Beer and Economics at NYU: On the Ivory Tower

My original idea for today’s talk was to collect a bunch of anecdotes about how to approach graduate school and research. They were meant to be both funny and intelligent or at least inspiring. This idea fell right away on the face of feasibility constraints – I did not have an interesting enough academic career. 

My second idea was better:   I’ll come early, get myself a few drinks and just blabber something vague enough which students may interpret as very deep. This idea fell because everybody I met in the corridors this morning asked me if I was ready for “beer and economics” …. Lot’s of pressure. And the afternoon sank in a sea of anxiety.

So …. I convinced myself I was asked for a talk and a talk I was going to deliver. I am going to talk about the Ivory tower. After all, most of you are banging at its door right now. Even those of you who can’t even see it in the horizon – so far away you are – have daily dreams about it, I’m sure.  

I checked Wikipedia – in the spirit of being thoroughly prepared – and realized that the origin of the image of the Ivory tower has nothing to do with the metaphor we use. But it’s still interesting and it might very well be the only thing you learn tonight, so here it is. The image comes from Song of Songs 7:4 in the Bible: 

 

Your neck is like an ivory tower.
Your eyes are the pools of Heshbon
    by the gate of Bath Rabbim.
Your nose is like the tower of Lebanon
    looking toward Damascus.

 

More like a love song than anything else. Indeed the Song of Songs is unique within the Hebrew bible: it makes no reference in the Law, the Covenant, or the God of Israel, nor does it teach or explore wisdom; instead, it celebrates sexual love.

Only starting in the 19th century the image of the Ivory tower has been used to designate “a world or atmosphere where intellectuals engage in pursuits that are disconnected from the practical concerns of everyday life.” It usually carries pejorative connotations, hinting at academic elitism. 

But let’s not be distracted by vulgar people and their envious hints. Rather, let’s go back to the Ivory tower you are banging at the door of. I will start with a few positive comments – as opposed to normative, not to negative. In other words, I will do what I know how to do: characterize the equilibrium, first, and then move to the Pareto optimum towards the end.  

1. Life in the Tower is great: tiny chubby cherub angels playing their harps, rivers of honey flow from mountains of ice-cream, and comfortable armchairs where you lie down and look at the ceiling are everywhere. There’s some hole in the ceiling –  sometimes you see the sky, but mostly the ceiling. But you might not experience any life in the Tower. Indeed the Tower might soon get smashed by technology into a hangar full of flat screen tv’s showing Greg Mankiw teaching all undergrads in the world. In the research rooms, Jim Heckman will do all empirical work worth doing, as he already does; Tom Sargent all macro, Daron Acemoglu will maintain communications with the other social science towers….. we still do not know who’ll occupy the theory room, but this might be because there will not be any theory room.   

Let’s be optimistic, however. Let’s assume the Tower will stay intact long enough that you could settle into it – let’s even be irrationally exuberant enough to  assume that it won’t be too crowded and we won’t throw boiling oil at you from the window.  Here’s a few more things you need to know about it. 

2. The Tower is not nearly tall enough. You can easily document this with an experiment - field experiment, nothing like those lab experiments they do at the Centre for Experimental Social Sciences (CESS), which we all know are useless, completely devoid of external validity. This is a field experiment which I have personally and involuntary been a subject of many many times.  Take a plane (in coach, the Tower is also not tall enough for you to travel in business) and sit next to your typically excessively-talkative-perhaps-afraid-of-flying guy. When he asks “so, what do you do,” try and answer “I am an economist” …..  You will have blown all chances to sleep – you’ll have to evaluate the economies of continents, countries, cities (China is a must) – you’ll have to predict the returns of all the stocks he’s holding -  you’ll have to listen to his evaluation of the economies of continents, countries, cities, stocks - you’ll have to discuss his cousin’s daughter’s business plan,… a real nightmare.  Most recently, you will be invariably accused of having engineered the crisis, or at least of not having predicted it – “How could you not see it coming!” he’ll say. Often you will be accused of starving children in Africa and suffocating the world into austerity (this lst one especially if you are traveling to Europe). You do not have this problem, but for me things are even worse: if for any reason, in a moment of weakness, I end up mentioning that I studied in Chicago, I will be immediately perceived as having lobsters and caviar with General Pinochet, while throwing desaparecidos in the Pacific ocean from a military plane.  

But now do a second treatment of the experiment, try and answering “I am a mathematician.” Now, the worst which would happen to you is that the guy tells you that you must be very smart, that he failed math in high school, but that his daughter is very good, her teacher says she has a real knack for math. You nod unassumingly a few times, congratulate him on his daughter’s abilities, and go to sleep. Believe me I know, I do this all the time. It works like a charm. Except for the occasional unlucky incident. Imagine on an Alitalia flight years ago, the talkative guy points to an older man on the window seat and says “oh, you must know each other then, he’s also a mathematician;” and the man (all in Italian, of course) “Pleasure to meet you, Enrico Bombieri” … a real shit-bomb of embarrassment (Bombieri is a Field Medal number theorist - and  much more -  at the Institute for Advanced Studies at Princeton - a giant, one of those guys who’s chair in the Tower is so high up that he actually does see the sky, no ceiling – rumor has it  that he regularly talks to God). 

3. The Tower is not tall enough - it’s about as tall as the one of the physicists who do climate change. But still better than the basement where psychologists, sociologists and political scientists are. There are a few risks as well. I found myself a comfortable chair in the General Equilibrium room, for instance… I just loved it. But I soon heard strange noises, like in the cartoons when somebody is sawing the floor in a circle around you. I jumped out of it quick. This is something you need to worry about, but if you are fast there’s always a few comfortable empty chairs.    

All in all, it’s a good place to be. And all the incentives in the profession are for you to do just that – find a chair and stay put, never get out, just go to the window from time to time to throw boiling oil to students and to colleagues who were silly enough to wander in the real world. But after a while on the chair you might get restless (or even bored). You might want to get out. Should this happen, the urge is hard to repress, you’ll probably embrace it. But should you?  And here comes the normative part.  

4. Is it efficient that you stay in the Ivory tower? For some of you the answer is a resounding yes. But maybe Pareto wants at least some of  you  out, wher the battle is fought, where there's carnage - blood and disembodied limbs everywhere. Indeed I think Pareto does want many of you out there – who does not enjoy pulp. Really, it’s a matter of taking economics seriously - not what you do specifically (people who take too seriously what they do are usually unbearable pricks) but the discipline as such. This is a Chicago thing, I admit. It’s intense there. Too intense. There is no light discussion, from the weather to sex, which does not end up in economics. A lot of is Becker's genius - he's the one who made a career of applying the economic method to anything that moves (and also to a few things that do not). Your generation thinks is Freakonomics, but it's not: Freakonomics is just a (well-done) pop rip-off of what Becker was doing 30-40 years before. In any case, it's the ability of abstracting from personal sentiments and emotions and go back to economics which is great and at the same time chillingly scary, in Chicago. But the point is, you never leave your roots – I work hard at taking things lightly, but cannot but take economics more seriously than most (people and other things). It’s a Chicago scar which I wear with embarrassment but pride as well.  

Indeed, I think the better question is not if Pareto wants you in the battlefield – but how should you dress for it.  I’ll offer my own thoughts and suggestions about this, having tried this for a while (only in an underdeveloped country where economists with any access to the Tower are few and in some demand).

i) Never leave the Tower for good; get the keys and go back and forth. Otherwise after a while you might end up like Paul Krugman who, in a piece complaining all macroeconomics except his was garbage (that is, not “his” in the Tower, but “his” after having left the Tower) used as an example the fact that economists do not study bubbles…… when his office was next door to Steve Morris and Hyun Shin, Dilip Abreu and Markus Brunnermeier, Jose’ Scheinkman and Wei Xiong, and Mike Woodford had just left [freely adapted from a comment by Tom Sargent]. Not to talk about the fact that, going back into the Tower after too long is hard, and  you might end up in a data collecting center  – rather close to the sociologists' basement.

ii) Realize that, out of the Tower, the first best is not feasible – better, it’s not incentive compatible. Economists, like climate change physicists, have ideologies and priors about policy which matter in their behavior and research even inside the Tower – that is why our towers are not that tall. These ideologies and priors run wild on outside.  Then aim for second best, a little bit of grace, a little bit of respect for the vulgar people outside the Tower, and a good chunk of intellectual honesty. 

5. But I do not want to get too serious and spoil the beer. Unless a nice spiel on the Categorical Imperative in Kant would arouse you papillary senses …. Ok, let me drop this. But let me give three anecdotes about economists acting as public intellectuals.  Each anecdote will be associated to a moral. That’ll be enough.  

i) Nouriel Roubini was quoted a few days ago being optimistic for once about U.S. stocks (I was asked by the Washington Square News what I thought about this – being in the Tower I trash these emails; but my son writes for that paper and being Italian, amoral familism kicks in, and here I am plugging it).  Nouriel argued that the average price-earning ratio is high but not too high, as anybody who’s never seen a Euler equation. As economists we know perhaps little about asset pricing, but we certainly know that playing chartists with publicly available statistics like price-earning ratios is not unlike slaughtering a pig and look at the spots on its liver – or whatever the Romans were doing. Here’s the moral: always air the discipline ignorance. You do not have to go as wild as Tom Sargent’s ad for Ally bank, which a pinnacle of honesty (and comedy), but just a bit more than the average price-earning ratio is high but not too high is quite necessary.

ii) Gene Fama was quoted right after winning the Nobel Prize this year saying that bubbles do not exist, that he’s never seen one in the data. Now, I’m sure that he was hysterical after answering the same question a million times and after hopelessly defending his “efficient market hypothesis” (it serves it well for the disservice the stupid name he picked for asset pricing theory served to the discipline). But, the question about the bubble is not a seminar question, we all know what vulgar laymen mean when they talk about bubbles – it isn’t their fault if they do not have in mind arbitrage at infinity. It’s the discipline’s fault that our notion of bubbles has no chances to make it alive outside the Tower.  So here’s the moral this time: never hide behind the discipline ignorance.

iii) Paul Krugman ….. I do not know what to pick – he’s used all tricks in the book and he is still innovating …   Ok, let’s just limit ourselves to the statements to the effect that the fiscal stimulus in 2008-9 did not work because it wasn’t large enough and the statements that managerial incentive compensation is just rents. In either case, equally valid arguments (in theory) are purposefully hidden. Some sort of Ricardian equivalence logic could contribute to the small effect of the stimulus and incentives also could partly explain managerial pay. Only in theory? Maybe, but hiding the theoretical possibility, or ridiculing it, gets rid quite conveniently of the necessary empirical arguments to sustain ones’ thesis. The moral here is very important:  always air identification problems - nothing is more important in economics than identification. But I can’t control myself on Krugman. Can’t get myself to stop here.  Let me add another one. In a recent column on long-term unemployment he uses a mistaken devious argument (a prize to the first who finds it - email  me) to suggest that those who thought of mis-match as an explanation of long-term unemployment were really after starving the poor. I just want to compare this with the attitude displayed by Narayana Kocherlakota – who also left the tower, to chair the Minnesota Fed – a rightwing man if there is one, who pushed mis-match as strong as he could at policy meetings – possibly moved by his ideology and priors – and kept doing it ….. until he saw evidence to the contrary trickling out of the Tower.