Nobel prize winning Economist Paul Krugman once again trotted out his “serious economics” meme.  This time in reference to an American Economics Association forum discussion on whether low interest rates are leading to excessive risk taking (they are, but that should not come as a surprise as the stated purpose when zero interest rate policies were adopted a decade ago was to drive investors to take more risk).  What caught my attention wasn’t the discussion, but rather the whole elitist notion only PhD Economists can engage in a serious economic debate.

This notion is fundamentally flawed.

Professor Krugman is saying only PhD Economists are capable of engaging in a serious economics discussion.  As for non-PhDs, they are reduced to deplorables whose comments are not worthy of consideration by the Priesthood of the PhDs.

This notion PhD Economists have a monopoly on serious economic ideas will be reinforced in the next couple of months with the announcement of who won the Economics’ version of the Nobel Prize.  The odds heavily favor it will be a PhD Economist.

Of course this is ironic since a deplorable rewrote the foundation on which the vast majority of micro and macro economics and all of finance is based.

Wait a second.  How could a deplorable have done this?

The deplorable understood just how much of Economics and all of finance relies on an assumption about the information available to both a buyer and seller.  Specifically, that at least one party in a transaction has information.

Unfortunately, this assumption doesn’t hold true in the world of finance.  There are plenty of opaque securities Wall Street sells based on a story.  These securities don’t just sell in the primary market (where a case might be made for information asymmetry favoring Wall Street), but they are also resold in a secondary market where the necessary information to assess their risk doesn’t exist.

Once the deplorable recognized this assumption didn’t hold, the deplorable rewrote the foundation of Economics and Finance with the introduction of the Information Matrix.

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

Not surprisingly, the new foundation for Economics and Finance solves many of the problems faced by the Priesthood of the PhDs.  It explains where financial crises come from.  It explains how to respond to financial crises.  It explains how to prevent financial crises and why our financial system is designed the way it is (hint: it is based on transparency in order to prevent financial crises).  It seamlessly integrates standard economics and behavioral economics.

I could continue with the list, but by now you get the point the Information Matrix has a substantial, if not revolutionary, impact.

But what about the Priesthood of the PhDs who don’t consider anything done by a deplorable as “serious economics”?

There is absolutely no reason to think they will ever embrace the Information Matrix.  It would be admitting they don’t have a monopoly on serious economic ideas.

On the other hand, I do expect one of them will plagiarize* it.  Which isn’t necessarily all bad since then we can start having the right conversation.

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* Members of the Priesthood of the PhDs are required to do a search to see if the “idea” has appeared anywhere in the peer reviewed literature.  They aren’t required to do a Google search and see if the “idea” appears in blog posts, speeches or books written by a deplorable.

Of course, members of the Priesthood of the PhDs might not plagiarize the Information Matrix because of the difficulty in getting an article featuring it published in a Top 5 Economics journal.  As several Economists have pointed out to me, these journals have no interest in information economics today.  That is ok, they also didn’t have any interest decades ago when Akerloff published his famous Lemon Problem paper featuring information asymmetry.

Why would not being able to publish in a Top 5 journal be a barrier?

This paper examines the relationship between placement of publications in Top Five (T5) journals and receipt of tenure in academic economics departments. Analyzing the job histories of tenure-track economists hired by the top 35 U.S. economics departments, we find that T5 publications have a powerful influence on tenure decisions and rates of transition to tenure. A survey of the perceptions of young economists supports the formal statistical analysis. Pursuit of T5 publications has become the obsession of the next generation of economists. However, the T5 screen is far from reliable. A substantial share of influential publications appear in non-T5 outlets. Reliance on the T5 to screen talent incentivizes careerism over creativity.

Shorter, better to write a paper based on flawed assumptions that can be published in a Top 5 Journal than to write a paper substantially improving Economics and Finance.