‘If Economists Are So Smart, Why Ain’t They Rich?’
The New York Times, 10/5/2022
After I wrote a newsletter last month on how economists’ views differ from those of ordinary people, I got emails to the effect of, “If economists are so smart, why ain’t they rich?” I’m not an economist, so the question doesn’t ruffle my feathers. The possible explanations, though, are interesting — sometimes funny, sometimes kind of deep. Here are five theories.
1. Economists aren’t trying to be rich. A lot of economists go to work for institutions of government and higher education. You don’t go to work for such employers because you aspire to vast riches. According to the Bureau of Labor Statistics, the median annual wages of economists in May 2021 were $105,630. That’s lower than the median pay of astronomers, nuclear engineers, medical dosimetrists and theatrical and performance makeup artists.
Nobody asks Trappist monks why they aren’t rich, because it’s understood that getting rich is not their aspiration. Economics likewise offers rewards beyond money. There’s a joke on Quora about a bunch of investment bankers who ask an economics professor why he isn’t rich if he’s so smart. He asks them why they aren’t smart if they’re so rich.
2. Economists are too good at economics. Learning a little economics is useful for a lot of lucrative careers, from management to banking. Warren Buffett, Steven Cohen, Kenneth Griffin, Henry Kravis and Elon Musk are among the billionaires who have bachelor or master degrees in economics. The mistake is loving it so much that you get your doctorate and become an impoverished postdoc or assistant professor. It’s the same with the hard sciences. In “My Life as a Quant,” the theoretical physicist Emanuel Derman writes that he didn’t start making real money until he realized he would never be a world-famous physicist and went to work on Wall Street, where his math skills were in great demand.
3. Economists aren’t actually smart. I don’t buy this one. I think that economists are smart. But some — not the good ones — can be blindered. They know their subspecialties well but are weak on others, such as economic history. These economists have technical expertise but not wisdom.
4. Economists are hamstrung by the “efficient market hypothesis.” There’s a joke about a young economist who stoops to pick up a $20 bill he sees on the sidewalk. An older colleague tells him not to bother because if there were really a $20 bill there, someone would have picked it up already. Devotion to the efficient markets hypothesis — which assumes that prices reflect all available information — discourages economists from trying to beat the market, and that’s why they never get rich.
5. Economists do think they can beat the market, but they’re wrong. A great example of this is Long-Term Capital Management, a heralded hedge fund that included a pair of Nobel economics laureates, Robert Merton and Myron Scholes. It went bust in spectacular fashion in 1998.
Deirdre McCloskey, an economist who wrote a 1990 book titled “If You’re So Smart: The Narrative of Economic Expertise,” wrote to me in an email that when she was at the University of Chicago in the 1970s, senior faculty members were speculating in the bond market. Milton Friedman told her that interest rates were bound to fall. “This was when interest rates were at 6 percent,” she wrote. “They in fact rose to 10 percent” soon after, “and the wise economists lost their shirts.”
Warren Buffett, despite earning a master of science degree in economics from Columbia University in 1951, told a CNBC interviewer in 2016, “I don’t pay any attention to what economists say, frankly.” He added: “You have all these economists with these 160 IQs who spent their life studying it. Can you name me one super-wealthy economist who’s ever made money out of securities?”
Buffett said that the great British economist John Maynard Keynes failed repeatedly as an investor when he tried to use the credit cycle to predict what businesses would do and succeeded when he gave up on that and “settled on buying good businesses cheap,” Buffett’s own approach.
Buffett is right that economics isn’t an ideal way to make money as an investor. On the other hand, that’s not what it’s for. It’s a science of means and ends. Let economists be economists!