Larry Summers's resignation from Harvard has produced a
spate of commentary on the pathologies of academia. But the fact is
that universities, like all institutions, function in conformity with
the incentives set by the institutional structure. And until the rules
of the game are changed, we can predict that college faculties will
defend a power structure in which they are accountable to no one.
The credibility of academia is based on the notion that
professors are "experts in their field" who have achieved their
position by means of a track record of exemplary scholarship. In the
hard sciences, where "exemplary scholarship" is based on scientific
work that is consistent with empirical research, this credibility is
based on a solid foundation. Outside the hard sciences, the foundation
for the credibility is more tenuous.
In the hard sciences non-obvious facts, such as the
existence of unimagined planets and elements, were predicted in advance
of discovery. It is striking that one of the few non-obvious
predictions in the social sciences, the prediction by Mises and Hayek
that communism would fail due to the lack of price information, was
ridiculed or neglected in the social science literature from the 1930s
until the 1990s, when it suddenly became accepted wisdom. Paul
Samuelson's Principles of Economics 13th edition,
published in 1989, claimed "the Soviet economy is proof that, contrary
to what many skeptics had earlier believed, a socialist command economy
can function and even thrive." The "skeptics" being sneered at here are
Mises and Hayek. Samuelson's economics textbooks, selling more than 4
million copies, represented "expert judgment" in economics throughout
the 50s, 60s, 70s, and 80s.
Social scientists superficially appear to be engaged in a
process similar to that of hard scientists. In the hard sciences,
however, it is much easier to judge whether a theory has been refuted
by the evidence: a specific prediction is made and either the evidence
confirms the theory or it does not. In the social sciences no specific
predictions are made and the "evidence" often supports a proliferation
of possibilities. There are, of course, particular topics in the social
sciences which can be supported by empirical research; these aspects of
social science may approach the rigor of the natural sciences. But in
many areas, academic reputations are built primarily upon the opinions
of other academics, and there appear to be long-term speculative
bubbles in academic ideas that are sustained for decades merely because
other academics like to read and discuss the same ideas.
For instance, an external observer might have expected that Social Text,
"a journal at the forefront of cultural theory," might have experienced
an Enron-like implosion after physicist Alan Sokal submitted a parody
that was accepted as authentic. On the contrary, although Social Text
is a laughing stock among scientists, it retains its legitimacy within
the world of cultural theory. It is as if Enron was revealed as a house
of cards but continued as if nothing had happened. Nature can't be
fooled but apparently academics can be.
The issue would be harmless enough if nothing were at stake
but thousands of delusional professors taking a few billion dollars out
of our economy. But lives are at stake. 
In 1989, when some academic economists were still praising the Soviet
economy, I had dinner with an Egyptian reporter who noted that the
Soviet Union had to change because a generation of Soviet military
advisors, sent to advise "third world" nations such as Egypt, had
discovered, to their humiliation, that ordinary Egyptians had cars,
refrigerators, and a host of modern conveniences that were only
available to the nomenklatura of the Soviet Union. Throughout
the world more than four million leaders and professionals were taught
to believe that Samuelson's work was authoritative. His judgment was a
major force for defining economic reality for the entire world
throughout the second half of the 20th century. And he was completely clueless regarding the state of the Soviet economy.
Samuelson's expertise consisted of writing papers that
interpreted aspects of the economic world in mathematical terms.
Samuelson is still considered brilliant by those professors who value
the mathematical formalisms of neo-classical economic theory. He made a
successful career by publishing papers that his academic peers
respected because of his ability to solve certain kinds of complicated
mathematical puzzles. Social Text continues to believe that it
is "at the forefront of cultural theory" because academics in cultural
studies respect the complicated verbal games that are played there. But
without a responsibility to compare their conclusions with empirical
realities, academic disciplines float off into the ozone. Unlike
science and engineering, there are no anchors to an external reality
beyond the pages of the peer- (and friend-) reviewed journals. Enron
eventually had to show a profit; when analysts realized there was no
chance of them coming out ahead because of their shenanigans, their
stock collapsed. Academics outside the natural sciences play
shenanigans and their stock just keeps floating in thin air.
We have been mistakenly led to trust academics outside the
natural sciences because of the extraordinary achievements of the
natural sciences. For the past hundred years we have assumed that the
university "brand name" that gave us science and technology could also
supply high quality thought, decisions, and judgment regarding politics
and society. We were wrong. What to do now?
Prediction Markets as Reputation System and Research Tool
Prediction markets may provide a powerful antidote to
academic abuses of power. Just as critical experiments have enforced a
reality-based ethos of scientific integrity in the hard sciences, so,
too, prediction markets may be used to enforce a reality-based ethos of
scientific integrity among those who make claims about society,
politics, and economics. When theoretical speculations in the hard
sciences repeatedly produce false predictions they are marginalized. We
need to create just such a system for the social sciences.
The idea behind prediction markets is simple: People who
claim to have any foresight or expertise into a social or political
issue bet on specific empirical predictions concerning what will happen
in the future. James Surowiecki's The Wisdom of Crowds has
popularized research showing that under certain conditions "crowds"
outperform experts. Well-designed prediction markets fulfill those
conditions: The Iowa prediction markets outperform exit polls in
predicting elections; and Florida orange futures markets outperform weather forecasters
in predicting Florida weather. When we give large numbers of people an
opportunity to discover the truth about the world, in a situation in
which there are financial pay-offs for accuracy, on balance they
outperform experts. More recently, Philip Tetlock
conducted a large-scale analysis of expert political judgment and
discovered that the better known an "expert," the worse his judgment as
measured against predictive accuracy.
Paul Ehrlich's bet with Julian Simon
concerning his belief that natural resources were becoming scarce --
which he famously lost -- has not completely undermined Ehrlich's
reputation. But what if, instead of one controversial academic betting
against another, there were thousands of ordinary people working to
make a buck off of the foolishness of academics? Insofar as ordinary
people often have much greater insight into social and economic systems
than do many academics, the most egregious foolishnesses of academia
would rapidly be exposed.
If in 1989 Paul Samuelson believed, for instance, that the
worker's standard of living in 1995 would be higher in the Soviet Union
than in the U.S., then he could have placed a public bet on a
prediction market (which would include a specified means of measuring t
he empirical outcome and a dispute resolution process). If, say, a
plumber in Queens, a bureaucrat in Stalingrad, and a factory worker in
Thailand had all bet differently, they would have made money and he
would have lost money. Instead of the limited recognition that Simon's
bet with Ehrlich received, people in bars in Queens, Stalingrad, and
Thailand would all be focused on the failure of so-called experts.
Academics would learn to become a lot more modest and realistic about
their public pronouncements -- or they would become laughingstocks.
Moreover, prediction markets are non-ideological: the
future happens the way it happens. Thus although Julian Simon beat
Ehrlich, there are now scientists concerned about global warming who
want global warming skeptics to put their money where their mouths are.
Will teen pregnancy be higher in 2010? Teens are apt to
have better information about this than sociologists. When storms
across the Midwest damage wheat crops, wheat futures reflect this
change in condition almost instantaneously. Just as futures markets in
wheat are sensitive to storms in the mid-west, so too, a futures market
in teen pregnancy would be sensitive to sexual practices and birth
control usage among teens. If a new ten million dollar abstinence
program was introduced, and it had almost no impact on the futures
market, we would know more quickly that such a program was likely to be
At present, monetized prediction markets are not legal. But
if they were, we could learn about the efficacy of government programs,
the pre-requisites for economic growth, the efficacy of educational
policies, and the validity of social theories.
Academic reputations in many fields, based as they are
merely on academic publication histories, bear no necessary
relationship to real world understanding in disciplines that lack
experimental verification. Yet academic opinions regarding politics,
economics, and society nonetheless both have legal force and social
prestige that are often completely unwarranted. Insofar as there are
areas in which academic experts have superior insight into the workings
of society, the validity of their expertise will be valued by
prediction markets. Prediction markets will cause unwarranted respect
for academic expertise to decline.
For those of us who believe
that excessive respect for academic opinion has led to avoidable
poverty, waste, and human misery due to adherence to the misguided
policies proposed by academics in the past century, then the need to
create a more reliable system for discovering the empirical truth about
the political and social realm is urgent. Moreover, prediction markets
have the added benefit of allowing ordinary people to make money,
possibly fortunes, by exposing those unfounded academic beliefs that
are most widely accepted at present. Society wins, ordinary people win,
and we create an incentive for people to focus their energy and
attention on discovering important facts about the future. The only
losers are those Enron-like academics who deserve to fall just as much
as Ken Lay. Unlike Enron executives, we won't be able to prosecute them
for the damage they've done.
Michael Strong is founder and CEO of FLOW.
 This entire essay
is based on the ideas presented in Robin Hanson's brilliant paper,
"Will Gambling Save Science: Encouraging an Honest Consenus," which
makes the case that, in fact, the hard sciences themselves would
benefit from futures markets in ideas.
 See also Michael Strong, "The Opportunity Cost of Obsolete Beliefs in Academia."
 See Mark Skousen's
excellent analysis of the history of Samuelson's textbooks, "The
Perseverance of Paul Samuelson's Economics,"
 Nick Schulz interview with Philip Tetlock, "What Makes You an Expert?", TCS, Feb. 3, 2006.