Saturday, January 23, 2010

Why Are Academics Dangerous?

 This article was also excerpted and recommended by The Reformed Broker. It was also linked to by Henry Blodget's BusinessInsider/Clusterstock.

Now that Dexter, Dasan and the Davian Letter have exposed smidiots, asset-gatherers, master extrapolators and link aggregators, let's talk about another dangerous element of the human ecosystem: the academics, and in particular, economists.

You see them everywhere: Bernanke, Krugman, Shiller, Stiglitz are well-known, but there are plenty of others in positions of real power like Christina Romer PhD, Chairman of the Council of Economic Advisers.

They all let you know how smart and useful they are, and they do sound pretty convincing. The intellectual lilliputians in the mass media can hardly hold their excitement once the academics show up on the screen. So why are the academics dangerous?

(1) An aura of absolute authority: what is the first thing your mother told you when she sent you to school? Listen to the teachers. Years of schooling reinforces "listening to the teachers" to the impressionable young minds, and this near-instinctive compliance and respect carries over in the adult world. In addition, our media is highly deferential to "experts" of all sorts, and someone with a PhD in subject X is often the ultimate, unquestioned "expert". Further, there is acceptance of scientific findings in "hard" sciences, such as physics, as the "truth", but this has carried over unjustifiably to social sciences, such as economics or finance. Shake off what your mothers told you, and do your own thinking.

(2) A pretense of objectivity: when a fund manager discusses an issue, more often than not, the listeners are aware that the manager is "talking his book", and is, hence, biased. If you are that guy running the $1 Tril "West Coast Fed", you'd probably never come out and say, "listen, I really do not think that most people should have bond funds" even if you earnestly believed that rates and spreads can only go up from here.
Academics, on the other hand, flaunt their objectivity when, in fact, they are just as conflicted as a fund manager. How is that? One, academics are slaves of their own work and would never, ever, do anything to undermine their pedestals. Second, many are pushing their ideas in books, thus their "assessments" of "the situation" (not to be mistaken with "The Situation") are nothing more than PR stunts and should be treated as such. Third, if you know anything about high-level academia, you know that many of these guys are heavily reliant on grants, and, thus, have a strong incentive to influence the federal policies in their own space, and often become nothing but mouthpieces for the official line. This goes well beyond finance/economics: academics are interested in creating "crises" that benefit them: "ClimateGate" and "swine flu" are recent examples of modern-day charlatanism. You can also see the excellent marketing effort surrounding AIDS, a 99.99% preventable disease with very low annual mortality rates. So whenever you hear about a "crisis", hold on to your wallet, or, better yet, figure out how to invest in the sham early.

(3) Lack of real-world experience: most academics are what The Governator once called "people who only sign checks on the back" They've never had to make payroll or rent. They've never made a sales call. They've never fired someone with a newborn. Most, I think, do not realize that their "success" comes from the structured, cuddly world of academia where the rules and relationships are not only clear, but also predictable. Those of us operating in the real world do not have that luxury, and yet, somehow the "distinguished John Q. Public professor of Economics" gets more airtime, more respect and more job security than the guy down the street trying to run a business. Makes no sense whatsoever.
Actually, often our "acclaimed" economists are business disasters: look at the imploded housing market ETFs from Shiller, or the Nobel winners at LTCM. Only academics can come up with theories based on a world with no taxes, or on efficient markets everywhere, or run a super-leveraged fund based on everything going right at all times. The reason why such absurdities exist is because there is no real clash of ideas in the Ivory Tower: they are all in the same boat, and pad each other on the back. For us, having the wrong idea hurts only the way a short squeeze or a big drop on volume can hurt.

(4) Expertise creep: most academics are highly specialized in a certain area. This is simply a necessity in a world with an ever-expanding body of knowledge: as one progresses in research, theoretically, one needs to discover "new things." These highly specialized academics are the academic world equivalents of specialization in many other fields: surgery, fixed income, engineering, etc. Most people would not voluntarily accept to have a knee replacement done by a neurosurgeon who has spent the last 20 years trying to reconnect neuron synapses inside patients' crania. And, yet, somehow most "popular economists" feel like they are experts on everything financial. Krugman won a Nobel prize for... international trade theory. And, here he is, The Authority on government spending, stimuli, and so on. Same with the other, more rotund bearded Nobel-winning fellow Stieglitz, an expert on globalization with an affinity for unsolicited advice to anyone who'd listen. Unfortunately, lots of lawmakers do listen.

What is the damage done?

There is a quite a bit, but the big one for me is the misallocation of resources. For example, the push for alternative energy has already resulted in the ethanol fiasco, and is also blowing up entire nascent industries, like solar: witness the wealth destruction last week when the word came out that Germany can cut the subsidies. Academics, in our case spearheaded by Steven Chu PhD, Energy Secretary, do not get that if something is a great idea, THE MARKET WILL SHOW IT.
Apple does not need special tax incentives to sell iPhones, right? Henry Ford did not need special handouts for Model T, right? P&G does not need tax incentives for the innovative Infinity pads they've got, right? The best, most competitive, most dynamic areas in business are the ones with the least amount of government interference: the federal government does not mandate quotas of certain classes of songs on iTunes, or certain features in enterprise management software products. The market does! If solar technology is not ready to compete, then, guess what, let it go on for one or two more iterations. But hardly a day goes by without some expert crying for a handout in his field.

Then you have the push for more spending at all levels of government based on "models" that someone like Krugman, in his $1.6 mm Riverside Drive coop, came up with. Stop it already: we were deep in debt before the current crisis. (This can be a very long paragraph but this is not the main topic, so I am stopping.)

The last example of misallocation of resources comes up in the indiscriminate push for higher education. Some researchers, obviously trying to protect their cushy academic jobs, found that going to college is a great idea because (on average) the college grads earn $X more. This has lead to an absolute overcapacity in the education space as people who really should not be going to college do (and fail to graduate even within six years but do create artificial demand for education). Imagine the contraction in the higher ed space once the flow of bodies reverts to what actually makes sense.

(PLUG: the author of Barbarian Capital blog is available for the right consumer- or inflation-focused analyst opportunity within the US)

No comments: