Kartik Athreya: Leave It to the “Experts”? Seriously??

Kartik Athreya’s article deriding the unwashed, mouth-breathing public for presumptuously daring to have an opinion about his area of expertise is making the rounds, predictably being slammed by those of us with the audacity to hold an opinion about some subject in which we lack a PhD. I list reasons why professional “expert” economists are useless or even dangerous, and why Athreya’s real problem is American culture.

  1. Economists’ general failure to have made many useful predictions in the past, as a profession. How many trained, qualified PhD economists warned us about the onset of the Great Recession in 2006? Right. About as many as predicted the Great Depression or the Panic of 1873 or the end of the gold standard or the ’70s oil shocks or the ’87 stock market crash or …

    I own Business Fluctuations, a 1952 textbook by UC Berkeley economics professor Robert Aaron Gordon, which has a quaint section entitled “IS THE BUSINESS CYCLE OBSOLETE?”

    How about bona fide, credentialed economist Irving Fisher‘s famous 1929 pronouncement that “Stock prices have reached what looks like a permanently high plateau”?

    It’s not just that one or a few fringe economists occasionally make wacky analyses of the economy that turn out to be totally false; the profession as a whole does it, and has been doing it repeatedly for as long as anyone can remember. These guys were not fringe nutjobs. These views were reasonably mainstream at the time they expressed them.

    Theories that do not make falsifiable, testable predictions are pseudoscience. A theory cannot explain every possible outcome, else there is no way to test it and it is not falsifiable.

    Embracing their theories as expert advice even after their repeated failure to demonstrate any accurate predictive ability is worse than useless. It’s dangerous. Remember that Alan Greenspan guy? What was his profession, again?

  2. The vast incidence of massively contradictory economic paradigms held by various “experts”. Keynes versus Friedman springs to mind at once, and let’s not even touch Marx or Soros. Efficient market hypothesis, anyone? Ask 10 economists today merely whether and why we will see deflation or inflation in the US, and you will get 10 contradictory, mutually exclusive answers.

    To extend Athreya’s cancer analogy, it’s as if one oncologist expert says cancer is caused by genes and requires gene therapy; another says it’s caused by fluoride in the water and needs wholesale tooth extraction; a third says it’s caused by ragweed pollen and just requires an antihistamine; a fourth says the patient’s bodily humours are merely imbalanced, but bloodletting with leeches is a sure cure in his vast and storied professional experience; and yet another says that cancer is caused by Mars having passed too close to Sagittarius on the patient’s birthday, so nothing can be done except perhaps a sacrifice to the gods. And still none of them can predict with any accuracy at all who will get cancer, much less tell you how to cure it with better-than-chance accuracy.

    Little respect would naturally develop for such a profession, and members of the public would feel well qualified to add their own opinions and contributions, since they couldn’t possibly do much worse than the self-designated “professionals”. And indeed, that was exactly how medicine worked in premodern times, until doctors began to put forth testable predictions that actually accurately predicted future conditions and developed rigorous, repeatable experiments to test them. Economics has not yet achieved any measure of remotely reliable prediction. Economics is today a protoscience at best.

    Athreya himself says, “For my part, seventeen years after my first PhD coursework, I still feel ill at ease with my grasp of many issues, and I am fairly confident that this is not just a question of limited intellect.” (This false humility is ostentatious and self-serving; it was written to say, “hey, this is so hard that even us experts don’t know what’s going on, so you amateurs should just all be quiet.”)

    Some amateurs, like Soros, have consistently done far, far better than the pros. The field is simply extremely immature and not capable of providing very good answers to anyone. “Experts” are not special in that regard. They’re barely more aware of what’s going on than anyone else, and often they develop emotional attachment to theories that they have invested professional capital in, resulting in tunnel vision. When they can consistently predict significant economic events before they happen, and consistently do so better than amateurs, then they can begin to merit the respect accorded to oncologists.

    As Nicholas Taleb says:

    The environment in financial economics is reminiscent of medieval medicine, which refused to incorporate the observations and experiences of the ple­beian barbers and surgeons. Medicine used to kill more patients than it saved – just as financial economics endangers the system by creating, not reducing, risk. But how did financial economics take on the appearance of a science? Not by experiments (perhaps the only true scientist who got the prize was Daniel Kahneman, who happens to be a psychologist, not an economist). It did so by drowning us in mathematics with abstract “theorems”. Prof Merton’s book Continuous Time Finance contains 339 mentions of the word “theorem” (or equivalent). An average physics book of the same length has 25 such mentions. Yet while economic models, it has been shown, work hardly better than random guesses or the intuition of cab drivers, physics can predict a wide range of phenomena with a tenth decimal precision.

  3. Economic policy requires concerted action by all, and its results have vast consequences for everyone. A choice of several potential cancer treatments is between the patient and his doctor. If oncologists disagree about which treatment is best, concluding a decision as to which to go with requires convincing at most a small handful of people: the patient and his family and close friends. The consequences of that choice will also rarely radiate much farther than that.

    Economic policy, on the other hand, requires the concerted efforts of substantially all of the population, via government agencies and their use (or lack thereof) of tax money (at least in a democracy.) Ordinary people don’t know or care about the abstruse details; they just want to know how it will affect them. Enter politicians and big businesses, who, needless to say, do not always have pure motives. Public opinion can be manipulated easily.

    Given that the choice of which policies to implement is a political choice that ultimately rests with the entire population; given that self-interested politicians, investment banks, and other capital institutions are actively seeking to manipulate that opinion for their own benefit; and given the gravity of policy choice ramifications for each and every member of society, Athreya’s position of “just leave it all to us experts and don’t insult us by trying to think about it” begins to seem positively Orwellian in tone.

  4. Perverse incentives reward bland economic thinking by the professionals; the “cover your ass” syndrome.

    Working professional economists are not rewarded for making accurate predictions about the future of the economy; they are rewarded for making safe predictions about it. (Safe for them, not for the economy.) You can see this in action every time new economic indicators come out. Bloomberg and the other financial news media run stories with “consensus estimates” which do not usually deviate very much from each other. When there’s a surprise figure, there is rarely a pro willing to go on record and call it in advance.

    Why? They have large career incentives to be safely mainstream and risk averse. The reward for correctly predicting an outlier economic data point is relatively small; maybe the financial press will perfunctorily laud you for half a day at most. The penalty for making an on-the-record inaccurate prediction of an outlier event is large in professional terms; other economists will suspect that you’re ignorant of the field’s basics. On the other hand, there is no penalty for making a safe prediction that is in line with the mainstream view. If the mainstream theory is right, all the better; naturally, everyone’s predictions will converge. If the mainstream theory is wrong and an outlier event occurs, no harm done; everyone else was wrong, too. How could anyone have known better?

    The same general process plays out in academia. A graduate student will not get a PhD, and a new professor will not get tenure, for making earth-shattering predictions or proposing radical new theories. She gets the PhD and tenure for making very minor improvements to some existing body of theory, fleshing out a few small details here and there, and flattering the preconceptions of a committee who have all invested decades of their lives into some particular paradigm of economics.

  5. Cultural factors related to perceptions of formal credentials. Many cultures in the world adore fancy titles and formal credentials. America is not one of them.

    “All men are created equal,” reads our founding document, the Declaration of Independence. It was written by upstart bourgeois traders and lawyers who were, in part, greatly annoyed that their potential for social advancement was limited in British society due to lack of aristocratic birth and an Oxford diploma. They came to America to live somewhere where that did not matter much.

    We are hardline egalitarians, proudly derisive of highfalutin institutional authority at every turn. The “experts” are a self-selected bunch who can often contribute something useful. Insofar as they can occasionally do so, great, we’ll keep them around. Just as often, they seek merely to guard their own status as elite members of an exclusive club, to defend their turf from outsiders. Not infrequently, they devolve into groupthink and dogmatism, eventually stifling progress if left unchecked. Mainstream society does not really care, because it pays little to no attention to them — though they are very often totally unaware of this and consider themselves important figures in society.

    I think this anti-authoritarian attitude is in no small part exactly what has driven American successes in so many fields of endeavor over the centuries. Sure, there’s nothing wrong with having a PhD here, and you can gain wonderful amounts of knowledge by doing so, which is great. But as far as anyone outside the narrow specialized field is concerned, that doctor’s theories are judged on their own merits, not on reputation or fancy titles. Moreover, we in no way whatsoever feel the need to refrain from commenting on a matter simply because we are not “experts.” (This does not mean that the laymen are necessarily or even often right, of course, which is another matter.) We certainly don’t refrain from criticizing some “experts” just because they are highly placed at a respected institution and bear its seal of approval.

    This is very much not the case in, say, Germany or China. Institutions there exist to imbue people with the right to have an opinion, and only after arduous study and prolonged ritualized vetting by the pre-existing high priests of the field. Everyone else simply shuts up and listen to them, because they know that they are not qualified to have an opinion on a complex matter without a PhD in hand.

    Immigrants to America, and sometimes their children, naturally carry a cultural legacy from their home country with them. Those who bear fancy degrees and come from countries with high regard for institutionalized authority often have a hard time adapting to the fact that Americans just don’t care about fancy degrees and titles very much. They feel stilted and insulted. Often they don’t even notice the cultural correlation, or if they do they dismissively condemn it as merely an attitude for the ignorant and the stupid, those who are simply too unenlightened to realize the vast power of institutional blessing for one’s opinions.

    I think this is the ultimate source of Athreya’s frustration. He’s annoyed that Americans are not exhibiting the proper deference to his institutionally sanctioned writ of authority to hold opinions about economics. His borderline-abusive derision of economics bloggers certainly supports this theory. How dare a “naif” layman hold a view that contradicts his, the great doctor, when he has spent so many years studying, and read so many books! He even goes to the trouble to be affectedly humble, disclaiming having a firm grasp of the subject himself so as to demonstrate just how tough it really is.

    I am unaware of his exact cultural provenance, but “Kartik” is the name of a month in Bengali. Indian subcontinent cultures exhibit an extreme case of this appeal-to-authority automatic reverence for institutional knowledge approval. He is trying to impose Bengali cultural norms (or wherever he’s actually from) upon Americans, a curious case of “reverse cultural imperialism”. Perhaps he grew up here, considers himself an American, and doesn’t even realize this cultural dimension himself.

None of this should be construed as a rejection of the formal academic process. Having a PhD is fine, and many PhDs do useful work. There are even many knowledgeable, useful professional PhD-bearing economists! The problem comes when the PhD is not taken as a marker of knowledge but rather as a cudgel with which to bludgeon those lesser beings who somehow have the audacity to fail to obey the expert’s opinion. This becomes a farce when done in a field like economics where there is no certain knowledge at all, a long track record of totally failing to predict major and devastating events clearly declared to be within the field’s purview, and indeed relatively few predictions that can be construed as “scientific” in any sense.

7 Responses to Kartik Athreya: Leave It to the “Experts”? Seriously??

  1. First, your response to Mr. Athreya’s article is well said.

    Second, Economics is bunk, or at least Mr. Athrea’s approach to it is bunk.

    From long before he was an economist at Citi I was there, having founded in 1987 a business investing in the capital assets of cyclical industries that grew to $7BN in assests with $2.5BN of Citi proprietary equity, which never had a year with less than a 35% ROE (at Citi’s leverage) and lost less than $1MM over nearly 20 years. How was this possible? It wasn’t because I had a Phd in Economics from Harvard (I was trained as an engineer at Purdue). It happened because all that matters in economics is simple supply and demand. If there is too much of something, the price goes down, and vice versa. Full stop.

    I have no problem with people who want to be Phd’s. I do have a problem paying their paychecks from the public purse to theorize about things they have no practical experience in and, worse, their attempt to make policy that will “manage” an economic process to some “greater good” (eliminate the business cycle, redistribution of wealth, whatever). We will lay to the side for now the issue of intellectual arrogance and the blindness to reality that it breeds, although Mr. Althreya would do well to bring his lofty self esteem back into the breathable atmosphere (his weak attempt at self deprecation was unconvincing).

    As for economic policy, there are only seven rules to follow.

    1. Have the money supply grow in concert with economic growth
    2. Don’t subsidize products or industries
    3. Don’t tax captial
    4. Enforce laws against fraud and monopoly
    5. Don’t allow deposit-taking institutions to speculate
    6. Don’t force banks to lend to people who cannot pay back the money or provide risk guarantees to create an incentive for them to do so
    7. Maintain a balanced budget.

    If we do the above things consistently over a long (10 year) period, the volatility of the economy will stabilize. It will be boring, and the traders will have to find a new job with pedestrian bonuses (including Mr. Soros), so will the economists for that matter, but this will create a stable and sustainable economy.

  2. Further to my last post:

    “In 1980, I had the privilege of advising Prime Minister Margaret Thatcher to ignore the demands of 360 British economists who made the outrageous claim that Britain would never (yes, never) recover from her decision to reduce government spending during a severe recession. They wanted more spending. She responded with a speech promising to stay with her tight budget. She kept a sustained focus on long-term problems. Expectations about the economy’s future improved, and the recovery soon began.” a quote from Mr. Allan Meltzer, professor of economics at Carnegie Mellon University, a visiting scholar at the American Enterprise Institute, and the author of “A History of the Federal Reserve” (University of Chicago Press, 2003 and 2010).

  3. The point of science is not that certain experts tell us what is true. It is that certain truths can be shown scientifically to be true. If the findings of some physicists are shown to be wrong in a scientific manner it doesn’t matter if the person doing it is an engineer, a layman, or a PhD.

    Harry Toll’s rules are interesting because they’re better than what we have but there is also some debate on some of them.

    1. Have the money supply grow in concert with economic growth
    2. Don’t subsidize products or industries
    3. Don’t tax capital
    4. Enforce laws against fraud and monopoly
    5. Don’t allow deposit-taking institutions to speculate
    6. Don’t force banks to lend to people who cannot pay back the money or provide risk guarantees to create an incentive for them to do so
    7. Maintain a balanced budget.

    According to the Austrian School – Mises.org – 1. is wrong increases in the money supply aren’t helpful. They’re something the market has to adjust to. In fact the boom bust cycle is the market adjusting to increases in the money supply.
    4. is correct if we accept that only the state or government can make something a monopoly.
    5. One man’s speculation is another’s investment. The Austrian School holds that fractional reserve banking by creating money or credit out of thin air is what creates boom busts.

  4. “Indian subcontinent cultures exhibit an extreme case of this appeal-to-authority automatic reverence for institutional knowledge approval.”

    How many years did you stay there? How do you support this? When you have audacity, use it wise.

    Even if you are able to cite some instances in sub-continent, so is possible in U.S.

    Sorry. I know I could have worded it better.

  5. Thanks for all the comments, guys. I would like to add a few replies –

    @Guru – Thanks to the magic of the Internet, and before that the printing press, it is possible to acquire knowledge of distant lands without actually physically going there oneself, and without spending years doing the research directly. Now, we can learn from others’ years of research without duplicating it.

    Of course there are some instances of severe power deference in the United States or anywhere else, but I am not talking about isolated examples and anecdotes. I’m talking about systemic cultural patterns, which have been well studied and well documented.

    Sociological research on Indian subcontinent cultural attitudes towards power and institutions is abundant and well known. Google, for example, “Geert Hofstede,” “Indian subcontinent power distance” and related themes. For a general and more informal discussion of the phenomenon, try Malcom Gladwell’s book “Outliers”.

    @Harry Toll – Interesting points, but I must say that I strongly disagree with the libertarian/Ayn Rand “let the economy run wild and everything will be fine” plan. Economic activity exists for the benefit of human society, not the other way around.

    It’s true that the economy will expand itself in the absence of regulation, but that is not necessarily a good thing. It does so precisely because it is an entirely amoral system that has no constraints whatsoever beyond self-expansion. Human misery is irrelevant to its expansion. So, the economy must be strictly regulated, or else it is nothing more than a cancer upon us.

    This is not to say that any and all regulations are good – most are quite bad. (I live in California, so I have seen plenty of examples of asinine regulations firsthand.) But unbridled private enterprise, with the government relegated to nothing more than policing fraud and contract disputes, is also quite bad. Such a society aggregates wealth in the hands of a small and always-shrinking elite.

    And let’s not forget that many, perhaps even most, regulations are created not to benefit society or to regulate the economy in some sane sense for the benefit of society, but by those already established in a line of business (i.e. rich people with capital) so as to create barriers to entry. Regulations must be carefully and thoughtfully structured so as to benefit the society, rather than to benefit some cartel or oligarchy (as with alcohol production and distribution regulations in the US, for example) or some entrenched bureaucratic class (as in Latin America and the Mediterranean, for example.) I’m sure you’d agree that these kinds of regulation are to be avoided. But that doesn’t imply that all regulation or government interference in the economy of whatever kind is necessarily bad.

    On a somewhat related note, governments should absolutely be investing in capital-intensive projects that provide great social benefit but for which there is insufficient profit motive or excessive risk for private investors, even if their capital is pooled.

    For example, microchips and the Internet have had massive and undipsuted benefits for humanity, but the risks involved in researching the technologies required to make them, and the extremely long R&D cycle that led up to them, were not feasible for private investors. There were much better and less risky opportunities available in traditional sectors, so why would any private investor pay for the decades basic scientific research to make, say, a transistor? So, the government stepped in, in the form of Cold War era research grants funnelled through the military and DARPA. An entire new and hugely profitable industry emerged and was spun off into the private sector.

    Going farther back, European colonization was a similar case. Setting aside debate on its morality so as to look at the economics of the situation, it was of unquestionable economic benefit to the colonizers, and it required such a massive amount of capital at first that no private subscription was capable of funding it. So, the governments paid for it initially, and eventually spun off private concerns. The spice trade with Asia worked much the same way.

    Today, I would point to nuclear fusion as a sector where the R&D cycle is much too expensive, long, and risky to be able to attract private capital, but where government subsidy could revolutionize the entire energy infrastructure, not to mention spawning a huge new profitable industry that would then be spun off into the private sector.

    A parallel case can be made for infrastructure such as highways, roads, and yes, even education. These things provide tremendous benefit to society — economic and otherwise — but are not profitable enough to be run privately. Moreover, some things such as education are almost by definition loss leaders that cannot be profitable if done right. Who would seriously advocate ending free public education and going back to the days when schools were only open to those capable of paying tuition, and so only priests and the rich knew how to read? Can anyone claim with a straight face that that situation would be better for the overall economy?

    Cheers,
    Paul

  6. Hi Paul. Thanks for the very interesting reply to several comments. While I am honored to be viewed as having an Ayn Rand approach, I am not quite as absolute in my thinking as my writing may have suggested. My 7 points are designed to create a stable environment for the economy to adjust to.

    The current economic circumstances have a corrolary in the test pilot’s world. Certain types of aircraft instability can be amplified by the pilot due to the nature and timing of aircraft responses to pilot inputs, and the pilots subsequent change in inputs. This is sometimes referred to as PIO or pilot induced oscillation. It is my view that a similar thing is currently happening economically. There are so many mis-matched policy/monetary/fiscal/ regulatory inputs to the system that further actions can result in completely unexpected results. In addition, very large amounts of investment capital have been mobilized to benefit from this increasing volatility, so much so that there is now a purposeful amplification of volatility. The solution is to reduce the uncertainty and complexity of the system, based on long term functional principals.

    I am a former MD at Citi, and have a very clear understanding of the need for logical regulation. That is why I am a fervent advocate of returning to Glass-Steagall (not very Ayn Randian of me!). I was there when all the post-depression Banking/Investment banking/insurance firewalls came tumbling down. The result was the placing of shareholder and depositor capital in the hands of speculators that had “heads I win, tails you lose” comp agreements. This, in conjunction with Barney Frank’s willingness to “take a little risk” in government subsidization of housing risk has created a true catastrophy.

    To your point on nuclear fusion, it is true of all nuclear-related issues that the government controls everything, and we can see how quickly that technology has evolved (I was trained as an engineer with a nuclear background).

    By the way, your last comment about infrastructure being not profitable enough to be run privately. I am a Managing Partner of a Private Equity fund that invests in large capital assets. I can tell you that they can be profitable, and cost much less when a private investor creates them than when a government does. As for education, if you test students coming out of public education, what percentage know anything really useful? How ever we pay for it (public or private) the system is horribly broken and we need to fix it now.