The Signaling of Economists

I like this essay by Brad DeLong about the failure of economics professors. They didn’t just fail to predict the recent economics crisis but they have failed, as far as he can tell, to learn from it. If you are naive, of course this is astonishing — but DeLong is not naive. Yet he is “astonished”. That’s interesting.

It’s hard to imagine DeLong doesn’t know what I am about to say. I imagine anybody with any academic sophistication is aware of it — especially economists. As Thorstein Veblen (an economist) pointed out in The Theory of the Leisure Class (1899), a great deal of what professors do, including economics professors, is about signaling high status. In economics, this is done by being highly mathematical. (Same in statistics. In art history, it is done by using big words. In engineering it is done by being theoretical. In many areas of science, it is done by using expensive equipment and having a large lab. In many fields it is done by being useless — e.g., preferring “pure” research over “applied” research.) This is no mystery. Economists think a lot about signaling. Michael Spence wrote an influential paper (which included Veblen’s phrase “conspicuous consumption”) and book about it, for example, for which he won a Nobel Prize. (More examples from economics.) But DeLong ignores the signaling of economists. Let me propose why economists haven’t taken the steps DeLong is astonished they haven’t taken: Because it would make them more useful and less mathematical. Thereby signaling lower status.

Why is signaling so common? It is basic biology, yes. But it is also convenient. Here is what Veblen didn’t say: It is so much easier to signal than to make progress. Among animals, it is much easier to signal you will win a fight than to actually win one. Among professors, it is easier to use big words than to write clearly. DeLong wants economists to choose progress over signaling. Shouldn’t an economist not be astonished when the lower-priced option is chosen?

19 Responses to “The Signaling of Economists”

  1. Joseph Dantes Says:

    Instead of writing an insightful comment, I will simply signal that I understood your point.

  2. Andy Says:

    Why do you think the signal DeLong sends is credible? My experience with his blog and debates is that he cares a lot more about status, affiliation, and scoring debate points than progress and understanding.

  3. Sonic Charmer Says:

    Given that what Professor DeLong evidently ‘learned’ is that we need “more old-fashioned Keynesians and monetarists” (i.e. more people like him, given more authority/prestige), I’m inclined to say there’s signaling all around. But frankly the problem with economics is worse than merely the science being overwhelmed by signaling. It’s that the science is pseudo-science, or scientism.

    What is this ‘economics’ that people like DeLong practice? Well, there are equations and letters. They invent concepts (‘aggregate demand’), give them letters, and play with them in equations on chalkboards. They think they are doing something meaningful here. Then their prescriptions (at least the ones who are ‘Keynesian’) are all rooted in thinking of the economy in metaphor as if it is a giant hydraulic machine – ‘velocity of money’, ‘boost aggregate demand’, ‘stimulus’ – using mathematical and scientific concepts straight out of 19th century thermodynamics and suchlike.

    And then it doesn’t work. (Unemployment is still near 10%, four years into the ‘recession’.) And what is their prescription? MORE! More ‘Keynesians’.

    This is more akin to bloodletting than it is to a Veblenesque signaling game.

  4. Gunnar Says:

    Money is just numbers on paper. The only value it has is the value that people _believe_ it has.

    The current USD is not even money, it is a Federal Reserve Note – which is a fancy name for a piece of paper with numbers on it. Real money would be silver and gold coins for example, which carry inherent value.

    The US deficit results from the US government borrowing those FRNs from the Federal Reserve instead of printing numbers on paper themselves. The people profiting from this scheme are the owners of the Federal Reserve, who unsurprisingly invented this scheme.

    These systems are built on lies and deception. Those are really big lies, which makes it hard to understand them. But once you break the barrier it gets easier.

    Be well.

  5. Jon Says:

    I thought the Austrians called this recession. Theirs isn’t an exact science since they use praxiology to determine things (from what I understand).

    I talked to people that sold their homes before the crash because it was that obvious, the Austrians were calling it about 4 years in advance.

    Keynesians are either really off in understanding or they’re just liars.

  6. Glen Raphael Says:

    Nobody knows how to entirely prevent recessions or bubbles. Some people have theories on the subject, but few that are well proven. Most of the relevant economic theories are more descriptive than prescriptive – they can tell you what’s happening, but not how to fix it. That doesn’t mean macroeconomics isn’t a science, just that it’s a science like Astronomy, focused on things that are large, slow-moving and hard for us puny humans to change.

    DeLong thinks “more stimulus” and “more regulation” would have made things better, while others argue at least as credibly that the stimulus made things worse and the regulatory bodies were part of the problem.

    DeLong doesn’t really want “economists to choose progress over signaling”, he just likes to signal via claims of “astonishment” that his side is right and should be given more resources. Any time things go badly, anyone can claim “if only they’d listened to me more, things would have been better” but that doesn’t mean these claims are credible.

  7. Roger Sweeny Says:

    Seth,

    You give two different reasons why economists do too much useless math and theory, and not enough useful prediction and prescription. They are morally different and have different implications.

    At the end of the second paragraph, you say they do it “Because it would make them more useful and less mathematical. Thereby signaling lower status.” Most of us find that morally reprehensible, and hope that shame and introspection will lead economists to better results.

    In the last paragraph, you say, “It is so much easier to signal than to make progress.” Economies are incredibly complex things–and, of course, there is no such thing as an economy that is not also a society and a polity. Economists have failed to answer many important questions because those questions are probably impossible to answer. Even super-intelligent people who cared nothing for status and only wanted to be useful would not be able to answer them.

    Perhaps my own experience influences me too much but I went through a very high status graduate economics program. I left before picking up a degree because I felt that the important questions couldn’t be answered and I didn’t want to play pretend.

  8. Seth Roberts Says:

    Roger, yes, those are two different reasons, I agree. I have a lot to say about the rest of your comment, too, but at the moment don’t have time to figure out how to say it.

  9. Paul Sherrard Says:

    Dr Roberts, I’m wondering how you square the economic crisis with Jane Jacobs’ idea that there is no class struggle, only the struggle between innovation & status quo.

    The recent crisis was the result, not of a defense of the status quo by the powerful, but of a prolonged attack on the status quo on their behalf (the status quo being the Depression-era financial regulatory apparatus).

    In addition, a huge transfer of wealth from lower to higher classes was effected not by quashing innovation but by embracing it (in financial instruments such as mortgage derivatives and default swaps, to say nothing of innovative accounting practices, risk assessment methods, etc).

  10. Sean Estey Says:

    Paul, I would argue your assertion that the financial crisis was caused by deregulation. It was in fact the introduction of new legislation beginning in the 70′s, including affordable housing policies and land restriction laws, which led to rising house prices, which enabled the bubble in the first place. Creative financing was a downstream consequence of these facts, not the initial cause. In a completely free market, this entire mess would not have occurred.

  11. Paul Sherrard Says:

    Sean: Interesting idea, but I don’t see how it makes much difference to my question. The banking-finance industry spent the past few decades lobbying heavily against the status quo (regulation), and innovating fervently in the use of new instruments and practices (derivatives, creative accounting, etc)—contra Jacobs, who posits entrenched power supporting the status quo and resisting innovation.

  12. Stephen M (Ethesis) Says:

    Ah, but applied economics, which is really applied statistics (think Freakeconomics for a popular example) is both math and useful.

    But it is micro economics, not macro.

  13. Seth Roberts Says:

    Paul, I don’t have a simple answer as to the cause of the financial crisis but I do think that derivatives and the like were a kind of pseudo-innovation. They had three strange properties: 1. They solved no obvious problem. 2. They were opaque — the people who bought them didn’t understand them. For example, they didn’t understand how the rating agencies worked. (By comparison, I really do understand how my laptop works.) 3. They were created with little trial and error. Calling this innovation is like calling a new version of three-card Monte innovation. Civilization has been built on countless innovations that 1. solved obvious problems, 2. are understandable by the people who buy them, and 3. involved vast amounts of trial and error. So the financial innovation you are talking about is a special case. It is really about people nearly at the top of society (Wall Street) figuring out new ways to rip off everyone else. That is different than figuring out stuff from which everyone gains.

  14. Ragout Says:

    “Derivatives” is a very broad category. Mostly, they function like insurance, and solve the same problem as other kinds of insurance: they transfer risk to those best able to bear it. Mostly, they are perfectly understandable. What’s so hard to understand about wheat futures or a put option or a credit default swap? I’m no financial historian, but I think it’s safe to say that derivatives have existed for at least a century, and there has been a lot of trial and error over the years. So, criticisms of “derivatives’ as a whole are based on ignorance.

    Certainly, there are particular types of derivatives that fit your critique, complex instruments that solve no obvious problem. In general, I think the purpose of these derivatives is to reduce taxes or get around regulatory restrictions (interest-rate swaps may be an example). Thus their opacity is deliberate: the intention is to keep the government from understanding how taxes and regulations are being avoided.

  15. Paul Sherrard Says:

    Thanks for the replies!

    2 things: (1) The derivatives did solve an “obvious problem” from the banks’ perspective: the problem of getting toxic mortgages off their books. And, as is becoming quite clear from the Levin report, this was fully understood by the banks to be their function. (2) A new version of 3-card monty IS innovation. As sure as a better mousetrap is. You can amend Jacobs’ idea to exclude antisocial innovation, but I don’t see how you can deny that antisocial innovation is still innovation.

  16. Roger Sweeny Says:

    Seth,

    1) Derivatives purported to solve a problem that has been obvious to bankers since there have been bankers: as things change, you don’t know how many of your borrowers are going to repay. Derivatives were supposed to lower that risk.

    Many financial regulations are also supposed to reduce the riskiness of the financial system, so bankers didn’t feel too bad when they also used some derivatives “to … get around regulatory restrictions” (to quote commenter Ragout).

    2) For most people, most innovations are opaque. In Arthur C. Clarke’s famous formulation, “Any sufficiently advanced technology is indistinguishable from magic.”

  17. Roger Sweeny Says:

    (continued) Most people who buy laptops have absolutely no idea how they work. Some bankers, and some economists, thought they knew how the rating agencies worked.

  18. Seth Roberts Says:

    Those are fair points. I was trying to say that the new financial products were innovations quite different than the innovations Jacobs was talking about.

  19. Roger Sweeny Says:

    Seth,

    I thought this might tickle you. It’s from William Allen’s memoir of his life as an economist:

    “All this is not to suggest that mathematics, so prized by the Economics
    Establishment, was to be denigrated in the mansion of economics—but
    mathematics was not to be allowed to evict economics and make itself sole, or even major, inhabitant of the mansion. … By a generation after Cournot,
    such notables as Walras [1834-1910], Marshall [1842-1924], Edgeworth [1845-1926], and Fisher [1867-1947] were among those who championed mathematical techniques as an essential tool in the economist’s toolbox. But used unwisely and naively, it turns economists into pretentious
    parasites on the rest of the community.”

    http://econjwatch.org/file_download/452/AllenMemoirSept2010.pdf
    p.15