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.[1]

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 13^th 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. [2] 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 20^th century. And he was completely clueless regarding the state of the Soviet economy.[3]

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.[4]

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 worthless.

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.

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