There is nothing as tightly sealed shut as an academic macroeconomist’s mind.  Unless of course, it is the minds of the rest of the PhD macroeconomists in government and industry.  This Priesthood of the close-minded PhDs is a significant problem that continues to undermine the real economy and society.

Economics professor Steve Keen explained why the Priesthood is a problem, particularly for non-economists like myself who literally rewrote the foundation of economics with the introduction of the Information Matrix:

But the mainstream rejects our analysis out of hand, because their model tells them that it’s OK to do so.

This wouldn’t matter if we could ignore the mainstream of the economics profession, but we can’t, because they are the key individuals who influence the economic policies that are actually put in place by politicians. Keynes understood this very well in his day, noting that “the world is ruled by little else”:

“The ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.” (Keynes, General Theory 1936)

The key observation here about the Economics profession is it “wouldn’t matter if we could ignore the mainstream of the economics profession, but we can’t, because they are the key individuals who influence the economic policies that are actually put in place by politicians.”

PhD Economists matter because they directly influence monetary policy at the central banks and indirectly influence fiscal policy.

Which gets us to the heart of the problem.

If their models are wrong, other than luck, the policies the Priesthood supports and implements are also wrong!  Or as Professor Keen put it:

If the mainstream is wrong on this point—and they are very wrong—then there’s no chance of politicians doing what is needed to overcome “The Great Malaise” (especially if the best remedy also challenges vested interests, which it surely does).

This observation is very, very important and needs to be expanded on.

It isn’t a question of “if the mainstream is wrong”.  The Great Financial Crisis and the decade of subsequent policy responses afterwards showed it was wrong!

The Economics profession failed to see the financial crisis coming (it actually marginalize the handful of Economists who warned about it).  Why?  Because its models of the economy excluded the financial system and its models of financial panics ignored what causes financial panics.

The Economics profession then doubled down on its failure to see the financial crisis coming by championing flawed policies [preservation of the banks and the 1% with the subsequent rise of both inequality and populism is a pretty good indicator the policies were flawed].

Championing flawed policies isn’t surprising.  It is really hard to choose the right policy response to an earthquake along the opacity fault line in the global financial system when your models assume transparency and exclude the financial system.

Of course, the flawed policies the Economics profession championed were supported by the vested interests who had the most to lose from actually pursuing the best remedy.  Regular readers know the best remedy was to restore transparency across the global financial system and use banks as they are designed to absorb losses.  This protects borrowers and the real economy.  Not doing so is what undermined the social contract and gave rise to populism.

Of course, bankers did not like this best remedy.  As a well connected vested interest, they supported the policies promoted by the Committee to Save the Banks.  These policies protecting the bankers were endorsed and implemented by the Economics profession.

Wait a minute.  You cannot blame the Economics profession for the decision to bailout the bankers.  Furthermore, the Economics profession admits its models were flawed at the time the decision was made.

True, but that didn’t stop the Economics profession from taking the time to fix their flawed models before championing these flawed policies.  Not only did the Economic profession rush to champion these flawed policies, it then spent the next decade going around the globe defending these flawed policies.

Wait a minute.  The Economics profession claims it has now fixed its models.  For example, it added a financial system.  Hmmm….  It is remarkable that after having not studied the financial system or how it is designed in the run-up to the financial crisis the Economics profession almost instantly understood how to accurately add the missing financial system to their models.  Not only that, but their models could now predict financial crises and determine the best policy responses.

Common sense tells you this isn’t true.  Confirmation of this is easy to find.  Their models consistently predicted a faster recovery than occurred. [For the record, their models are doing a better job forecasting the economy now.  However, that isn’t necessarily a function of better model design. It could be driven by their models’ use of statistics and the fact there is a decade worth of post crisis data.]

So how to persuade the mainstream that, despite their Nobel Prizes, they might just be wrong?

My solution was to come up with a simple explanation.  I use a physical model consisting of two securities.  One security is a clear plastic bag representing transparency.  The other security is a paper bag representing opacity.  Each security describes the buyer’s or seller’s access to the information they need in order to value what is inside the bag.  With these two securities, I can create the Information Matrix.

Information Matrix

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

The Information Matrix explains a lot.  It explains the design of the global financial system.  It explains where financial crises come from.  It explains how to prevent financial crises and their related panic and bank runs.  It explains how to end financial crises.

It also bridges behavioral economics and standard economics.  People like a good story.  This is true whether the investment Wall Street is telling them the story about is in the Perfect Information quadrant or in the Blind Betting quadrant.

The key difference between investments in the two quadrants is in the Perfect Information quadrant investors can Trust, but Verify Wall Street’s story.  In the Blind Betting quadrant, opacity (the absence of the necessary information) prevents investors from being able to verify Wall Street’s story.

Whether the story can be verified or not results in a vastly different response when Wall Street’s story is called into doubt.

In the Perfect Information quadrant, the story can be verified and the doubt generated dismissed.

In the Blind Betting quadrant, the story cannot be verified.  Not only is the doubt not dismissed, but the logical follow-up question arises:  is the investment worth anything?  This too cannot be verified.  Investors recognize this and, as behavioral economics suggests, naturally panic.  The result is a classic bank “run” to get their money back.

So has the Economics profession embraced the Information Matrix?

Of course not!

The Priesthood is immune to outsiders correcting their flawed models “because their models tell them it’s OK to do so.”  The only individuals who can correct the Priesthood’s flawed models are card carrying members of the Priesthood.

So long as they don’t stray from their models, members of the Priesthood live in the consequence free zone.  Supporting the wrong policies has no negative personal consequences.  They don’t lose their jobs.  They still get invited to conferences.  They still get to publish in academic journals no matter how fundamentally flawed their research is.  They still get to write books their fellow PhDs positively review in all the major business publications.  Heck, being wrong isn’t even a barrier to winning the Priesthood’s version of the Nobel prize.

Of course, by not listening to outsiders this limits the ability of the Priesthood to ever correct the real flaws in their models.

Or as Professor Keen says:

But in economics, the profession has sailed on, blithely unaware of how their model … is seriously wrong, and now blinds them to the remedy for the crisis as it previously blinded them to the possibility of a crisis occurring.