Professor John Harvey uses this quote from John Maynard Keynes in a must read post.  It captures the essence of Nobel prize winning Economist Paul Romer’s critique of the current state of the macroeconomics profession.  In his critique, Professor Romer finds the focus on mathematically solvable macroeconomic models leads to making increasingly unrealistic assumptions.  It also leads to a form of groupthink.

Professor Romer unfavorably compares his macroeconomics profession with string-theorist in physics.  Both have seven distinctive characteristics.

1. Tremendous self-confidence
2. An unusually monolithic community
3. A sense of identification with the group akin to identification with a religious faith or political platform
4. A strong sense of the boundary between the group and other experts
5. A disregard for and disinterest in ideas, opinions, and work of experts who are not part of the group
6. A tendency to interpret evidence optimistically, to believe exaggerated or incomplete statements of results, and to disregard the possibility that the theory might be wrong
7. A lack of appreciation for the extent to which a research program ought to involve risk

I want to focus on the 4th and 5th characteristics.  Together, they explain why macroeconomists ignore any idea not originated by their Priesthood of the PhDs.

Consider for a moment the Information Matrix.  Developed by an expert in financial transparency, it rewrites Information Economics.  In doing so, it also rewrites most of economics and all of finance.

Wait a second.  How could an expert who doesn’t have a PhD in Economics have done this?

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

Information Matrix

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 someone who isn’t a PhD macroeconomist?

While they have politely listened to the expert since the acute phase of the Great Financial Crisis hit in September 2008, they have completely ignored what they were told.

This is very unfortunate.

By ignoring an expert, they made life worse for the vast majority of people by continuing to champion the wrong policy responses to the financial crisis.  [If you doubt this happened, just look at the rise of inequality and populism that resulted from these policy responses.]