CAN THE NOBEL PRIZE REFORM ECONOMICS?

Talk to University of Sydney Department of Government and International Relations
October 29, 2009

Economists often suspect that Australia’s quite extensive quarantine restrictions - against apples from New Zealand, for instance - constitute a form of disguised protection. But when Alexander Downer was Minister for Foreign Affairs he was having none of that. ‘I want to assure you,’ he once said, ‘that our quarantine laws are based strictly on science - [pause] - political science.’

I wanted to say a few words about economics but, since this is a political science function, I thought I should compromise and speak about the politics of economics. It’s not hard to meld the two disciplines because, as many of you would have heard a fortnight ago, this year’s Nobel Prize in Economics was won for the first time by a woman, Elinor Ostrom, who isn’t even an economist, but a political scientist. (Her win caused Michael Jackson some chagrin, because she’d once offered him a job, which he’d turned down.) The person Ostrom shared the prize with, Oliver Williamson, is regarded as an economist, although the person who drew his work to my attention was a sociologist, and it certainly reads as if it was written by a sociologist.

Before we go any further - and in case there are any people from the hard sciences who’ve strayed into the room - I should confess that the economics Nobel isn’t a real Nobel. It wasn’t provided for in Alfred Nobel’s will - I’ve heard he didn’t have much regard for economists, though I’m sure that can’t be true - but was established just 40 years ago under the sponsorship of the Swedish central bank, and styles itself as the Swedish Riksbank Prize in Economic Sciences in memory of Alfred Nobel. That reference to ‘economic sciences’ is sus, for a start. I’m not convinced economics is a science, let alone more than one. But it certainly implies that the sponsors saw economics as a broad church.

This year’s awards - to a political scientist and an economic sociologist - come at a critical time for economics - in both senses of the word. In the wake of the global financial crisis, economics has come under considerable criticism for its failure to foresee that trouble was brewing. There’s been a lot of soul-searching within the profession, some of it quite acrimonious. In America they’ve been arguing on blogs; in Britain they’ve been sending petitions to the Queen.

A lot of the blame is going to the unrealistic assumptions on which conventional economics is based - as epitomised by the ‘efficient-markets hypothesis’ - and on the effort economists have made over the past 40 years to make their discipline more scientifically rigorous by making it more mathematical. The two criticisms are linked because the unrealistic assumptions are needed to make the equations work. In America, last year’s Nobel Laureate, Paul Krugman, concluded that ‘the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth’. In Britain, the eminent petitioners agreed with what they said were the complaints of three Nobel laureates that ‘in recent years economics has turned virtually into a branch of applied mathematics, and has been become detached from real world institutions and events’.

The annual awarding of the Nobel prize is a bit like the Melbourne Cup for economists. It generates considerable excitement among younger academic economists and, no doubt, quite a lot of covetousness among older economists - especially in America, which has taken out two-thirds of the awards so far. There’s a lot of betting on who’ll win. This year in the betting at Ladbrokes, the odds-on favourite was the same as last year: someone from the University of Chicago, Eugene Fama.

Really? Really? The man who dreamt up the efficient-markets hypothesis was the favourite to win the Nobel in the year after the GFC? There could hardly be a better illustration of the insularity of the economics profession - truly, they don’t live in our world. Fortunately, those anonymous souls who nominate and vote on the prize - including, I suspect, a disproportionate number of Swedes - are a little more politically attune.

And so, in the aftermath of the GFC, they gave the prize to a female political scientist and an economic sociologist. That’s the first noteworthy feature of the award: it wasn’t even given to real economists. Second shock: neither Laureate made a ‘formal’ contribution. Their contributions lacked the two qualities academic economists admire most: ‘elegance’ and ‘parsimony’. Meaning? They wrote their papers in words, not equations. Wow. Third shock: neither Laureate’s work fits the conventional right/left, libertarian versus interventionist dichotomy. Rather, they drew conclusions neither side would be particularly comfortable with.

Fourth shock: Elinor Ostrom’s work in particular is essentially empirical. Rather than theorising about the world on the basis of mathematically convenient assumptions, she’s spent her career doing field studies - ranging from irrigation systems in Nepal and grazing on the grasslands of Asia to lobster fisherpersons in Maine - to disprove a favourite theory of economists about the alleged ‘tragedy of the commons’. Although Ostrom’s contribution clearly concerned an economic issue, the fact she is a political scientist means few economists have heard of her - even though her 7000 citations on Google Scholar exceed the well-known Williamson’s by 40 per cent.

My daughter told me last night that, according to her psychology lecturer at this august institution, economists are psychologists dealing with bigger numbers. I would have said economists were psychologists who hadn’t read the textbook. Economics is amazingly inward looking. Economists know little about other social - or physical - sciences, bar mathematics. In particular, they know far less psychology, sociology and ecology than they should.

It seems clear to me the Nobel selectors were sending a pretty clear message to economists, about the need for them to widen their horizons, become more multidisciplinary and more empirical. Can the Nobel Prize reform economics? Well, economists believe in incentives, and it’s a pretty powerful incentive. If it doesn’t work, it won’t be surprising to see the prize going more often to those psychologists and political scientists who do the economists’ job for them.

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TALK TO UNIVERSITY OF SYDNEY PROFESSORS DINNER

Sydney University
October 6, 2009

You may know that about once a month I appear on the Journos’ Forum segment on Richard Glover’s drive time program on ABC Radio 702. I usually appear with Greg Sheridan, foreign editor of The Australian, and Jennifer Byrne of the First Tuesday Book Club on ABC TV. Greg is a terribly right wing character but, in person, a really nice bloke with a great sense of humour. My role is to act as straight man for Greg’s jokes. Whenever Jennifer can’t make it, Richard hunts around for another token female and once a few years ago he came up with Jana Wendt. I was beside myself with excitement: at last l was getting to meet the great, the beautiful Jana. But when the great day came and I walked into the room, she instantly greeted me with, ‘G’day Ross, how’s it going?’. How come we were so well acquainted when we’d never before clapped eyes on each other?

Well, since that wasn’t the first time it had happened to me when meeting a celebrity TV journalist, I think I know. Big-name TV journalists are infinitely more famous - and more highly paid - than someone like me. But there’s something a broadsheet newspaper columnist has that they haven’t got and really envy - professional gravitas. So they want to be able to think of themselves as close colleagues of all the top journos in the profession.

The moral of the story is that many people crave intellectual recognition. So when I was asked to speak to a room full of Sydney University professors, there was no way I was going to say no. Of course, once the gratification had worn off, it’s also a bit daunting. No matter what topic you choose to speak about, there’ll be people in the audience who know a lot more about it than you do. Were I to speak on any economic topic - the weaknesses of economics, for instance, or the economists’ failure to forewarn of the global financial crisis - there’d be sure to be someone furiously arguing the toss. But not to worry: I’ve thought of a topic I know a lot about and, particularly since my mate Rod Tiffen isn’t here, none of you know much about: journalism. I want to make some comparisons between journalists and academics and explain a few things about journalism that improve your understanding of it.

I used to feel sorry for professors. All of them think they’re a lot smarter than I am, but I earn far more than they do - unless they’re doing a mighty lot of consulting work. And the fact that you guys have got time to come here tonight suggests you’re not doing a lot of consulting. Whenever I write about the money-grubbing ways of the medical profession I get indignant letters from doctor’s wives arguing that their husband deserves his high income because of all the years of study he had to put in. I’m often tempted to ask whether they think an academic who spent eight years getting a PhD in Italian deserves to be paid as much as a doctor. The link between years of study and salary seems a tenuous one, with the explanation for the weak correlation embodied somewhere in the words ‘market forces’. But I stopped feeling sorry for professors: they may be as poor as church mice, but their employment gets them at least 10 times more overseas travel than I get. You can never find them when you want them because they’re always away delivering a paper to a conference in Seoul. And all their frequent flyer miles get them regular overseas holidays, to boot. I console myself with the knowledge that they have to travel steerage (unless they’re on a consulting job, of course).

Actually, I quite like professors. That’s to say, I don’t dis-like them as much as I dislike lecturers and senior lecturers and even aspros. I long ago formed the theory that only when academics gain a chair do they feel licensed to express an opinion. Until they’ve attained that point they’re not game to say anything they can’t reference to someone’s paper. Just why they feel it’s poor form to express an opinion but perfect form to quote someone else’s opinion is something I’ve never understood.

There’s a lot of rivalry and professional jealousy in journalism, something I’ve used to my advantage. The great thing is that, when you’re first to get on to a new topic, or to think of a slightly different way to write a column, no matter how successful it is your competitors simply won’t abase themselves by copying you - nor give you the satisfaction of being copied. This, of course, is quite contrary to what’s predicted by the economists’ neoclassical model. But the rivalry in journalism is nothing to the rivalry and jealousy in academia. They say that the less there is to fight over, the more furiously academics battle. Sometimes the fights are ideological, but the trouble with academics is that, though they love to argue, they tend to take things personally (which is a mark of the introvert). And that can end up meaning the fights aren’t about rival theories. It’s been a great disappointment to me that, in this university, Political Economy and straight economics never boxed it out intellectually, but sat in opposite corners of the faculty hating each other’s guts, until finally PE was cast into the outer darkness of the Arts faculty. This absence of engagement was to the great disadvantage of both sides’ students because, in my never-humble opinion, each side was incomplete without the other.

You may not know that there are two broad classes of journalist: writers (mainly reporters, but also opinion writers such as me) and sub-editors (better understood by their American name, copy editors). So reporters and writers write the copy and subs sub it - check it for spelling, grammar and libel, then write a headline for it and find it a hole to fill in the paper. So writers and subs have the same status, but different roles. Every young person entering journalism starts as a reporter, but some stay as reporters, where they get out and about, while others gravitate to the office-bound desk job that is subbing. What drives this sorting process? It’s long been clear to me that extroverts stay as reporters and writers, whereas introverts become subs (provided they can spell). Subs are supposed to consult reporters before they change their copy, but they often don’t because they’re so desperately afraid of possible confrontation.

I mention this because it’s long been clear to me that the people who become academics tend also to be introverts - they prefer reading books to talking to people. Reporters, by contrast, love talking to people. My mate Rod Tiffen says it’s just as hard to persuade an academic to talk to someone as it is to persuade a journo to read a book. I remember once, long before the internet, a reporter asked me how much the inflation rate was. I said I didn’t know, but gave him very detailed instructions of where to find the CPI press release a few steps away in the Herald library. When I asked him about it later he said: ‘Oh it was OK. I rang the Bureau of Stats and asked them what it was’. When young economic journalist recruits come to me - usually from this university; from Political Economy, in fact - I lose no time in telling them: in journalism we never do Research, we phone experts and ask them what they think. Eventually, of course, they learn that it’s often a waste of time to phone academic experts. Why? Because journalists are always dealing with some new development, but many academics don’t keep up with the latest news in their field and, being academics, they’re not willing to give an on-the-record reaction to the latest development the journo has just summarised for them. If you hate being pestered by phone calls from journalists, this is a great way to ensure you aren’t.

Academics are often highly critical of the things they read or see in the media. I don’t want to shock you, but journos are often just as critical of academics. Much of this criticism is unfair and, more to the point, uninformed. Each side judges the other by its own standards and finds the other wanting. What both sides fail to understand is that they’re playing different games, with different rules and different objectives. Both sides are involved in writing, but they write in very different genres. When I go into the budget lockup each year I get five hours to read and digest a stack of budget papers a foot high and write a punchy comment for the front page of the next morning’s paper. The very purpose of the lockup is to ensure I get no time to consult experts independent of the government before deadline. Not surprisingly, I sometimes misjudge the budget’s objectives and motivations and have to modify my views in subsequent days. Sometimes I even get some of the facts wrong. By contrast, for many years the leading economic academic journal in Australia used to publish a budget review in which leading macroeconomics professors delivered a carefully considered and measured (and possibly refereed) judgment. Just one problem: this review appeared at least six months after budget night. Journalism is said to be the first draft of history, but it’s a very rough draft. The public can’t wait six months to be told what the budget adds up to. Even so, there’s a useful place for the academics’ carefully researched and considered judgment on the budget. Each profession has a different role to play; there’s little to be gained by each judging the other by standards inappropriate to the role the other plays. The reason journos use the phone rather than a library is the extreme time pressures they’re under.

I’ve always been contemptuous of the Marxist theory of the press, that the media is an integral means by which the capitalists keep the workers in thrall. If this implies some sort of conspiracy by the media barons, it’s rubbish. Even so, I’ve come to believe that in many ways the media do help keep the wheels of the capitalist economy turning. It took me years in journalism to realise I was part of the fashion business - we deal with the latest, not just in clothes, but in movies, TV shows, restaurants, discos and much else, including ideas. But the paradox is that this Marxist approach seems to blind many academics to our capitalist motivation. They love to try to explain our behaviour in ideological terms and can’t see the bleeding obvious: the main reason we do what we do the way we do it is because we’re trying to make a quid. Our primary motive isn’t ideological, it’s commercial. What’s more, humans’ evolutionary drive to compete means that, despite its lack of commercial motivation, the ABC behaves much the same way as its profit-motivated rivals do.

Academia is - supposedly, hopefully - dedicated to the search for truth. But contrary to what many academics and media-users imagine, the news media isn’t. Although we’re supposed to be truthful in what we say, and many journalists are anxious to reveal an unexpected truth in some area, it’s a mistake to think the news media is on about the search for truth. Why not? Because much of the time the truth is dull. Media owners are dedicated to profit maximisation, and their minions seek to do this by selling a product called ‘news’. What is news? Whatever sells. What sells - what’s ‘newsworthy’ as journos say? Anything happening out there that our audience will find interesting or important, although the interesting will always trump the important. Paris Hilton is interesting but of no importance; the latest change in the superannuation rules is important but deadly dull - guess which one gets more media coverage?

Maybe 99 per cent of what happens in the world is of little interest: it’s the old, not the new; the good, not the bad; the usual, not the unusual. It’s dog bites man, not man bites dog. Much of the criticism of the media rests on the unspoken assumption that the media’s role is to give us an accurate picture of the world around us. We don’t have first hand experience of much of what’s happening around us and we need the media to inform us.

Sorry, but that’s just not what we do - because we don’t think there’s much of a market for it. Let me tell you two stories and then I’ll stop. Stories to demonstrate how we select news - how what we do bears no relation to the scientific method that guides so much of what academics do. Once when I was answering a question at a Treasury seminar in Canberra it occurred to me to say this: when social scientists take a random sample they may examine the sample and discard any outliers that could distort their survey, throwing them on the floor. A journalist is someone who comes along, finds them on the floor and says, ‘these would make a great story’.

Final story: I happened to be in the Herald’s daily news conference in February this year on the day Kevin Rudd’s $42 billion stimulus package was announced, with all its (then) $950 cash handouts. We discussed searching for a farmer who’d get $950 because he was in exceptional circumstances, $950 because he paid tax last year, $950 because his wife also works, $4750 because he has five school-age kids, and maybe another $950 because one of the kids is doing a training course. And, of course, he’d have a big mortgage, meaning he’d also save $250 a month because of the 1 per cent cut in interest rates announced the same day. Had we found such a person and taken a good photo of him he’d have been all over our front page. The point is that we were search for the most unrepresentative person we could find. Why? Because our readers would have been fascinated to read about him. It’s reasonable to expect the media to be accurate in the facts they report but, even if they are, it’s idle to expect them to give us a representative picture of the world. We’re not in that business.

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