Yesterday, I wrote about a 1926 Atlantic Magazine article written by William Z. Ripley.  This article, Stop, Look, Listen! The Shareholders’ Right to Adequate Information, and others like it contributed to and inspired the FDR Administration’s creation of the SEC in 1934.

At the time he wrote this article, Mr. Ripley was a professor of Economics at Harvard.

Why is this important?

It shows almost a century ago the faculty in Harvard’s Economics Department were aware of the need for transparency in the financial markets if the markets were not going to be rigged.  They were also aware there was active resistance to the provision of this transparency by Wall Street and the issuers of securities.

You could almost say Professor Ripley and the Harvard Economic Department lead the charge for transparency in the 1920s.

Fast forward almost a century and the institutional knowledge of both transparency and the active resistance to transparency has disappeared entirely from Harvard’s Economic Department.  In its place, its PhD Economists have substituted two assumptions.

First, they assume away opacity.  They assume transparency exists throughout the financial markets.  They proved to their own satisfaction transparency exists by testing the strong form of the Efficient Market Hypothesis.  The strong form of the EMH says all information, both insider and publicly disclosed, is reflected in the price.  Of course, these tests were not run on the opaque securities Wall Street creates.

Second, they assume the active resistance to the provision of transparency has ended.  They ignore the inconvenient fact Wall Street makes more per transaction selling opaque, high margin products than transparent, low margin products.

Of course, both assumptions exemplify pure PhD Economist derp.

Should we expect more from Harvard’s Economics Department than a belief in assumptions with no basis in reality?

If these same Economists took a vow of silence and never commented on economic policies, then No.  Why?  Beyond the Economics profession, no one would care about their flawed assumptions because they would have no impact on anyone’s life.

However, if these same Economists want to comment on economic policies, then Yes.  Why?  The aura of Harvard’s reputation boosts the credibility of what these Economists have to say.  When they champion fundamentally flawed economic policies as a result of believing in the assumptions with no basis in reality, this has a negative impact on everyone.

As shown by the willful loss of institutional knowledge about the role of transparency in our financial system, Harvard’s Economic Department is not close to meeting our expectations.

Either their Economists need to shut up or before speaking publicly again they should spend the time to actually learn something about the role Harvard’s Economic Department played in bringing transparency to our financial system and why it did so.

To help these PhD’s along, I will provide the Information Matrix and ask two questions:

• If you are going to design a financial system, where would you want all the transactions to occur?
• Why?

Information Matrix

	Does Seller Know What They Are Selling?
Does Buyer Know What They are Buying?		Yes	No
	Yes	Perfect Information	Antique Dealer Problem
	No	Lemon Problem	Blind Betting

Clearly, in the 1920s, led by Professor Ripley, Harvard’s Economic Department would have answered the Perfect Information quadrant as it is only here markets are not rigged.

In 2018, it is entirely unclear what Harvard’s Economic Department would answer.  I can tell you based on the speeches they have given and the articles and books they have written, it appears they are highly likely to answer the Blind Betting quadrant.

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Update:

Several individuals have asked me if the answer the Blind Betting quadrant is limited to Harvard’s Economic Department.  No.

Academic Economists around the global would also choose the Blind Betting quadrant.  Lead by the Yale School of Management’s Gary Gorton there are a number of Economic departments and even a Nobel prize winning Economist that have written about the “benefits” of opaque securities (see: informationally insensitive debt).

It is remarkable to me the number of articles published in Economist peer reviewed journals arguing there are benefits from opacity.  These articles should have been easy desk rejects by the editors.  Even if the editors failed, the reviewers should have rejected these articles as fundamentally flawed.

Why?

Because all of Economics is built on the foundation of perfect information (what do they think underlies the micro-foundations of macro-economics).  Any Economist who accepts there are “benefits” from opacity is effectively making the following statement: blind betting produces the same positive outcomes we expect from informed decision making.  If this is true, the Economics profession has real problems.

Unfortunately, the choice of the Blind Betting quadrant isn’t limited to just academic Economists.  It would also be the choice of Economists at central banks as well as many big name think tanks.

The Economics profession’s loss of knowledge about transparency and its role in the global financial markets is breathtaking in its scope.  Particularly when one realizes the redesign of the global financial system based on transparency is one of the Economic profession’s greatest positive contributions.