The Prevailing Academic Administrative Policy is the Root Cause of the Economic Crisis:
A Proposal for Reform

Sankarshan Acharya
Founder, Pro-Prosperity.Com and Citizens for Development

1. What is the academic mission?

For survival, the academy must accomplish a twin mission, namely, discovery of truth through academic research and contribution to the economy that props the academy.

The academy is supposed to be the source or fountain of discovery and propagation of truth.  Truth is the basis of trust, which is vital for economic activity among people and institutions.  Trust means credit which, via enterprise, generates wealth that keeps the economy glued, strong and stable. 

The statutes of some universities have explicitly embraced a mission to conduct faculty research that contributes to the economy.  The universities have, however, practiced an academic administrative policy of promoting scholarly research, based on publications in professional refereed journals, with a hope that this policy will automatically make the university a fountain of truth and help the economy. 

2. Failure of the Academy

The economy is in serious doldrums after the 2008 financial catastrophe, considered to be worse than the Great Depression by the Federal Reserve Board.  In a 2011 report, the Congressional Financial Crisis Inquiry Commission blamed the academic experts and leaders in government and industry trained by the academy for causing an avoidable economic catastrophe. 

The academy has, thus, failed to accomplish its main mission of protecting the economy. 

3. Is the failure of the academy due to the academic administrative policy?

The failure of any institution or country can be attributed to deficiency in its governance or administrative policy:

  • Firstly, the academic administrative policy cannot achieve the twin university mission because each profession has floated journals with a view to enhancing the net-worth of individuals in the profession.  This amounts to subsidies to the profession from the economy.  My research published in the Journal of Governance and Regulation proves in a robust general equilibrium model that no-subsidy mantra of governance is necessary to attain the most efficiently competitive economy.[1]   Subsidies garnered through professional associations and publications are, thus, antithetic to economic efficiency and stability of a nation.  Empirically, these subsidies have resulted in ballooning of debts - of the federal, state, and local governments, businesses, students and households - which cannot be recouped from borrowers with declining incomes in a slowing economy. 

Scholarly publications in professional journals, funded by the profession, are unlikely to publish truths (discovered in research) that hurt the economic net-worth of individuals controlling the profession.  The academic journals cannot, therefore, publish truths vital for the economy.  For example, the Federal Reserve now admits moral hazard is a serious problem for the economy.[2]  But my paper, first mimeographed in Federal Reserve in 1991, on policies for efficient resolution of economic moral hazard has not been accepted by journals controlled directly and indirectly by the banking and finance industry under the jurisdiction of the Fed.[3] Journals that have accepted papers based on coalition of lenders to fix interest rate policy have refused to even review my general equilibrium paper based on coalitions of lenders and borrowers that attains a truly free market economy.[4]

  • Secondly, it is rare that a researcher would pursue the twin academic mission seriously because of the pervasive fear of retribution by the controllers of his profession.  Even if some researcher dares to sacrifice his salary raises and career to pursue for the twin academic mission and makes significant contributions to the economy through discoveries of truths,[5] he may not necessarily be recognized by the powerful controllers of his profession during his life time.[6] The professional career of such an accomplished individual will have been already stymied by the time of any recognition.  A stymied career will have disqualified him to lead a university because he cannot be chosen according to norms which are ironically set by a failed academic administrative policy. 
  • Thirdly, the board of trustees of a university perhaps can relax the minimum past career positions of a researcher with significant accomplishments of the twin academic mission.  But no BOT of any university currently has any mechanism to sway the senior faculty to vote in favor of any candidate for leadership of the university based on accomplishment of the twin academic mission.  No BOT currently determines seniority of faculty based on accomplishment of the twin academic mission.  The BOT cannot force its senior faculty to vote in favor of a candidate, who unlike them has accomplished the twin academic mission and can after assuming leadership undermine their status and remuneration. 

4. Failure to Nurture Leaders to Accomplish the Twin Academic Mission

The academic administrative policy thus checkmated the process of nurturing potential leaders to accomplish the twin academic mission.
Finding a candidate who has accomplished the twin academic mission and who meets minimum seniority criteria in past career positions is very arduous, if not impossible.  This is why the academy has failed to foresee, let alone prescribe preemptive policies to avert the 2008 financial catastrophe.  The reason for failure is the prevailing academic administrative policy that does not allow career rise of researchers based on accomplishment of the twin academic mission. 

This behooves upon the BOT of a university to reform the prevailing academic administrative policy.

[1] Acharya, S. (2012), “No-Subsidy Mantra of Governance to Attain the Most Efficiently Competitive Economy,” Journal of Governance and Regulation, available at http://pro-prosperity.com/Research/Governance-and-Most-Efficient-Competitive-Economy.pdf
[2] Acharya, S. (April 15, 2014), “Federal Reserve Now Admits (in a speech on April 8, 2014) that
Moral Hazard in Banking and Finance is a Serious Problem facing USA,” memo written to US President, available at http://pro-prosperity.com/Federal%20Reserve%20Now%20Admits%20that%20Moral%20Hazard%20in%20Banking%20and%20Finance%20is%20a%20Serious%20Problem.html
[3] Acharya, S. (2013), “Arbitrage Pricing of Total Risk of Assets and First-Best Governance of Financial Markets,” available at http://pro-prosperity.com/Research/moralhazardliberty.pdf
[4]Acharya, S. (2014), “Coalitions of Lenders and Borrowers, Government-Guaranteed Lender, Safe Central Bank and Interest Rate in Equilibrium,” http://pro-prosperity.com/Research/Coalition%20of%20Borrowers.pdf
[5]Acharya, S. (March 4, 2014), “Advice of Most Successful Entrepreneurs for Governance,” memo submitted to US President, available at http://pro-prosperity.com/Advice%20of%20Most%20Successful%20Enterpreneurs%20for%20Governance.html
[6]See, e.g., Acharya, S. (April 15, 2014), “Federal Reserve Now Admits (in a speech on April 8, 2014) that
Moral Hazard in Banking and Finance is a Serious Problem facing USA,” memo written to US President, available at http://pro-prosperity.com/Federal%20Reserve%20Now%20Admits%20that%20Moral%20Hazard%20in%20Banking%20and%20Finance%20is%20a%20Serious%20Problem.html