Since the Great Financial Crisis began on August 9, 2007, I have talked with lots and lots of Economic PhDs.  Several of them have even won the Economic profession’s version of the Nobel prize.  They worked or are working for central banks, international governmental bodies, financial regulators, think tanks and name brand academic institutions.  None of them disputes the Information Matrix or the conclusions to be drawn from it.

Yet, none of these PhD Economists has embraced the Information Matrix.

Why?

Paul Krugman offers up the most likely answer.  In a 1996 speech he gave, Professor Krugman noted:

I won’t say that I am entirely happy with the state of economics. But let us be honest: I have done very well within the world of conventional economics. I have pushed the envelope, but not broken it, and have received very widespread acceptance for my ideas.

Please focus on how he pushed, but did not break the envelope.  The Information Matrix breaks the envelope.

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

By introducing the Blind Betting quadrant, the Information Matrix integrates behavioral and classic economics.  It forces members of the economics profession to answer the question of what assumption about information are they making in their models.

When that question is asked, one quickly finds all the finance models and most of the macro economic models assume perfect information.  No surprise as there is no reason to think blindly betting yields the same outcome as informed decision making.

The Information Matrix shows opacity is the ultimate market imperfection.  A market imperfection that isn’t talked about in Econ 101.

In a recent New York Times op-ed, Professor Krugman explained what happens when an idea breaks the envelope.

What does it take to build a successful career as a mainstream economist?

The truth is that it’s not at all easy. Parroting orthodox views definitely won’t do it; you have to be technically proficient, and to have a really good career you must be seen as making important new contributions — innovative ways to think about economic issues and/or innovative ways to bring data to bear on those issues. And the truth is that not many people can pull this off: it requires a combination of deep knowledge of previous research and the ability to think differently. You have to both understand the box and be able to think outside it.

… There’s far too much dominance by an old-boy network of economists with PhDs from a handful of elite institutions. (And yes, I’ve been a beneficiary of these sins.) Many good ideas have been effectively blocked by ideology — even now, for example, it’s hard to publish anything with a Keynesian flavor in top journals. And there’s still an overvaluation of mathematical razzle-dazzle relative to real insight.

But even for people who can check off all the right identity boxes, climbing the ladder of success in mainstream economics is tough. And here’s the thing: for those who can’t or won’t make that climb, there are other ladders. Heterodoxy can itself be a careerist move, as long as it’s an approved, orthodox sort of heterodoxy.

Everyone loves the idea of brave, independent thinkers whose brilliant insights are rejected by a hidebound establishment, only to be vindicated in the end. And such people do exist, in economics as in other fields. Someone like Hyman Minsky, with his theory of financial instability, was, in fact, ignored by almost everyone in the mainstream until the 2008 crisis sent everyone scurrying off to read his work.

What happens to an idea that breaks the envelope.  It is rejected by a hidebound establishment!

That is where the Information Matrix and transparency are with the Economics profession.  They are outside of the approved, orthodox sort of heterodoxy.  They don’t have mathematical razzle-dazzle.  Yet, they literally redefine the box in which Economic thinking and analysis takes place (as much or more so than the work of Akerlof/Stiglitz on information asymmetry or Kahneman on behavioral economics).

I expect to be vindicated in the end.

Why?

Because central banks and governments pursuing the policy recommendations of PhD macro economists are engaged in confirming Albert Einstein’s definition of insanity.  After the financial crisis started, they have been doing the same thing, cutting rates/QE and fiscal stimulus, over and over again expecting it to result in a self-sustaining economic recovery.  Yet it never does.  Nor in the aftermath of any financial crisis has it ever been shown to.

Each time it doesn’t work, the professional reputation of these Economic PhDs takes a hit.  Their reputation has sunk so far they now have to take out a telescope to look up and see the reputation of Astrologers.

At some point, Universities will ask since they don’t have an Astrology department why do they have an Economics department.  It will be hard to make a case for retaining the department given its demonstrated lack of ability to understand the subject matter it claims to know something about.

And it is when Economists are subjected to career risk for not embracing the Information Matrix and transparency that they will be embraced.

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Naturally, I received pushback from the Economics profession on this post.  Some of this pushback surprised me.

The economists argued it would be unfair to close their departments because of the perceived failure to predict the Great Financial Crisis or any of its aftermath.  After all, as Astrologers know, predicting the future is hard.  Plus, there were a handful of economists who did predict the crisis.

Why I found this surprising is in the run-up to the financial crisis, the Economics profession marginalized these individuals.  This indicates their predictions were one off and unreproducible, rather than the result of an economic model.

More importantly, if the Economics profession is truly unable to “predict” the future any better than Astrologers, why should we listen to its opinion when it comes to the impact of any policy on future economic performance?  Clearly, we shouldn’t.

The profession is trying to have it both ways.  They want us listen to them as if they have something of value to say, but not hold them accountable for their failure to accurately predict future economic performance.