Who would trust a lemon? Why economists leave a sour taste in the mouth

By Morgan Anthony

In a recent episode of Conversations with Tyler while interviewing former chair of the Council of Economic Advisors Jason Furman, economist Tyler Cowen declared that ‘along a particular dimension … I think you are the greatest economist in the world. A particular kind of policy economist’. Tyler Cowen insightfully points out how unique an economist Jason Furman is in the world today. ‘[He has] some kind of mix of breadth and being analytical …  and having real-world experience, but being focused on policy’.

If we were to travel back in time to when Cowen and Furman were born in the 1960s and 1970s, the complete opposite would be the case. Well renowned academic economists ruled the roost; helping engineer policy often to great popular acclaim. From Cornell professor Alfred E. Kahn leading Airline Deregulation in the 1970s, to Manmohan Singh helping India enter into global trade in the early 1990s and Milton Friedman’s highly successful book and accompanying television series, Free to Choose, ‘the economist’s hour’ had dawned.

That is no longer the case. Trust in economists has plummeted. A study by Bristol University and published in the Financial Times, reveals that while judges, doctors and engineers still hold society’s faith, economists are among the ‘least trusted professions’ in the United Kingdom. That survey revealed that many voters believed that economists views were mainly political opinions driven by political affiliation.

Most economists failed to predict the Great Recession of 2007-08. Some economists’ confidence in the economy in the run-up to the crash almost reached the levels of the hubris of economist Irving Fisher who claimed stock prices had reached a ‘permanently high plateau’ just before the 1929 Wall Street Crash.

Economists disagree over issues all the time. Embarrassing spectacles such as the response to Kenneth Rogoff and Carmen Reinhart’s research into the effects of high debt to GDP ratio’s do not engender confidence. Further, many of the new generation of prominent academic economists, including recent winners of the John Bates Clark Medal (one of economics’ most prestigious awards for the best economists under thirty working in the United States) have very narrow profiles among the population and minimal experience in public policy despite highly influential academic work in fields surrounding healthcare, the efficacy of fiscal stimulus policies and the effectiveness of government policy.

However, a key piece of economic theory may help explain why there is so little confidence in economists and why so few academic economists choose to take public roles.

In 1970, economist George Akerlof wrote a paper on information asymmetry or adverse selection titled the market for lemons about the second-hand car market which won him the Nobel Prize in economics in 2001. Akerlof considered the second-hand car market in which lemons (defective and low-quality cars) and peaches (high quality cars) are sold at different prices (unsurprisingly the price of peaches is above that of lemons). However, it is often difficult for consumers to determine whether a car is a peach or a lemon, so they are only willing to pay the average price for a car. However, as the price has dropped only those selling lemons will remain in the market as the sellers of peaches won’t accept the lower price. A feedback loop will occur here, where sellers of peaches will leave the market, reducing the quality of cars for sale and reducing the price of cars until only lemons are left in the market. Akerlof’s theory helps demonstrate how in a market where consumers have limited information about the quality of a product and the sellers have a large amount of information, that market will end up with low prices and low-quality products. This is partially what has occurred in the market for economists.

It may be ironic to think of the livelihoods of public economists as being modelled by a market but like many phenomena, a market offers a very useful way of representing it. Economists compete with analysts, journalists, researchers, reporters, lawyers, politicians and many others for column space in newspapers and magazines, prominent slots on television and influence in shaping public policy. Furthermore, economists themselves must decide whether it is worth focussing on writing policy alongside engagement with the general population often at the expense of maximising their academic careers and research or general livelihoods.

Even if we can use markets to explain the behaviour of economists in the public sphere, what makes them like the lemons in Akerlof’s description of adverse selection? Similar to second-hand cars, determining the accuracy of an economist’s argument or efficacy of a policy proposal is a difficult conundrum for people. Economists make predictions and propose policy based on mathematical modelling and assumptions about behaviour. If highly credentialled economists with many letters after their name who have studied or worked at some of the most prestigious institutions of high education can radically disagree over predictions and often get them staggeringly wrong (even if their work revealed something useful), it is difficult for an already sceptical public to put faith in the work of economists.

Without diving head first in reams of academic papers and evaluating the assumptions and modelling of economists, it is supremely difficult to distinguish between economists. Many economists are serious and sober academics who have dedicated years of their careers to studying areas in minute detail. Conversely, there are also economists incentivised by working for companies or political parties to trumpet particular policies or make particularly one-sided predictions, opportunists who try to apply a bit of jargon to gain credibility and those with limited academic credibility or record.

From here, the feedback loop Akerlof described in his market for lemons appears. The population becomes less willing to listen to economists, their column inches get shorter, their spots on television become less notable, their books end up lower on the New York Times best sellers list, politicians become less willing to employ them due to a lack of popular cache from utilising experts or become cynical themselves. The opportunity cost of public economics declines and the best economists vacate the market. Why sacrifice some of your academic career or expose your personal life to greater time commitments and online abuse for limited gain when a highly respectable academic career awaits?

There do remain a few economists who maintain a strong public career nowadays. Jason Furman was a trusted economic advisor to Barrack Obama in the early 2010s, helping advise on the Affordable Care Act and reforming the system of tax credits for middle- and lower-income Americans. Unlike the well-renowned celebrity economists of the previous fifty years, Furman is known to few outside Washington and academia and had to rely on a great deal of political shrewdness to maintain his effectiveness in within a cacophony of different voices trying to influence Barrack Obama and the Democratic Party. The uniqueness of his political skill allowed him to succeed where many of his contemporaries have struggled.

Despite these rare specimens, few economists without an unbending sense of civic service or preceding focus on policy or desire for a public profile become well known in society or work on government policy. Without a change in the communication of economics to broader society in order to reduce adverse selection, there will continue to be fewer Jason Furmans and the lemons will remain the face of the field. That leaves behind a very sour taste.

The views expressed in this article are the author’s own, and may not reflect the opinions of the St Andrews Economist.

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