Cipher challenge #2 from Joshua Holden: Subliminal channels

The Mathematics of Secrets by Joshua Holden takes readers on a tour of the mathematics behind cryptography. Most books about cryptography are organized historically, or around how codes and ciphers have been used in government and military intelligence or bank transactions. Holden instead focuses on how mathematical principles underpin the ways that different codes and ciphers operate. Discussing the majority of ancient and modern ciphers currently known, The Mathematics of Secrets sheds light on both code making and code breaking. Over the next few weeks, we’ll be running a series of cipher challenges from Joshua Holden. The first was on Merkle’s puzzles. Today’s focuses on subliminal channels:

As I explain in Section 1.6 of The Mathematics of Secrets, in 1929 Lester Hill invented the first general method for encrypting messages using a set of multiple equations in multiple unknowns.  A less general version, however, had already appeared in 1926, submitted by an 18-year-old to a cryptography column in a detective magazine.  This was Jack Levine, who would later become a prolific researcher in several areas of mathematics, including cryptography.

Levine’s system was billed as a way of encrypting two different messages at the same time.  Maybe one of them was the real message and the other was a dummy message–if the message was intercepted, the interceptor could be thrown off the scent by showing them the dummy message.  This sort of system is now known as a subliminal channel.

The system starts with numbering the letters of the alphabet in two different ways:

   a  b  c  d  e  f  g  h  i  j  k  l  m
  27 28 29 30 31 32 33 34 35 36 37 38 39
   1  2  3  4  5  6  7  8  9 10 11 12 13
  
   n  o  p  q  r  s  t  u  v  w  x  y  z
  40 41 42 43 44 45 46 47 48 49 50 51 52
  14 15 16 17 18 19 20 21 22 23 24 25 26

Suppose the first plaintext, or unencrypted message, is “tuesday” and the second plaintext is “tonight.”  We use the first set of numbers for the first plaintext:

   t  u  e  s  d  a  y
  46 47 31 45 30 27 51

and the second set for the second plaintext:

   t  o  n  i  g  h  t
  20 15 14  9  7  8 20

The encrypted message, or ciphertext, is made up of pairs of numbers.  The first number in each pair is half the sum of the two message numbers, and the second number is half the difference:

    t       u        e       s       d       a        y
   46      47       31      45      30      27       51
  
    t       o        n       i       g       h        t
   20      15       14       9       7       8       20
  
33,13    31,16  22½,8½   27,18 18½,11½  17½,9½  35½,15½

To decrypt the first message, just take the sum of the two numbers in the pair, and to decrypt the second message just take the difference.  This works because if P1 is the first plaintext number and P2 is the second, then the first ciphertext number is

and the second is

.

Then the plaintext can be recovered from the ciphertext using

and

This system is not as secure as Hill’s because it gives away too much information.  For starters, the existence and nature of the fractions is a clue to the encryption process.  (The editor of the cryptography column suggested doubling the numbers to avoid the fractions, but then the pattern of odd and even numbers would still give information away.)  Also, the first number in each pair is always between 14 and 39 and is always larger than the second number, which is always between ½ and 25 ½.  This suggests that subtraction might be relevant, and the fact that there are twice as many numbers as letters might make a codebreaker suspect the existence of a second message and a second process.  Hill’s system solves some of these issues, but the problem of information leakage continues to be relevant with modern-day ciphers.

With those hints in mind, can you break the cipher used in the following message?

11 3/5, 15 4/5   10 4/5,  9 2/5   17,     11        14 1/5, 16 3/5
 9 4/5,  7 2/5   12 3/5,  7 4/5    9 2/5, 12  1/5   13 1/5, 13 3/5
18,     11       12 2/5, 14 1/5    8 4/5, 10  2/5   12 1/5,  6 3/5
15 4/5, 12 2/5   13 3/5, 13 4/5   12,     16        11 2/5,  8 1/5
 9 1/5, 16 3/5   14,     17       16 3/5, 12  4/5    9 4/5, 14 2/5
12 1/5,  6 3/5   11 3/5, 15 4/5   10,     11        11 4/5,  6 2/5
10 2/5, 14 1/5   17 2/5, 12 1/5   14 3/5,  9  4/5

Once you have the two plaintexts, can you deduce the process used to encrypt them?

 

Answer to Cipher Challenge #1: Merkle’s Puzzles

The hole in the version of Merkle’s puzzles is that the shift we used for encrypting is vulnerable to a known-plaintext attack. That means that if Eve knows the ciphertext and part of the plaintext, she can get the rest of the plaintext. In Cipher Challenge #1, she knew that the word “ten” is part of the plaintext. So she shifts it until she finds a ciphertext that matches one of the puzzles:

ten
UFO
VGP

“Aha!” says Eve. “The first puzzle starts with VGP, so it must decrypt to ten!” Then she decrypts the rest of the puzzle:

VGPVY QUGXG PVYGP VAQPG UKZVG GPUGX GPVGG PBTPU XSNHT JZFEB
whqwz rvhyh qwzhq wbrqh vlawh hqvhy hqwhh qcuqv ytoiu kagfc
xirxa swizi rxair xcsri wmbxi irwiz irxii rdvrw zupjv lbhgd
yjsyb txjaj sybjs ydtsj xncyj jsxja jsyjj sewsx avqkw mcihe
                             ⋮
qbkqt lpbsb kqtbk qvlkb pfuqb bkpbs bkqbb kwokp snico euazw
rclru mqctc lrucl rwmlc qgvrc clqct clrcc lxplq tojdp fvbax
sdmsv nrdud msvdm sxnmd rhwsd dmrdu dmsdd myqmr upkeq gwcby
tentw oseve ntwen tyone sixte ensev entee nzrns vqlfr hxdcz

So the secret key is 2, 7, 21, 16.

The hole can be fixed by using a cipher that is less vulnerable to known-plaintext attacks. Sections 4.4 and 4.5 of The Mathematics of Secrets give examples of ciphers that would be more secure.

Bird Fact Friday—Weekly Warbler: Black-and-White

Welcome back to the warblers!

As we approach the launch of our long-awaited Warbler Guide App for Android, we’re highlighting some fun facts about the warblers with a new Weekly Warbler feature. Kicking it off today is the black and white warbler.

From page 160-161 in The Warbler Guide:

The black-and-white warbler is distinctive in many features. Its black-and-white crown stripes are diagnostic. It has long and slightly curved bill, very broad white supercilium, and contrasty white wing bars joining wide white tertial edgings. Its black-and-white pattern is striking even in flight. It likes to creep on trunks and limbs, and more interestingly, to creep downward. It is the longest-lived warbler on record, at eleven years.

 

The Warbler Guide
Tom Stephenson & Scott Whittle
Drawings by Catherine Hamilton
Warbler Guide App
Species Account Example: American Redstart Male

 

Warblers are amwarblerong the most challenging birds to identify. They exhibit an array of seasonal plumages and have distinctive yet oft-confused calls and songs. The Warbler Guide enables you to quickly identify any of the 56 species of warblers in the United States and Canada. This groundbreaking guide features more than 1,000 stunning color photos, extensive species accounts with multiple viewing angles, and an entirely new system of vocalization analysis that helps you distinguish songs and calls.

The Warbler Guide revolutionizes birdwatching, making warbler identification easier than ever before. For more information, please see the author videos on the Princeton University Press website.

 

Happy birthday, John Singer Sargent

Over on Instagram we’re giving a shout out to John Singer Sargent, born 161 years ago today. Kilmurray & Ormond’s lavish book on his work has been in print for 18 years, and remains a perennial favorite. Here it is perched on our courtyard steps, enjoying the unseasonably warm breeze:

 

The remarkable portraits for which John Singer Sargent is most famous are only one aspect of a career that included landscapes, watercolors, figure subjects, and murals. Even within portraiture, his style ranged from bold experiments to studied formality. And the subjects of his paintings were as varied as his styles, including the leaders of fashionable society, rural laborers, city streets, remote mountains, and the front lines of World War I. John Singer Sargent, edited by Elaine Kilmurray and Richard Ormond surveys and evaluates the extraordinary range of Sargent’s work, and reproduces 150 of his paintings in color.

Happy birthday to a man widely considered to be the leading portrait painter of his generation.

 

10 facts about the early life of Ernst Kantorowicz

LernerIn this first complete biography of Ernst Kantorowicz (1895–1963), Robert E. Lerner takes an in depth look at an influential and controversial German-American intellectual whose colorful and dramatic life intersected with many of the great events and thinkers of his time. Though he exerted influence well outside of his field, Kantorowicz is most famous for two books—a notoriously nationalistic 1927 biography of the Holy Roman Emperor Frederick II and The King’s Two Bodies (1957), a classic study of medieval politics. Drawing on many new sources, including numerous interviews and unpublished letters, Lerner tells the story of a major intellectual whose life and times were as fascinating as his work.

A few things you may not know about the life of Ernst Kantorowicz:

In the United States Ernst Kantorowicz told people that he “loved his father,” unusual language for him, and he kept a photograph of him on his bedroom dresser.

Kantorowicz was born into a wealthy family—they owned a successful distillery business.

He had two sisters; Sophie, known as Soscha, with whom he was close, and Margarete, known as Grete or Gretel, with whom he was not.

Toward the end of his life, he described himself as being of, “Jewish descent, not Jewish belief.” When he was young, Yiddish was likely not spoken in his home, and he was almost certainly not Bar Mitzvahed.

When Kantorowicz was growing up, his parents thought that teaching him English was essential since they believed he would be working in the family business. Thus, they engaged an English governess for him until he was 12.

In gymnasia (high school) Kantorowicz never received the highest possible grade in any of his courses. Most were either barely passing or failing, and he did not do his homework. Many of his classmates had comparable performances.

Kantorowicz volunteered for his local field artillery regiment on August 8, six days after Germany declared war on France, at the age of 19.

He entered the army as a private in 1914 and was promoted to corporal, then to sergeant in October 1915. In June 1915 he received the Iron Cross, second class. In 1917, he was awarded the Iron Crescent, the Ottoman equivalent of the Iron Cross.

When the Great War was over, Kantorowicz began studying economics and finance in preparation for his role in the family business. He also took courses in the study of Islam, pursuing an interest he had developed when he was stationed in Turkey during the war.

In February 1919, Kantorowicz transferred from the University of Berlin to the University of Munich. He told a friend it was because he thought he could get more work done in Munich, but his other motive was that he had fallen in love with Josefine von Kahler.

For more detail, pick up a copy of Ernst Kantorowicz: A Life.

**

Robert E. Lerner is professor emeritus of history at Northwestern University, where he taught medieval history for more than forty years. The author of many books, he is a fellow of the Medieval Academy of America and the American Academy in Rome, and a former member of the Institute for Advanced Study in Princeton.

Thomas W. Laqueur: Ghosts and ghouls haunt the living with a message about life

LaqueurThere is, it would seem, no greater chasm than that which divides the living from the dead. We who still dwell on the side of life know this as we relegate the inert bodies of those so recently just like ourselves to the elements from which they came: earth or fire – ashes to ashes; air in the towers of the Zoroastrians; very occasionally, water. We do not just toss bodies over walls, whatever we might believe (or not believe) about a soul or an afterlife. We do it with care and with rituals: funeral and mourning. We do it because it is what humans do and have always done; it represents our entry into culture from nature. We live and have always lived with our dead. To do otherwise would be to expel the dead from the community of the living, to expunge them from history.

But, at the same time as we honour our dead, we generally also want to keep a certain distance. We expect them to leave us alone in our world and remain safely in theirs. When they don’t, it is a sign that something has gone very wrong. King Creon argues in Sophocles’ tragedy Antigone that the rebel Polyneices should remain unburied as punishment for his crimes: ‘unwept, unsepulchered, a treasure to feast on for birds looking out for a dainty meal’. Had he had his way, the shade of Polyneices would undoubtedly have returned to berate the living for their scandalous neglect. Antigone’s voice is the one we – or, in any case, our better selves – hear. Care for the dead is among the ‘unwavering, unwritten customs of the gods … not some trifle of now or yesterday, but for all eternity’.

This brings us to Halloween, and to All Saints’ Day on 1 November, and All Souls’ the day after – the days when the boundaries between the living and the dead seem most likely to be breached. Why are these still the days of ghosts and goblins, ghouls and dancing skeletons?

Before we can answer, we need a taxonomy of the dead who have returned to our world: the revenants. Within this large family there are two genera: the fleshly and the ethereal. And within each genus there are many species. Among the fleshly, there are vampires, for example – archaeologists have dug up skeletons in Poland with bricks in their mouths put there, they think, by villagers determined to keep the vampires from coming back to devour them. Vampires seldom stray far from home, while the Norse draugr, a fleshy revenant, wanders far afield. A related Norse species, the haugbúar stays near its burrow, complains about the other inhabitants and affects the weather. The very corporeal Chinese walking dead travel great distances to be buried in a geomantically auspicious spot.

Within the genus of the ethereal revenant there are also many species: those that come back very soon after death to chide their friends for not giving them proper obsequies; the shade of Patroclus appears to Achilles in the Iliad under just these circumstance. Or ghosts such as Hamlet’s father, in full armour – a touch of the material – coming back to tell his son he’d been murdered. There are ghosts that give off foul vapours, and ghosts that strike people (although how they do that since they have no bodies is unclear).

One thing can be said about the whole family of revenants: they are generally not a cheery lot. They come back because something is wrong: some debt from life needs to be repaid or vengeance taken; or their bodies were insufficiently cared for; or their souls were ill-remembered. Friendly ghosts such as the cartoon character Casper are an extreme rarity. In monotheistic religions, God tends to keep a close watch on the boundaries of the other world and ghosts are rare; he draws the dead to him. Monotheistic religions tend to discourage traffic with the dead, which is called necromancy, a dangerous kind of magic. In religions without one god in charge, the revenant tends to proliferate.

But nowhere do they ever seem to go away. Not in the Age of Reason: James Boswell in his Life of Samuel Johnson (1791) writes, ‘It is wonderful that 5,000 years have now elapsed … and still it is undecided whether or not there has ever been an instance of the spirit of any person appearing after death.’ All sorts of good arguments are against it, ‘but all belief is for it’. Not in the 19th century either: Jeremy Bentham, the most rational of men and enemy of superstition, could not rid himself of a belief in ghosts.

Even today, Halloween encourages us to remember in a fuzzy sort of way the medieval custom of praying for the souls of the dead by name and asking the saints to speed them toward salvation. Back then, it was an occasion for any souls unhappy with efforts to help them to come back and complain. It was a time when the boundaries between the living and the dead seemed more porous. Few of us today think we can do much for the souls of the dead or that there is much border-crossing. But the ghosts of old and even new species of revenant, such as zombies – a whole other story – are still resonant. In part, this is because the revenant have gone inward; our guilt toward the dead in general, or someone in particular whom we might have wronged, makes itself vividly manifest in our minds. It is real even if we know it is not real.

In part, it is because we are all in some way haunted by the dead who are still part of us and of our lives. It is also because mortality remains so deeply strange and unbearable. Sigmund Freud gets this right. Reason is of little help. After tens of thousands of years, there has been little progress. In ‘hardly any other sphere,’ he writes in The Uncanny (1919), ‘has our thinking and feeling changed so little since primitive times or the old been so well preserved, under a thin veneer, as in our relation to death.’

Finally, to return to where we began, we wish our fellow creatures a good death and a peaceful rest within the community of the living because we need them among us. They remain part of the world as we imagine it. To be human is to care for the dead. But we also wish the dead and dying well in order to maintain the chasm between our world and theirs. The dead are primally dangerous; we need them to stay where they are, safely quarantined, in a parallel universe to ours.Aeon counter – do not remove

Thomas W. Laqueur is the Helen Fawcett Professor of History at the University of California, Berkeley. His books include Making Sex: Body and Gender from the Greeks to Freud and Solitary Sex: A Cultural History of Masturbation. He is a regular contributor to the London Review of Books.

This article was originally published at Aeon and has been republished under Creative Commons.

Edward Balleisen on the long history of fraud in America

BalleisenDuplicitous business dealings and scandal may seem like manifestations of contemporary America gone awry, but fraud has been a key feature of American business since its beginnings. The United States has always proved an inviting home for boosters, sharp dealers, and outright swindlers. Worship of entrepreneurial freedom has complicated the task of distinguishing aggressive salesmanship from unacceptable deceit, especially on the frontiers of innovation. At the same time, competitive pressures have often nudged respectable firms to embrace deception. In Fraud: An American History from Barnum to Madoff, Edward Balleisen traces the history of fraud in America—and the evolving efforts to combat it. Recently, he took the time to answer some questions about his book.

Can you explain what brought you to write this book?

EB: For more than two decades, I have been fascinated by the role of trust in modern American capitalism and the challenges posed by businesses that break their promises. My first book, Navigating Failure: Bankruptcy and Commercial Society in Antebellum America, addressed this question by examining institutional responses to insolvency in the mid-nineteenth-century. This book widens my angle of vision, considering the problem of intentional deceit in the United States across a full two centuries.

In part, my research was motivated by the dramatic American fraud scandals of the late 1990s and early 2000s, which demonstrated how badly duplicitous business practices could hurt investors, consumers, and general confidence in capitalism. I wanted to understand how American society had developed strategies to constrain such behavior, and why they had increasingly proved unequal to the task since the 1970s.

In part, I was gripped by all the compelling stories suggested by historical episodes of fraud, which often involve charismatic business-owners, and often raise complex questions about how to distinguish enthusiastic exaggeration from unscrupulous misrepresentation.

In part, I wanted to tackle the challenges of reconstructing a history over the longer term. Many of the best historians during the last generation have turned to microhistory – detailed studies of specific events or moments. But there is also an important place for macro-history that traces continuity and change over several generations.

In addition, my research was shaped by increasingly heated debates about the costs and benefits of governmental regulation, the extent to which the social legitimacy of market economies rest on regulatory foundations, and the best ways to structure regulatory policy. The history of American anti-fraud policy offers compelling evidence about these issues, and shows that smart government can achieve important policy goals.

What are the basic types of fraud?

EB: One important distinction involves the targets of intentional economic deceit. Sometimes individual consumers defraud businesses, as when they lie on applications for credit or life insurance. Sometimes taxpayers defraud governments, by hiding income. Sometimes employees defraud employers, by misappropriating funds, which sociologists call “occupational fraud.” I focus mostly on deceit committed by firms against their counterparties (other businesses, consumers, investors, the government), or “organizational fraud.”

Then there are the major techniques of deception by businesses. Within the realm of consumer fraud, most misrepresentations take the form of a bait and switch – making big promises about goods or services, but then delivering something of lesser or even no quality.

Investment fraud can take this form as well. But it also may depend on market manipulations – spreading rumors, engaging in sham trades, or falsifying corporate financial reports in order to influence price movements, and so the willingness of investors to buy or sell; or taking advantage of inside information to trade ahead of market reactions to that news.

One crucial type of corporate fraud involves managerial looting. That is, executives engage in self-dealing. They give themselves outsized compensation despite financial difficulties, direct corporate resources to outside firms that they control in order to skim off profits, or even drive their firms into bankruptcy, and then take advantage of inside information to buy up assets on the cheap.

Why does business fraud occur?

EB: Modern economic life presents consumers, investors, and businesses with never-ending challenges of assessing information. What is the quality of goods and services on offer, some of which may depend on newfangled technologies or complex financial arrangements? How should we distinguish good investment opportunities from poor ones?

In many situations, sellers and buyers do not possess the same access to evidence about such issues. Economists refer to this state of affairs as “information asymmetry.” Then there is the problem of information overload, which leads many economic actors to rely on mental short-cuts – rules of thumb about the sorts of businesses or offers that they can trust. Almost all deceptive firms seek to look and sound like successful enterprises, taking advantage of the tendency of consumers and investors to rely on such rules of thumb. Some of the most sophisticated financial scams even try to build confidence by warning investors about other frauds.

A number of common psychological tendencies leave most people susceptible to economic misrepresentations at least some of the time. Often we can be taken in by strategies of “framing” – the promise of a big discount from an inflated base price may entice us to get out our wallets, even though the actual price is not much of a bargain. Or a high-pressure stock promoter may convince us to invest by convincing us that we have to avoid the regret that will dog us if we hold back and then lose out on massive gains.

How has government policy toward business fraud changed since the early nineteenth century?

EB: In the nineteenth century, Anglo-American law tended to err on the side of leniency toward self-promotion by businesses. In most situations, the key legal standard was caveat emptor, or let the buyer beware. For the judges and legislators who embraced this way of thinking, markets worked best when consumers and investors knew that they had to look out for themselves. As a result, they adopted legal rules that often made it difficult for economic actors to substantiate allegations of illegal deceit.

For more than a century after the American Civil War, however, there was a strong trend to make anti-fraud policies less forgiving of companies that shade the truth in their business dealings. As industrialization and the emergence of complex national markets produced wider information asymmetries, economic deceit became a bigger problem. The private sector responded through new types of businesses (accounting services, credit reporting) and self-regulatory bodies to certify trustworthiness. But from the late nineteenth century into the 1970s, policy-makers periodically enacted anti-fraud regulations that required truthful disclosures from businesses, and that made it easier for investors and consumers to receive relief when they were taken for a ride.

More recently, the conservative turn in American politics since the 1970s led to significant policy reversals. Convinced that markets would police fraudulent businesses by damaging their reputations, elected officials cut back on budgets for anti-fraud enforcement, and rejected the extension of anti-fraud regulations to new financial markets like debt securitization.

Since the Global Financial Crisis of 2007-08, which was triggered in part by widespread duplicity in the mortgage markets, Americans have again seen economic deceit as a worrisome threat to confidence in capitalist institutions. That concern has prompted the adoption of some important anti-fraud policies, like the creation of the Consumer Financial Protection Bureau. But it remains unclear whether we have an entered a new era of greater faith in government to be able to constrain the most harmful forms of business fraud.

Many journalists and pundits have characterized the last several decades as generating epidemics of business fraud. What if anything is distinctive about the incidence of business fraud since the 1970s?

EB: Fraud episodes have occurred in every era of American history. During the nineteenth century, railroad contracting frauds abounded, as did duplicity related to land companies and patent medicine advertising. Deception in the marketing of mining stocks became so common that a prevalent joke defined “mine” as “a hole in the ground with a liar at the top.” From the 1850s through the 1920s, Wall Street was notorious for the ruthless manner in which dodgy operators fleeced unsuspecting investors.

Business frauds hardly disappeared in mid-twentieth-century America. Indeed, bait and switch marketing existed in every urban retailing sector, and especially in poor urban neighborhoods. Within the world of investing, scams continued to target new-fangled industries, such as uranium mines and electronics. As Americans moved to the suburbs, fraudulent pitchmen followed right behind, with duplicitous franchising schemes and shoddy home improvement projects.

The last forty years have also produced a regular stream of major fraud scandals, including the Savings & Loan frauds of the 1980s and early 1990s, contracting frauds in military procurement and healthcare reimbursement during the 1980s and 1990s, corporate accounting scandals in the late 1990s and early 2000s, and frauds associated with the collapse of the mortgage market in 2007-2008.

Unlike in the period from the 1930s through the 1970s, however, business fraud during the more recent four decades have attained a different scale and scope. The costs of the worst episodes have reached into the billions of dollars (an order of magnitude greater than their counterparts in the mid-twentieth century, taking account of inflation and the overall growth in the economy), and have far more frequently involved leading corporations.

Why is business fraud so hard to stamp out through government policy?

EB: One big challenge is presented by the task of defining fraud in legal terms. In ordinary language, people often refer to any rip-off as a “fraud.” But how should the law distinguish between enthusiastic exaggerations, so common among entrepreneurs who just know that their business is offering the best thing ever, and unacceptable lies? Drawing that line has never been easy, especially if one wants to give some leeway to new firms seeking to gain a hearing through initial promotions.

Then there are several enduring obstacles to enforcement of American anti-fraud regulations. Often specific instances of business fraud impose relatively small harms on individuals, even if overall losses may be great. That fact, along with embarrassment at having been duped, has historically led many American victims of fraud to remain “silent suckers.” Proving that misrepresentations were intentional is often difficult; as is explaining the nature of deception to juries in complex cases of financial fraud.

The most effective modes of anti-fraud regulation often have been administrative in character. They either require truthful disclosure of crucial information to consumers and investors, at the right time and incomprehensible language, or they cut off access to the marketplace to fraudulent businesses. Postal fraud orders constitute one example of the latter sort of policy. When the post office determines that a business has engaged in fraudulent practices, it can deny it the use of the mails, a very effective means of policing mail-order firms. Such draconian steps, however, have always raised questions about fairness and often lead to the adoption of procedural safeguards that can blunt their impact.

How does this book help us better understand on contemporary frauds, such as the Madoff pyramid scheme or the Volkswagen emissions scandal?  

EB: One key insight is that so long as economic transactions depend on trust, and so long as there are asymmetries of information between economic counterparties, there will be significant incentives to cheat. Some economists and legal thinkers argue that the best counter to these incentives are reputational counterweights. Established firms, on this view, will not take actions that threaten their goodwill; newer enterprises will focus on earning the trust of creditors, suppliers, and customers. And heavy-handed efforts to police deceptive practices remove the incentive for economic actors to exercise due diligence, while raising barriers to entry, and so limiting the scope for new commercial ideas. This way of thinking shares much in common with the philosophy of caveat emptor that structured most American markets in the nineteenth-century.

But as instances like the Madoff investment frauds and Volkswagen’s reliance on deceptive emissions overrides suggest, reputational considerations have significant limits. Even firms with sterling reputations are susceptible to fraud. This is especially the case when regulatory supports, and wider social norms against commercial dishonesty, are weak.

The title of this book is Fraud: An American History from Barnum to Madoff. What do you see as uniquely American about this history of fraud?  

EB: The basic psychological patterns of economic deception have not changed much in the United States. Indeed, these patterns mirror experimental findings regarding vulnerabilities that appear to be common across societies. Thus I would be skeptical that the tactics of an investment “pump and dump” or marketing “bait and switch” would look very different in 1920s France or the Japan of the early 21st century than in the U.S. at those times.

That said, dimensions of American culture have created welcome ground for fraudulent schemes and schemers. American policy-makers have tended to accord great respect to entrepreneurs, which helps to explain the adoption of a legal baseline of caveat emptor in the nineteenth century, and the partial return to that baseline in the last quarter of the twentieth-century.

The growth of the antifraud state, however, likely narrowed the differences between American policies and those in other industrialized countries. One hope of mine for this book is that it prompts more historical analysis of antifraud regulation elsewhere – in continental Europe, Latin America, Africa, and Asia. We need more detailed histories in other societies before we can draw firmer comparative conclusions.

What do you see as the most important implications of this book for policy-makers charged with furthering consumer or investor protection?

EB: Business fraud is a truly complex regulatory problem. No modern society can hope to eliminate it without adopting such restrictive rules as to strangle economic activity. But if governments rely too heavily on the market forces associated with reputation, business fraud can become sufficiently common and sufficiently costly to threaten public confidence in capitalist institutions. As a result, policy-makers would do well to focus on strategies of fraud containment.

That approach calls for:

• well-designed campaigns of public education for consumers and investors;
• empowering consumers and investors through contractual defaults, like cooling off periods that allow consumers to back out of purchases;
• cultivating social norms that stigmatize businesses that take the deceptive road;
• building regulatory networks to share information across agencies and levels of government, and between government bodies and the large number of antifraud NGOs; and
• a determination to shut down the most unscrupulous firms, not only to curb their activities, but also to persuade everyone that the state is serious about combating fraud.

Edward Balleisen talks about his new book:

Edward J. Balleisen is associate professor of history and public policy and vice provost for Interdisciplinary Studies at Duke University. He is the author of Navigating Failure: Bankruptcy and Commercial Society in Antebellum America and Fraud: An American History from Barnum to Madoff. He lives in Durham, North Carolina.

Coming soon: The Atlas of Ancient Rome

CarandiniThe Atlas of Ancient Rome, edited by Andrea Carandini, is a gorgeous, authoritative archeological survey of Rome from prehistory to the early medieval period. Transport yourself to antiquity with full-color maps, drawings, photos, and 3D reconstructions of the Eternal City, featuring descriptions of the fourteen regions of Rome and the urban history of each in unprecedented detail. Included are profiles and reconstructions of more than 500 major monuments and works of art, such as the Sanctuary of Vesta, the domus Augusti, and the Mausoleum of Augustus. This two-volume, slipcased edition examines the city’s topography and political-administrative divisions, trade and economic production, and social landscape and infrastructure using the most current archaeological findings and the latest mapping technologies. Take a look at a sampling of some of the detailed images from the book here, and be sure to mark your calendar for when this book becomes available in February 2017.

Cipher challenge #1 from Joshua Holden: Merkle’s Puzzles

The Mathematics of Secrets by Joshua Holden takes readers on a tour of the mathematics behind cryptography. Most books about cryptography are organized historically, or around how codes and ciphers have been used in government and military intelligence or bank transactions. Holden instead focuses on how mathematical principles underpin the ways that different codes and ciphers operate. Discussing the majority of ancient and modern ciphers currently known, The Mathematics of Secrets sheds light on both code making and code breaking. Over the next few weeks, we’ll be running a series of cipher challenges from Joshua Holden. Presenting the first, on Merkle’s puzzles. 

For over two thousand years, everyone assumed that before Alice and Bob start sending secret messages, they’d need to get together somewhere where an eavesdropper couldn’t overhear them in order to agree on the secret key they would use. In the fall of 1974, Ralph Merkle was an undergraduate at the University of California, Berkeley, and taking a class in computer security. He began wondering if there was a way around the assumption that everyone had always made. Was it possible for Alice to send Bob a message without having them agree on a key beforehand? Systems that do this are now called public-key cryptography, and they are a key ingredient in Internet commerce. Maybe Alice and Bob could agree on a key through some process that the eavesdropper couldn’t understand, even if she could overhear it.

Merkle’s idea, which is now commonly known as Merkle’s puzzles, was slow to be accepted and went through several revisions. Here is the version that was finally published. Alice starts by creating a large number of encrypted messages (the puzzles) and sends them to Bob.

The beginning of Merkle’s puzzles.

Merkle suggested that the encryption should be chosen so that breaking each puzzle by brute force is “tedious, but quite possible.” For our very small example, we will just use a cipher which shifts each letter in the message by a specified number of letters. Here are ten puzzles:

VGPVY QUGXG PVYGP VAQPG UKZVG GPUGX GPVGG PBTPU XSNHT JZFEB
GJBAV ARSVI RFRIR AGRRA GJRYI RFRIR AGRRA VTDHC BMABD QMPUP
AFSPO JOFUF FOUFO TFWFO UXFOU ZGJWF TFWFO UFFOI RCXJQ EHHZF
JIZJI ZNDSO RZIOT ADAOZ ZINZQ ZIOZZ IWOPL KDWJH SEXRJ IKAVV
YBJSY DSNSJ YJJSY BJSYD KNAJX JAJSK TZWXJ AJSYJ JSFNY UZAKM
QCTCL RFPCC RUCLR WDMSP RCCLD GDRCC LQCTC LRCCL JLXUW HAYDT
ADLUA FMVBY ALUVU LVULZ LCLUZ LCLUA LLUGE AMPWB PSEQG IKDSV
JXHUU VYLUJ XHUUJ UDDYD UIULU DJUUD AUTRC SGBOD ALQUS ERDWN
RDUDM SDDMS VDMSX RDUDM SDDMM HMDSD DMRHW SDDMR DUDMS DDMAW
BEMTD MBEMV BGBPZ MMMQO PBMMV AMDMV NQDMA MDMVB MMVUR YCEZC

Alice explains to Bob that each puzzle consists of three sets of numbers. The first number is an ID number to identify the puzzle. The second set of numbers is a secret key from a more secure cipher which Alice and Bob could actually use to communicate. The last number is the same for all puzzles and is a check so that Bob can make sure he has solved the puzzle correctly. Finally, the puzzles are padded with random letters so that they are all the same length, and each puzzle is encrypted by shifting a different number of letters.

Bob picks one of the puzzles at random and solves it by a brute force search. He then sends Alice the ID number encrypted in the puzzle.

Bob solves the puzzle.

For example, if he picked the puzzle on the fifth line above, he might try shifting the letters:

YBJSY DSNSJ YJJSY BJSYD KNAJX JAJSK TZWXJ AJSYJ JSFNY UZAKM
zcktz etotk zkktz cktze lobky kbktl uaxyk bktzk ktgoz vabln
adlua fupul allua dluaf mpclz lclum vbyzl clual luhpa wbcmo
bemvb gvqvm bmmvb emvbg nqdma mdmvn wczam dmvbm mviqb xcdnp

qtbkq vkfkb qbbkq tbkqv cfsbp bsbkc lropb sbkqb bkxfq mrsce
ruclr wlglc rcclr uclrw dgtcq ctcld mspqc tclrc clygr nstdf
svdms xmhmd sddms vdmsx ehudr dudme ntqrd udmsd dmzhs otueg
twent ynine teent wenty fives evenf ourse vente enait puvfh

Now he knows the ID number is “twenty” and the secret key is 19, 25, 7, 4. He sends Alice “twenty”.

Alice has a list of the decrypted puzzles, sorted by ID number:

ID secret key check
zero nineteen ten seven twentyfive seventeen
one one six twenty fifteen seventeen
two nine five seventeen twelve seventeen
three five three ten nine seventeen
seventeen twenty seventeen nineteen sixteen seventeen
twenty nineteen twentyfive seven four seventeen
twentyfour ten one one seven seventeen

So she can also look up the secret key and find that it is 19, 25, 7, 4. Now Alice and Bob both know a secret key to a secure cipher, and they can start sending encrypted messages. (For examples of ciphers they might use, see Sections 1.6, 4.4, and 4.5 of The Mathematics of Secrets.)

Alice and Bob both have the secret key.

Can Eve the eavesdropper figure out the secret key? Let’s see what she has overheard. She has the encryptions of all of the puzzles, and the check number. She doesn’t know which puzzle Bob picked, but she does know that the ID number was “twenty”. And she doesn’t have Alice’s list of decrypted puzzles. It looks like she has to solve all of the puzzles before she can figure out which one Bob picked and get the secret key. This of course is possible, but will take her a lot longer than the procedure took Alice or Bob.

Eve can’t keep up.

Merkle’s puzzles were always a proof of concept — even Merkle knew that they wouldn’t work in practice. Alice and Bob’s advantage over Eve just isn’t large enough. Nevertheless, they had a direct impact on the development of public-key systems that are still very much in use on the Internet, such as the ones in Chapters 7 and 8 of The Mathematics of Secrets.

Actually, the version of Merkle’s puzzles that I’ve given here has a hole in it. The shift cipher has a weakness that lets Eve use Bob’s ID number to figure out which puzzle he solved without solving them herself. Can you use it to find the secret key which goes with ID number “ten”?

Dalton Conley & Jason Fletcher on how genomics is transforming the social sciences

GenomeSocial sciences have long been leery of genetics, but in the past decade, a small but intrepid group of economists, political scientists, and sociologists have harnessed the genomics revolution to paint a more complete picture of human social life. The Genome Factor shows how genomics is transforming the social sciences—and how social scientists are integrating both nature and nurture into a unified, comprehensive understanding of human behavior at both the individual and society-wide levels. The book raises pertinent questions: Can and should we target policies based on genotype? What evidence demonstrates how genes and environments work together to produce socioeconomic outcomes? Recently, The Genome Factor‘s authors, Dalton Conley and Jason Fletcher, answered some questions about their work.

What inspired you to write The Genome Factor?

JF: Our book discusses how findings and theories in genetics and biological sciences have shaped social science inquiry—the theories, methodologies, and interpretations of findings used in economics, sociology, political science, and related disciplines —both historically and in the newer era of molecular genetics. We have witnessed, and participated in, a period of rapid change and cross-pollination between the social and biological sciences. Our book draws out some of the major implications of this cross-pollination—we particularly focus on how new findings in genetics has overturned ideas and theories in the social sciences. We also use a critical eye to evaluate what social scientists and the broader public should believe about the overwhelming number of new findings produced in genetics.

What insights did you learn in writing the book?

JF: Genetics, the human genome project in particular, has been quite successful and influential in the past two decades, but has also experienced major setbacks and is still reeling from years of disappointments and a paradigm shift. There has been a major re-evaluation and resetting of expectations the clarity and power of genetic effects. Only 15 years ago, a main model was on the so-called OGOD model—one gene, one disease. While there are a few important examples where this model works, it has mostly failed. This failure has had wide implications on how genetic analysis is conducted as well as a rethinking of previous results; many of which are now thought to false findings. Now, much analysis is conducted using data 10s or 100s of thousands of people because the thinking is that most disease is caused by tens, hundreds, or even thousands of genes that each have a tiny effect. This shift has major implications for social science as well. It means genetic effects are diffuse and subtle, which makes it challenging to combine genetic and social science research. Genetics has also shifted from a science of mechanistic understanding to a large scale data mining enterprises. As social scientists, this approach is in opposition to our norms of producing evidence. This is something we will need to struggle through in the future.

How did you select the topics for the book chapters?

JF: We wanted to tackle big topics across multiple disciplines. We discuss some of the recent history of combining genetics and social science, before the molecular revolution when “genetics” were inferred from family relationships rather than measured directly. We then pivot to provide examples of cutting edge research in economics and sociology that has incorporated genetics to push social science inquiry forward. One example is the use of population genetic changes as a determinant of levels of economic development across the world. We also focus our attention to the near future and discuss how policy decisions may be affected by the inclusion of genetic data into social science and policy analysis. Can and should we target policies based on genotype? What evidence do we have that demonstrates how genes and environments work together to produce socioeconomic outcomes?

What impact do you hope The Genome Factor will have?

JF: We hope that readers see the promise as well as the perils of combining genetic and social science analysis. We provide a lot of examples of ongoing work, but also want to show the reader how we think about the larger issues that will remain as genetics progresses. We seek to show the reader how to look through a social science lens when thinking about genetic discoveries. This is a rapidly advancing field, so the particular examples we discuss will be out of date soon, but we want our broader ideas and lens to have longer staying power. As an example, advances in gene editing (CRISPR) have the potential to fundamentally transform genetic analysis. We discuss these gene editing discoveries in the context of some of their likely social impacts.

Dalton Conley is the Henry Putnam University Professor of Sociology at Princeton University. His many books include Parentology: Everything You Wanted to Know about the Science of Raising Children but Were Too Exhausted to Ask. He lives in New York City. Jason Fletcher is Professor of Public Affairs, Sociology, Agricultural and Applied Economics, and Population Health Sciences at the University of Wisconsin–Madison. He lives in Madison. They are the authors of The Genome Factor: What the Social Genomics Revolution Reveals about Ourselves, Our History, and the Future.

Kenneth Rogoff: Australia contemplates moving to a less cash society

RogoffToday in our blog series by Kenneth Rogoff, author of The Curse of Cash, Rogoff discusses Australia’s exploration of a less-cash society. Read other posts in the series here.

Recently, the Australian government stirred up a great deal of controversy by announcing the formation of task force to study the role of cash in the underground or “black” economy. There is no suggestion of an impetuous overnight change a la India, but rather a slow deliberative process. (For a recent review of The Curse of Cash with a special focus on the Indian context, see Businessline). Among other ideas, the task force is going to consider phasing out the Australian $100 bill (and presumably eventually the $50 in due time). It will also contemplate restrictions on the maximum size of cash purchases (as France, Italy, Spain, Greece and other European countries have done), and to wire cash registers to transmit sales information directly to the Treasury, as countries such as Sweden have done. According to the Minister for Revenue and Financial Services, Kelly O’Dwyer, the taskforce will have the full cooperation of the Federal police, immigration authorities, the Reserve Bank of Australia and financial regulators.

Of course, the issues with paper currency and how to mitigate them are the main topic of The Curse of Cash, which also provides historical context, data and institutional detail an an economic analysis of the issues. Australia is in many ways a very typical advanced economy when it comes to cash, with huge amounts of cash outstanding and unaccounted for, and mostly in the form of very large denomination notes. Roughly 93% of the Australian paper currency supply is in the form of $100 and $50 dollar bills (versus, say, 85% for the United States, and just over 90% for bills over 50 euro in the Euro area).

(Updated from The Curse of Cash, which goes through end 2015, when large notes constituted 92% of the money supply; all the data and figures for the book are posted here).

With 328 million $100s in circulation and 643 million $50s, there are roughly 14 $100 dollar bills for every man, woman and child in Australia, and roughly 27 $50s. As elsewhere, only a small fraction of these are accounted for.

Overall, the value of cash in circulation (70 billion Australian dollars) is a little over 4% of GDP, which puts Australia in the mainstream of advanced economies, about on par with the UK and Canada, and similar to the United States if USD held abroad are excluded. (See Figure 3.4 in The Curse of Cash).   

As in the US, cash is widely used for small transactions in Australia, accounting for 70% of transactions under $20 according to an April 2016 report by the Australian National Audit office in April 2016. But as in the United States, the importance of cash drops sharply for larger transactions – and that is even considering money washing back from the black economy into retail transactions. (See Figure 4.2 in The Curse of Cash).

Predictably, the Australian government announcement met with the usual tirades that equate getting rid of the large denomination notes with going cashless. This is polemic nonsense, readers of my book will know; I have also discussed the fundamental distinction in my blogs. Any legal fully tax-compliant transaction that ordinary citizens want to engage in can be executed easily enough with $20 bills (or even $10 bills), up to very large amounts. And smaller bills are also more than sufficient to satisfy ordinary people’s needs for privacy, the loss of big bills is a far greater detriment to those engaged in tax evasion and crime. Another strand of nonsense is that there must be better ways to increase tax compliance, such as lowering tax rates. (We can recall this from James Grant’s broadside rant in the Wall Street Journal.) Of course it would be good to improve the tax system, but tax evasion is always going to be an issue, and so will enforcement. And to the extent the government can collect a larger share of what it is owed from people who now avoid taxes by clever use of cash, then rates can be lowered for everyone else.

It is also nonsense to say that criminals and tax evaders will not feel the bite of a less cash society, and that they will effortlessly turn to other vehicles such as Bitcoin. There are good reasons why cash is king and why international law enforcement authorities find that cash is used somewhere along the line in almost every major criminal enterprise. Other vehicles simply cannot replicate its universality, convenience and liquidity. (Again, all this is discussed at length in the The Curse of Cash).

Not surprisingly, there has been pushback from the Reserve Bank of Australia, which argues that 5% of the cash banked by retailers is in 100s. This, of course, hardly matches up to the 45% of the cash supply that is 100s and more importantly, does not take into account that money from the black economy is routinely spent at retail stores. Many central banks are understandably reticent that a fall in the demand for cash will hurt their “seigniorage profits” from printing cash. The book discusses different conceptual approaches to measuring seigniorage. Perhaps the simplest measure is simply net new currency printed each year as a share of GDP). By this metric the Reserve Bank of Australia earned an average of .25% of GDP annually on average from 2006-2015, a very significant sum of money (see chapter 6.) But, as the book argues, the consolidated government (including the central bank) are likely losing even more through cash-facilitated tax evasion, and that does not even count the costs to the public of cash-facilitated crime.

The Australian authorities have noted that under-reporting of cash income has also distorted the welfare system (The Curse of Cash discusses this issue including evidence on Canada). Indeed, former senior Australian Reserve Bank official Peter Maier has argued that large denomination notes are widely hoarded by pensioners who aim to evade Australia’s mean-tested pension system. There are some tricky issues here having to do with privacy and tax fairness, but all in all, getting rid of big bills mainly hits those engaged in wholesale tax evasion and crime, not the poor. The Curse of Cash suggests low-cost approaches to financial inclusion to ensure that low-income families benefit beyond just reduction in crime.

Australia’s gradual and careful approach to dealing with cash is nothing like India’s radical policy, which aims at the same problems, but has created massive collateral damage. For a discussion of India, see here, here and here. The Australian cash commission’s report is due in October 2017; it is a welcome step. Given that Australia has been a huge innovator in currency (the Reserve Bank of Australia commission the first modern polymer notes that the UK and Canada have now adopted), it is encouraging that Australia is still willing to take the lead in the move to a less cash society.

Kenneth S. Rogoff, the Thomas D. Cabot Professor of Public Policy at Harvard University and former chief economist of the International Monetary Fund, is the coauthor of the New York Times bestseller This Time Is Different: Eight Centuries of Financial Folly (Princeton). He appears frequently in the national media and writes a monthly newspaper column that is syndicated in more than fifty countries. He lives in Cambridge, Massachusetts.

Find Kenneth Rogoff on Twitter: @krogoff