The hatching of an academic economist.
Anyone in the real estate industry who's read an academic economist's thoughts on that industry must have silently mused, "where do these guys come from, and how do they get that way?" No real estate observer is more sure he's cornered the truth, and less likely to come within a country mile of it. A Nobel-prize winning economist's memoirs give us helpful and unintentionally revealing insights into how this happens.
I won't identify the economist, other than as S, for three reasons. First, that's how old European novels sometimes identify their characters, and it looks cool. Second, a neighbor who knew S tells me he was a great guy, and you sense this in his memoirs, particularly the latter half, where he climbs down off his pedestal and good-naturedly deprecates both himself and his profession. And third, there's no point in identifying S. You've probably never heard of him; he won his Nobel years ago, and he's not quoted in the popular press these days.
But S's memoirs are worth a read, because they exude a stereotypical ivory tower mentality guaranteed to impress the impressionable and irritate everyone else, and they flaunt the hubris that seems to come naturally to at least a portion of the breed.
So why do I care? Because many if not most of us look to economists to explain the workings of the economy in general and its marketplaces in particular, including real estate. Yet the paradox is that so few economists, particularly the academics, appear to have much if any practical experience as functioning members of the economy in general and any marketplace in particularunless it's the marketplace for speculation of the it-works-in-practice-but-will-it-work-in-theory? variety. And, alas, for all his endearing traits and undoubted intelligence, S was no exception.
"Three weeks of [picking apples] constitute my lifetime record of physical labor for wages."
No, the economist answers a higher calling, which may be why his training, with its emphasis on theory as opposed to practice, resembles that of the seminary student. S regrets that he took "entirely too many...undergraduate courses in business administration, which I assumed would prepare me for a life of trade." Fortunately for S's purity, no one was hiring business majors in 1931. Fate spared him the tedium of "a life of trade" and, instead, landed him a fellowship that led to a master's degree and, thence, to the hallowed halls of academe.
S bemoans his poor preparation for the ivory tower, including as it did "a lot of foolish reading, an overemphasis on taking 'applied courses' like real estate principles (as if there were any), and avoidance of mathematics." That's a remarkable statement on several levels, not only because S's father made his living in real estate, but because it seems to confirm what I've long suspected is the attitude of academics who study real estate.
"...as if there were any [principles]..." Nice. As if you would know.
But more than that, there's the implied disdain, not just for the real estate profession, but for any profession wallowing in the muck and mire of the marketplace. Or perhaps S means that real estate is a marketplace with no principles worth studying. In either case, with an attitude like this S missed his calling as an academic real estate economist.
And it gives us insight into how the academic economist prepares for a career spent explaining the machinery of the economy: no "applied courses" required or desired. No, that would only put the fledgling academic close to the nuts and bolts of the very machine he'll spend his career "studying" and "explaining".
Even more regrettable than practical coursework would be time spent as a cog in the machine. That's why you won't find an academic real estate economist with industry experience. Because who knows where an insider's understanding of the industry might lead? Most likely to a career-destroying skepticism for the output of his peers. Far better for the academic real estate economist to keep his hands clean, his soul spotless and his naοvetι intact. Far better that he turn his back on the real world in favor of advanced mathematics, so that he can take indifferent data (because he doesn't have the practical knowledge to know good data from bad) and grind it through complex models into peer-acceptable and improbable conclusions.
This virginal avoidance of anything resembling reality reminds me of J.K. Galbraith's assertion that "once, students [of economics] were attracted by the seeming urgency of economic problems and by a sense of their mission to solve them. Now the best come to economics for the opportunity it provides to exercise arcane mathematical skills."
S enrolls in the economics department of the University of Chicago, where "the teacher who greatly influenced me and most of my fellow students was Frank Knight...an irreverent critic of scholars and institutions" and, if Knight aimed his irreverence at wooly economists, he never lacked for targets. "He was already moving out of economics into the study of philosophy and religion", a natural progression if you've wondered if maybe economics is the modern mystery religion and economists its high priests.
The academic economist gets his credibility with the public in large part from his alleged renunciation of the almighty dollar, but it's telling that S illustrates Knight's virtue by the less-traveled road he took: "He was not a consultant...he did not ride the lecture circuit [or show up on cable TV]; he did not seek a place in the popular press [and never had a best-seller]...This conduct was becoming less common in economics even at the time [the mid-1930s].
S reveals the forgiving nature of academic life, so different from the irksome demands of the workplace. "If X is a great mathematician...his great strength is highly prized; his many faults are tolerated", unlike the real world, where "in the normal progression of his or her career, an entrepreneur or a cleric or a bureaucrat or a lawyer must display a larger variety of talents to succeed". The non-academic has to grow up, at least a little.
Vigorous debate with other grad students is remembered fondly. "At least half what one learns at a college or university is learned from fellow students. They live together and they argue among themselves with a vigor and candor that are inappropriate in discussion with faculty members." Considering how little exposure these students must have had to even the artificial world of economics, let alone the real world lurking just off campus, I wonder what these debates taught them. How many angels can dance on the head of a pin produced by Adam Smith's pin factory?
Ever heard the academic imperative, "publish or perish"? Call it the academic's production quota or, more accurately, his sales quota. S admits that "the volume of the published output of the main competitors in a science is usually awe-inspiring". He mentions a certain Harry Johnson of the University of Chicago, "the champion in economics...whose bibliography runs to 52 closely printed pages". Is the academic rewarded for quantity over quality? "I remember once asking myself: How could Harry Johnson possibly have hundreds of ideas, or even five really fundamental ones?" But for S it's all good, because this publishing blizzard "leads to many invitations to speak and write", which enhances the academic's reputation and career. The lesson is clear: keep throwing it against the wall and hope your audience won't remember when you're wrong. And, in fact, you'll hardly ever be demonstrably wrong, because in a soft science where truth ranges from slippery to non-existent, "right" and "wrong" are more subjective than provable. The academic economist runs more risk of being unfashionable than wrong.
But what about his main weapon in the pursuit of truth? Data don't lie, right? Let's just say that data can be "persuaded". Here's S with a handy tip for all you economists out there: "If the statistical analysis doesn't come out 'right' the first or the twentieth time, one can drop a year from the data, add a new variable to explain contradictions, take the logarithm of another variable, and so on until, lo, the desired answer appears..."
"Frequent exchanges with strong minds and powerful scientific imaginations" is the advantage S claims for the academic economist over his non-academic colleague, because these exchanges are "invaluable in discovering errors and eliminating strange perspectives that creep into one's work". Not that I'd noticed a shortage of errors and strange perspectives and, in fact, the academic real estate economist seems living proof that the opposite is more likely. "Frequent exchanges" with colleagues, highly opinionated and highly imaginative only within the confines of everyone-knows prevailing fashion, inevitably lead only to highly opinionated group-think and a highly imaginative interpretation of reality.
S recounts that "until the 1950s I accepted the prevailing view of my profession that monopoly was widespread...I was an aggressive critic of big business", which may be typical of economists not on the payroll of big business. In 1950 he appeared before a congressional committee to recommend that U.S. Steel, then the largest American steel maker and one of the largest corporations in the world, be dismembered in the interest of solving theoretical "monopoly competition problems". But by 1982 S had had a change of heart, marveling "at my confidence at that time in discussing the proper way to run a steel company...What is still more embarrassing is that I no longer believe the economics I was preaching..." So, sure, testify in favor of breaking up a huge corporation and throwing an equally huge monkey wrench in the economy (no social costs there, right?) just because prevailing economic wisdom says "big equals monopoly", then take it all back thirty years later.
By the way, is it any coincidence that these days the typical academic economist sees the real estate industry as a cartel, stifling competition and innovation as it rips off the consumer? Do I detect a trend?
But at least S eventually changed his mind, and, as he admits, change happens slowly and grudgingly in economics, conventional wisdom holding on with cold stiff fingers. And here's where S starts taking a jaundiced view of his field. "The individual economist who seeks to change the views of the profession has essentially zero prospects of success unless he or she is gifted with ideas and heavily endowed with energy." Why? Because the accepted thinking is ruthlessly enforced by "the governors of science", a "self-perpetuating and self-selecting group of leading practitioners". This elite resists change because new ideas "are potentially disruptive or destructive of the established knowledge of these very professors...the opposition can be powerful: Max Planck said that a science progresses by having the old professors die off". "A system of government of a science by a self-chosen elite has the potentiality for stagnation and scholasticism" which may explain why in the field of real estate economics, half-baked ideas have long and happy lives.
And how ironic that academic economists so over-awed by new ideas in real estate, however unworkable, should be so resistant to new ideas in their own field.
S claims that "no one model of orthodoxy can be imposed on a science", yet it's evident that any academic real estate economist who values his or her career will fall in line with the following orthodoxies, even in the unlikely event he or she has any doubts:
Ah, the blessings of the contemplative life! "There are advantages to living outside a university...but they are clearly swamped by the advantages of academic life when it comes to doing economic research." Among the famous economists who couldn't do their best thinking in splendid isolation S cites David Ricardo, "a highly successful stock (government bond) broker" and John Stuart Mill, who "spent most of his life as a senior 'clerk' (executive) in the East India Company". Yep, it's a real shame that Mill and Ricardo had to get out of bed every morning and do a real job in the real world. No doubt their intimate understanding of the inner workings of the marketplace denied them the academic economist's intimate understanding of the inner workings of the marketplace.
S leaves us with what may be a veiled warning to the public at large and the economist groupie in particular: "The likelihood of error and the magnitude of the error will both be larger, the more careless (ambitious?) a scholar becomes." Ambitious? Is S implying something I've often wondered, that the more high-profile and frequently quoted an academic economist is, the more likely he is to be wrong?