June 05, 2004

Market Forces and Economics Professors

More interesting than Chun's willingness to make contrary-to-fact implicit assertions about the cost structure of the retail gasoline market is the subtext of his critique of Alex Tabarrok. Let me bring this subtext to the forefront:

Chun the Unavoidable: The statists at [Marginal Revolution]... being rich economics professors.... Economics professors are among the highest paid in the academy. I've never met a non-economics professor who didn't think this was absurd... gross injustice... "market forces," which, if you try to figure out what they are, you have to ask an economist. It's a good racket, and I'd admire them for it if they all weren't shills for insurance companies and Microsoft...

The envy and loathing is palpable, and greatly warps Chun's discourse out of shape. I can safely assert that this is the first time Alex Tabarrok has been called a "statist." Perhaps it is meant ironically (irony doesn't travel well through packet networks). Perhaps Chun does not know what a "statist" is. I can also safely assert that few economists are shills for insurance companies, and fewer are shills for Microsoft. Alex is not one of them: he calls 'em like he sees 'em, all the time.

And the reasons that economics professors are among the highest paid in the academy? As I understand the story (perhaps not correctly), there seem to be three important reasons, three important "market forces" pushing up the relative salaries of academic economists:

  1. In the 1970s, when the expansion of American higher education came to a halt, economics departments cut back the sizes of their Ph.D. programs by about 1/3. English and history and sociology and philosophy departments did not--you had to keep the current flow of graduate students in order to teach the undergraduates, after all. Over time, this means that an enormous oversupply of people with Ph.D.'s who are both well-qualified and who want to fill university posts in disciplines like English and history and sociology has built up.
  2. A relatively large number of people with economics Ph.D.s have found employment in the rapidly-expanding business schools of America. Few sociologists, a negligible number of historians, and no English Ph.D.s have found employment in business schools.
  3. A relatively large number of people with economics Ph.D.s have found employment in the government and the para-government: the Treasury, the Office of Management and Budget, the Federal Reserve, the IMF, the World Bank, foreign governments, et cetera.

Supply-and-demand do not determine everything in university pay scales,* but they do have some influence. All three of the factors above have diminished the supply of economists searching for non-business school academic jobs. And when supply goes down, price goes up.

If you want to understand where these market forces pushing up academic economists' relative salaries come from, it seems to me that you would be better off consulting a historian or a political scientist or a sociologist than an economist. Why have business schools grown so much in the past several decades? A historian might be able to tell you why American businesses have fallen into a pattern in which they have strong demand for MBAs, but economists are at a loss to explain it. Why so much growth in the governmental and para-governmental agencies that employ Ph.D. economists? A political scientist might be able to tell you, but economists have little insight into the growth of not-for-profit institutions. Why were economists socially cohesive enough to take the long view and cut back on Ph.D. admissions in the 1970s--even at the price of having to have senior professors teach undergraduates--while other disciplines were not? Here we economists shrug our shoulders, but a sociologist might be of some help.


*That supply-and-demand do not determine everything is shown by the failure of arbitrage in economists' salaries between business schools and economics departments. As one young finance professor said, "Isn't this rich! You have twice my Journal of Finance publications and I have twice your salary." To remedy this--warning: irony coming--appalling, absurd, and gross injustice--irony passed--is obviously an extremely urgent task.

Posted by DeLong at June 5, 2004 08:04 PM | TrackBack | | Other weblogs commenting on this post
Comments

Much of this is sensible. But at first I thought you must be joking about even having senior professors teach undergraduates in economics. In my experience, and certainly at my university now, econ professors are notorious for taking minimal responsibility for teaching undergraduates. But, to be fair, part of that notoriety derives from careless teaching of unusually gigantic classes -- a piece of self-interest that perhaps goes some way toward explaining why the discipline cut back on Ph.D. admissions.

Posted by: Jeff L. on June 5, 2004 08:39 PM

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Not at my place, or where I was trained (Yale). Everybody pitches in. But to the point. The academics get a rent that comes from our substitutiability with the finance guys. I recall a conversation with a colleague a number of years ago (long enough back that the number seems small today), when he told me that he once thought a hundred thou was a big number (it was a buy-out for his university subsidizied apartment.) We got to talking about salaries, and he mentioned a person (an economist who is also a grand master in chess, for the cogniscienti) who was making ten thou a day consulting on Wall Street. O.K. It's big money, and maybe it's not worth the product. But neither are the multi-million CEO salaries. Life's unfair. It you don't like it, become an economist. The extra supply will drive the price down.

Posted by: knut wicksell on June 5, 2004 08:57 PM

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So what's the word on pre-industrial agricultural productivity in Europe? I've just been looking at the rice fields between Shanghai and Hangzhou, out of which they move tons of rice per year for each acre...

Posted by: Brad DeLong on June 5, 2004 09:41 PM

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Here's an idea as to why B-school profs earn more - they have to put up with MBA students who regard themselves as customers consuming a product.

I know. I pestered my school's administration about all sorts of things, including facilities, course content, program structure, class hours and a hundred other things. Yes, I was part of the student government at the time so I had the right to be a bit more assertive than the typical student. And the administration by and large listened, negotiated and tweaked the program.

Professors were shocked, SHOCKED that students wanted harder classes and more cross-disciplinary ingetration in the courses. I don't think that this sort of thing happens too much outside of business schools.

And if you want to see resentment, just ask an English prof what they think about business students' starting salaries, let alone the business faculty's. (They also often resent the B-school's facilities as well.)

Posted by: Larry B on June 5, 2004 09:49 PM

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Ignore Chun. As we know, at least, from reading his Crooked Timber comments, he speaks with great erudition and authority with equally great stupidity and belligerence. He's a highbrow troll.

Posted by: Keith M Ellis on June 5, 2004 10:01 PM

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Few sociologists, a negligible number of historians, and no English Ph.D.s have found employment in business schools.

Actually there's an increasingly large number of sociologists teaching in business schools these days --- organizations people, neoinstitutionalists (the sociological kind), network theorists, others. It's been a trend since the late '80s.

Posted by: Kieran Healy on June 5, 2004 10:21 PM

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I wonder if the current abundance (or so it seems, but then I go to the University of Chicago) of aspiring economics people means that we're going to end up fairly lowly-paid in the next few decades :^).

Posted by: Julian Elson on June 5, 2004 11:14 PM

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What about political science professors?

Posted by: Matt on June 6, 2004 12:00 AM

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I've always admired Elmer, Ph.D., for having earned his stripes against that silly wabbit.

Posted by: john c. halasz on June 6, 2004 03:52 AM

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Don't forget the presence of Wall St opportunities for academic economists which can pay multiples of academic salaries (especially after a few years on the job). As I recall the other faculty which had higher pay than the average tended to be the engineering department which also had significant industrial opportunities.

Posted by: Knut G on June 6, 2004 04:24 AM

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Brad, I think you are simply being naive.

Why would the University of Chicago chair in Econ be the most well paid?

Because Austrian Monarchist Economics, the Chicago School, Hayek, Friedman and von Mises, is pro-rich economics, it is a justification of the status quo.

The extremely rich need well paid statistics slingers to "prove" their points.

Why do football players get paid? Because they are such an excellent distraction.

Posted by: Josh Narins on June 6, 2004 05:18 AM

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"the word on pre-industrial agricultural productivity in Europe"
Some sources I can think of: Kriedte, Bairoch, van Valkenburg/Held. As usual, the data should be capable to disprove any thesis thrown at it...

Posted by: Joerg Wenck on June 6, 2004 06:57 AM

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One minor detail: to get into grad school in economics most places put you through a math test, which is a fair proxy for screening out blithering incompetence.

This isn't really because economics needs math. It's because the nightmare that makes economists wake up screaming and sweating is the one where, in the dream, they wake up in the morning and go to a school where economics has just been discovered to be a subdivision of sociology.

This means that it's not just that the math test is not there because of economics being mathematical. It's the other way around, i.e. economics has developed its mathematical byways as an accidental result of the math based IQ test being imposed across the entry-gate to the profession.

Posted by: David Lloyd-Jones on June 6, 2004 08:19 AM

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As I'm currently procrastinating to avoid studying for finals and qualifying exams in an upper-second-tier econ PhD program, I may as well throw in my two cents:

I wouldn't discard supply and demand as explanations--there is a great demand for PhD economists in consulting and in Wall Street, if for no other reason than basic numeracy skills. Lots of data management and computer programming come naturally to people who've done that kind of research--economists and engineers in particular.

Secondly, there's a big compensating differential between private and academic work--private work is much more schedule driven and one has to deal with horribly clueless clients (or governments). I know this from experience.

Thirdly, there's the supply bottleneck that Brad and others have mentioned.

Finally, there's a cultural difference between b-schools and econ departments that makes it difficult for some economists to fit in. Business schools are a whole lot more conservative by reputation, and there's a lot more presentation involved. It's the difference between being comfortable in a suit and being comfortable in sandals. Some people do well making the jump; others simply can't pull it off. Think of the cultural difference between Steve Levitt and Eugene Fama at Chicago, for instance.

I will say, the coffee in b-schools is almost universally better than in econ departments, from what I've seen. Business students really are more demanding, some might say self-centered.

Posted by: Chris on June 6, 2004 11:53 AM

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One point of contention. I wouldn't lump Mises, Friedman, Hayek, and Austrian monarchists, or for that matter, Lucas and Levitt, together in any sort of way. Just because none of these guys agrees with your particular politics doesn't make him a paid hack (although I disagree strongly with the Austrian methodology and tend to agree with Friedman and Lucas on a good day). Friedman, Lucas, and Levitt were employed by the University of Chicago econ department, not by a bunch of industrialists. Hayek was paid by some other department at Chicago. Mises and the Austrians were paid by uni-Wien (I think) before the war and they were quite liberal. This explains why they didn't get along with the Habsburgs very well.

And this also doesn't explain why leftish economists like Solow, Akerlof, Arrow, Debreu, Samuelson, Krugman, Modigliani, Tobin, and even Galbraith have had these cushy chairs. I'll bet that none of them was badly paid at all, and none of these guys would be remotely welcome at a Republican convention. Again, this comes down to whether or not many liberals are willing to tolerate the existence of conservative academics. Somehow the existence of four or five conservatives at Chicago in the 1960s or Minnesota in the 1980s is cause for alarm but the liberal bent in other schools isn't. I honestly can't tell you if even one of my professors at UCSD is a Republican.

The point that I'm making is, condescend at your own peril. Even when supply-side hacks or vulgar Keynesians come along, strong but polite criticism achieves a lot more than vitriol can. Nobody wants to listen to a hateful rant; this is exactly the wrong way to win hearts and minds. Think about how much more effective Paul Krugman would be if he didn't hate his opponents.

Posted by: Chris on June 6, 2004 11:59 AM

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In addition to supply and demand, it may also be appropriate to consider productivity. As my children progressed through high school, I was often struck by how little things had changed since my time there 30 years ago. Individual classes are about the same size. They still teach essentially the same amount of math and science and English and social studies as when I was in school (and much of the material is unchanged). In brief, high school teachers today are little if any more productive than their counterparts of 30 years ago. The situation at the university level may be somewhat different (K-12 schools are probably not allowed to teach 500-student lecture sessions), but not that much.

Then I compared it to what happened in the technology end of the telecom and cable industries where I spent my previous career. Manufacturing became highly automated. Design tools of enormous efficiency (relative to the past) became widely available. Computers at the engineers' desks replaced typists and draftsmen. Faster processors, cheap memory, and new software tools made programmers much more productive. Modern data networks made it possible for one person to sit in their office and do most of the management of a world-wide network.

Teaching, with some rare exceptions, and lower-level teaching in particular, would appear to be a profession caught in a productivity trap.

Posted by: Michael Cain on June 6, 2004 12:11 PM

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As more sociologists have gone into B-schools, the average salary of sociologists studying organizations in traditional sociology departments has increased, or so I've been led to believe. Still, the salary of an organizational sociologist in a soc. dept. is considerably less than an economist's salary. I have a friend who is employed as a visiting assistant professor (non-tenure track) in a lower-ranked economics dept. who has a higher salary than any assistant professor in the top-ten sociology department where I'm getting my degree. He's certainly not employed as a non-tenure track professor because he's in great demand.

Posted by: brayden on June 6, 2004 12:15 PM

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I'm planning on majoring in math with a specialization in econ, then doing the econ in grad school, myself, and *I* think economics is a subdivision of sociology.

Posted by: Julian Elson on June 6, 2004 12:16 PM

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Brad,
You missed a point in the economics of grad student supply. As you said, some disciplines are driven by the need for grad students as teachers: monster freshman sections. But other disciplines are driven by the need for grad students as researchers. This means natural science, which, like economics, uses mathematics as a pons asinorum. I don't know what natural science faculty pay is like--although the substantial industrial demand for techies probably means you can't compare it to other departments it by looking at supply factors alone. I do know that natural science has a great postdoc glut.

FWIW, the highest professorial pay is probably in the law schools, to whom law students serve mainly as a convenient source of tuition money. Heh, heh.

Posted by: Joe S. on June 6, 2004 03:50 PM

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Here's a simple explanation for the reason economists get much higher pay than any other social scientists: economists have a simple and useful product to sell, other social scientists don't. Once you learn some basic microeconomics and regression, you can use your ideas to analyze a huge range of behavior - and people are willing to pay for it.

A friend of mine (a sociologist) is writing a dissertation on economists and their careers. He did in depth interviews with 30 economists at a range of universities, government posts and consulting firms. He asked them tons of interesting stuff. Great interviews.

The relevant finding is this: He found economists at elite research universities are the only ones who ever use the high-powered math. A lot of non-elite, non-academic economists admit that they don't read the top journals, at least since grad school - it's simply useless for them.

He found that economists of all stripes do use two skills: microeconomics and regression analysis. You can expect with certainty that a person with a Ph.D. in econ from a legitimate dept can use these two tools and competently apply them to a wide range of policy and business problems. This can't be said for any other social science field.

In a nutshell, economics education makes you marketable because you have acquired rare, portable skills of relatively wide application in government and industry. Until other social science disciplines do the same for their Ph.D.'s, the wage gap will continue.

Posted by: Fabio Rojas on June 6, 2004 03:53 PM

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"....So what's the word on pre-industrial agricultural productivity in Europe? I've just been looking at the rice fields between Shanghai and Hangzhou, out of which they move tons of rice per year for each acre..."

In Europe, it was an "Industrial Revolution", you know, not an agricultural revolution. In Europe, and more so in America, they industrialized the agricultural sector.

In China, they opted for a "Cultural Revolution", apparently with mixed results...

And I don't know to what extent they could mechanize/industrialize production of rice.


Posted by: Bulent Sayin on June 6, 2004 04:20 PM

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"The relevant finding is this: He found economists at elite research universities are the only ones who ever use the high-powered math. A lot of non-elite, non-academic economists admit that they don't read the top journals, at least since grad school - it's simply useless for them."

Are you saying that the professors at a lower-ranked department don't really have the same habits as someone at university like Berkeley?

Posted by: Brian on June 6, 2004 08:03 PM

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At the law schools they actually collect rent on the certification of the law school. Other professional and graduate programs have to produce usefull of knowledgeable grads, but the right to sit for the Bar is a fine privilege to dispense.

And thqat is why law schools can regard students as a means to the faculty's ends while B-schools are educating "customers."

Posted by: Brian on June 6, 2004 10:21 PM

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The other day, I did my bimonthly perusal of local used bookstores and picked up a used copy of (a reprint of) Edgeworth's "Mathematical Psychics". Now of course that title sounds pretty oddball to the average educated person, something like the mathematical underpinings of Deepak Chopra's exploration of inner self; Chopra apparently does refer to quantum mechanics in his (a)musings) but of course, it's the classic on equilibrium theory -- with the famous "Edgeworth Diagrams" that I learned about *NOT* in the course I nearly flunked, taught by the Berkeley econ dept, but from Stephen Smale.

With this obligatory dumping on the Berkeley econ dept out of the way, I wonder how it easy it is to create new and exciting fields of economic research:

* Quantum computational economics. The impact of Quantum computation on decision processes.

* (Schwartz) Distributional economics. Applications of distribution theory to discontinuous economic processes (actually something like this already exists...)

* Relativistic economics. Bartering protocols for economic agents moving at nearly the speed of light with respect to each other.

* Entanglement econmics. Effects of entanglement on consumer behavior.

* Closed paths in space-time and the effects of future government deficits on current government spending.

Can I get more money now?

Posted by: CSTAR on June 7, 2004 09:06 AM

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A few years ago during my Ph.D. studies I found myself running an undergraduate TA section for intermediate micro. During one class I asked why econ professors make more than other professors, hoping to elicit reasons along the lines which Brad has proposed. No such luck.

The first response was that econ Ph.D.s are much smarter than other Ph.D.'s. I thanked the student for the compliment, but said that that wasn't exactly what I was looking for.

But the kicker was the next answer: another student argued that studying and teaching economics was so unpleasant that it required a compensating wage differential!

Posted by: Len E on June 7, 2004 10:47 AM

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Bulent,
Rice production is highly mechanized here in California. It uses little labor. Seeds and fertilizer spread by aircraft and giant harvesters and of course subsidized water.

Posted by: dilbert dogbert on June 7, 2004 03:44 PM

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"Are you saying that the professors at a lower-ranked department don't really have the same habits as someone at university like Berkeley?"

Yes, that is correct. While most econ professors know calculus and regression, only the elites spend time working on measure theoretical macro-economic models or infinite dimensional commodity spaces. Most think of the arguments in plain english and then translate them into utility maximization problems. That requires a fairly modest amount of math compared to what you have to learn at a top econ program these days.

Posted by: Fabio Rojas on June 8, 2004 01:46 PM

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And what would you say is an elite school? Obviously, a university like Berkeley is up there, but where is the cut off line?

Additionally, why do you think this situation of things being different at the elites came to be? Is something similar going on in every field?

Posted by: Brian on June 9, 2004 02:04 PM

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Let's distinguish between Economics professors and MBA programs.

Approximately 35% of graduate degrees are MBAs nowadays, and their explosive popularity occurs at both elite and non-elite schools. They are simply today's equivalent of yesteryear's college diploma, while today's undergrad degree is equivalent to the old high school diploma.

A high school diploma is a joke, with lighter requirements than a GED. High school teachers complain that they are bureaucrats, that a student can flunk every class in every year but without the parents' acquiescence cannot be held back and so will graduate, and that moronically incompetent teachers cannot be fired. Even the corner dry-cleaners looking for a cash register operator know this.

And now it's worked its way to the colleges, which must provide remedial classes to sometimes a majority of freshmen. A degree in sociology, anthropology, English, psychology, political science, etc. ad nauseum, means know-nothing spoiled kids with expertise in partying and poor work habits. The transition is from sandals to uniforms and paper hats.

Someone with a few years in the job market will yearn for useful knowledge and an academic environment which carefully segregates itself from the fools "across the street" (as we said at Stanford) and focuses on microeconomics, accounting, finance, communication skills, and anything but foppish self-gratification at the temple of bongwater. Sociology is fine, but it had better be useful.

The difference between an elite and a non-elite school means you'll have higher-IQ classmates. The more important difference, IMHO, is the difference between a serious degree and politically correct onanism -- and that is a motivated student who is trying to derive value from his education as a consumer versus a scared thirty-year-old trying to avoid work and an honest assessment of usefull skills in the market.

Posted by: froth on June 9, 2004 11:08 PM

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Ut humiliter opinor - In my humble opinion

Posted by: mother son incest on July 11, 2004 04:15 AM

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Ultima ratio regum - The final argument of kings. (Inscription on French canons in the times of Louis XIV.)

Posted by: big black ass on July 24, 2004 11:47 AM

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