Soon pandemonium prevailed. As the first rotten tomato was thrown, descending upon us in a gentle, looping parabola, I tried to reach out to George and bundle him off the stage. To my utter surprise, I saw that Mr. Akerlof had joined the mob in their sloganeering. Armed with a mike, George was in fact, inciting the mob further. For the next one hour, nobody mentioned ‘lemons’ as George regaled us about the state of the Protest Movement at Berkley, California, and what had happened at Kent State University. Questions flew on such subjects like Herbert Marcuse, Daniel Cohn Bendt, Noam Chomsky and Angela Davis. George Akerlof was in his element. As one stoned colleague clambered on stage with a guitar, George and he broke into the Vietnam song, immortalised by Country Joe McDonald at Woodstock. The college reverberated to the din of 300 students singing:

‘…and its one, two ,three, four , five

What are we fighting for,

I don’t know…I don’t give a damn

The next stop is Vietnam.’

George explained that such asymmetric information ruled many markets such as insurance, where significant work had been done by Joe Stiglitz at Yale, who in fact was Janet’s thesis supervisor, along with James Tobin.

At the end of it all, I took George and Janet to the college cafeteria. I finally asked him what his original talk was all about. George explained that in the USA, it was very difficult to get a decent price for a second-hand car, especially for a car that was almost brand new. Potential buyers suspected that owners wanted to sell off their cars so soon after buying them because of the likelihood of some serious defect. But in many cases, the cars were, in fact, good cars. The owners might be facing sudden, unexpected relocation options, such as diplomats do. Thus, a seller had an edge over information because he knew whether his car was good or ‘a lemon’. The buyer had no way of distinguishing which of two second hand cars that that he was considering was a good car and which a lemon. Akerlof called this asymmetry of information. Due to the mismatch between the buyers’ and sellers’ information, the minimum price that the seller was willing to consider was still much higher than the maximum price the buyer was willing to offer. In such a situation, markets don’t clear and sale of second hand cars can come to a halt. George explained that such asymmetric information ruled many markets such as insurance, where significant work had been done by Joe Stiglitz at Yale, who in fact was Janet’s thesis supervisor, along with James Tobin.

In 2001, George Ackerlof shared the Nobel Prize in Economics with Joseph E. Stiglitz and Michael Spence for their pioneering work on Asymmetric Information. In 1970, sitting at the St Stephens college cafeteria, one could understand George’s difficulty in getting his paper published until the QJE ultimately gave him a break. Janet Yellen, his wife, is today the Chair of the Board of the Federal Reserve, being a distinguished economist in her own right. But, I’m getting ahead of the story.

Recalling that incident, I read the original paper on the Market for Lemons, and what was happening in the London streetwalkers’ market became clear to me.

Note: This story is purely a work of fiction. Though some of the personae peripheral to the story (such as Professors Desai and Goodhart exist), the main protagonists are fictional. Any resemblance to known figures is purely coincidental.

This is the fourth part of the short story The Adventures of Fanny Hill at the London School of Economics.

bozBoz is the nom de plume of a retired IAS Officer with experience in Finance. He was at the IMF and possesses a PhD in Economics from the London School of Economics.

[1] Dan Cruikshank:”Adventures in Architecture”tells of Geeorgian London, where rich brothel keepers spurred construction boom.Henry Fielding and Samuel Johnson wrote about the plight of ondon’s prostitutes.

[2] Marthe Richards was a Prostitute turned Social heroine,a part of the French Underground movement in both Worlld Wars.After the libreration, she was elected to the Paris City Council in 1946,closed down all Paris brothels ruthlessly.and became highly unpopular.In 1952, it was dscovred that she was not a French citizen and was disenfranchised

[3] George Ackerlof-The Market for Lemons-Quality Uncertainty and The Market Mechanism (QJE).The paper was rejected by American Economic Review for being too trivial.It was also rejected by The Review of Economic Studies and the Journal of Political Economy.

Read the fifth part here: The Adventures of Fanny Hill at the London School of Economics – Part 5

Posted by The Indian Economist