This week the American Economic Association is discussing putting forward a code of ethics, including guidelines for managing conflicts of interest. The motivation is apparently the backlash against the profession resulting from the movie Inside Job (above and a teacher's guide is here in PDF). The movie profiles a number of academic economists who advocated for deregulation of the financial industry while at the same time working for that industry in lucrative positions as consultants, directors or in other roles. Such relationships are rarely disclosed in published papers or in congressional testimony.
The NY Times reports of a letter from 300 academic economists calling for such a code of ethics (see also this paper in PDF). It reads in part:
As the economics profession serves a prominent role in economic policy, the public’s confidence in the integrity of the profession will, in part, depend on how the issue of potential conflicts of interest is addressed. We believe that the AEA, as the main professional organization of the economics profession, should take the lead on creating and adopting a code of ethics to address this issue.George DeMartino, a professor at the University of Denver and author of the forthcoming book, "The Economist’s Oath: On the Need for and Content of Professional Economic Ethics" (Oxford University Press, 2011), explains at The Economist Free Exchange blog that change is needed:
More specifically we propose that the AEA adopt a code modeled on that of the American Sociological Association. This code could state that: “Economists should maintain the highest degree of integrity in their professional work and avoid conflicts of interest and the appearance of conflict. Moreover, economists should disclose relevant sources of financial support and relevant personal or professional relationships that may have the appearance or potential for a conflict of interest in public speeches and writing, as well as in academic publications.”
Over the past two years prominent economists have begun to ask, in full public view, whether and to what degree the economics profession contributed to the current financial crisis. Then a few months back Charles Ferguson’s film “Inside Job” was released. It revealed stunning failures by influential economists to disclose their professional entanglements when giving testimony and writing about or advising on financial regulatory reform. Since then, the business press has begun to press the AEA leadership for action on conflicts of interest in economic practice. And just last week, a petition circulated by UMass economists Jerry Epstein and Jessica Carrick-Hagenbarth and now signed by over 300 economists is calling on the AEA Executive Committee to formulate a code of conduct that addresses this issue.The self-organization by the economics community to better oversee its role in policy making is indeed overdue. Perhaps other academic fields seeking to have wide public influence but lacking any such guidelines (such as) will follow suit.
All this is to the good, and long overdue. Not because economists are typically crooks or shills for outside interests, though there are some of those just as in every other profession. But because most economists are trying to do good work in a field where they enjoy extraordinary influence, their interventions generally harm some while benefitting others, and things can go very wrong in unpredictable ways. And so while it is important that the AEA and other economic associations take steps to address conflicts of interest among their members—and while publications like the Economist should as a matter of course begin to demand full disclosure from those economists who appear in its pages and on its blogs—economists and non-economists alike should press for something much more ambitious. We need a new field of inquiry into the many ethical issues that arise in the context of economic practice, including the risk of causing harm; the role conflict that arises when an economist serves an institution with an agenda that conflicts with the public good; the virtues that are required of the ethical economist; and so forth. And perhaps most difficult of all for a profession that has worked so hard to achieve influence, we need to consider our obligation to convey to our students and to the public not just the capacities but also the limitations of economics, and of economists.
8 comments:
The continued problems biomedical researchers have with conflicts management and related disclosures (Charles Nemeroff is my preferred poster child, YMMV) suggests that economists will likely go kicking and screaming.
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http://www.nakedcapitalism.com/
http://www.zerohedge.com/
Facebook is the next bubble.
Deregulation caused the financial crisis?! Truly bizarre.
Apparntly, global warming and deregulation cause everything bad in the world. Oh, and Republicans, of course. Yep, if we could just sic those same SEC eagle-eyed regulators who nailed Madoff on the financial world, all would be right. What?! They were too busy downloading porn? They didn't nail Madoff even when people laid it out for them on silver platter? Hmmm.
Well how 'bout the finanical regulators who kept Fannie Mae and Freddie Mac under control. Those green eye shade types who kept Dodd and Frank from letting their political cronies lard up personal fortunes while committing blatant fraud. What? Didn't happen? Well that just proves that Schumer, Dodd and Frank didn't have enough power.
If extensive regulation doesn't work, the obvious answer is even more regulation.
Stan: actually, deregulation - and the lack of ANY regulation of derivatives - played a huge part in the financial collapse. Dodd and Frank played their role (more as poster boys than in their individual roles) but the total lack of oversight on the billions of dollars that were sunk into derivatives allowed the major financial houses to leverage themselves up to the neck, and it was the derivatives that took them down.
When Congress broke down the wall between banking proper and Wall street, they opened the flood gates to financial manipulation on a grand scale.
Pointing fingers at political opponents - to the exclusion of all else - goes well on talk radio. In rational discussion, not so much. Both political parties have dirty hands in this matter.
Seems to me these reforms have some real challenges ahead. From Free Exchange:
"Economists’ influence comes to them by virtue of their intellectual monopoly over a subject matter that is vital to social welfare."
And, unlike political scientists and sociologists, they're generally taken seriously by both business and government. This is why DeMartino's final advice that "we need to consider our obligation to convey to our students and to the public not just the capacities but also the limitations of economics" is such a difficult pill to swallow (along with actually enforcing various ethical standards). All of these proposals are geared towards some sort of intangible restoration of public trust, while immediately limiting those practicing the discipline.
I'd love to see some serious reform, but I think the world will keep listening to economists no matter how many lousy predictions are made or warning signs are missed. More optimistically, the window for learning some lessons from 2008 seems to still be open a crack.
The problem isn't that bankers or economists got greedy, the problem is the neoclassical economic theory that dictates (and has been dictating for decades) Western economy, and culture and society by proxy. At the core of this theory is the concept that economic growth is always good and therefore can and must be infinite.
Once such a concept becomes the driving force of everything it is only natural that things happen like we saw when this particular financial bubble popped. Bankers and economists acted the way they did because it is required of them. And no code of ethics is going to work as long as you keep that economic concept of infinite growth in place. It's just a diversion.
I recently wrote an article on this called Infinite Growth and the Crisis Cocktail.
Something I read today also touches on this subject:
And that’s why the standard view won’t succeed in fixing the problem. The spasm of debt repudiation with which the crisis began — the collapse of the sub-prime lending market — is what happens when an infinite-growth economy runs into the limits of a finite world.
That insight comes from the reference frame suggested by Frederick Soddy, as elaborated by Nicholas Georgescu-Roegen, Herman Daly, and others. Soddy offered a vision of economics as rooted in physics — the laws of thermodynamics, in particular. An economy is often likened to a machine, though few economists follow the parallel to its logical conclusion: like any machine the economy must draw energy from outside itself. The first and second laws of thermodynamics forbid perpetual motion, schemes in which machines create energy out of nothing or recycle it forever. Soddy criticized the prevailing belief in the economy as a perpetual motion machine, capable of generating infinite wealth.
- 6 - Neven,
Exactly so. The question is in what manner and when the physical limits really begin to impose themselves. There is great truth in the view that improved technologies (and improved efficiencies) can adjust the timing and impacts of the limits of sustainability, but that does not affect the basic point. That Malthus did not accurately predict technology advancement and scale does not invalidate his basic premise. Whether food, water, or energy become the fundamental limit will affect the details greatly. What Jared Diamond illustrated in _Collapse_ were examples of situations where societies made adjustments and others where they failed to make adjustments to sustainability crises, usually on islands of some kind. Since the globe is an effective island, we get to run the scenario at its grandest scale yet in our history. The 'iron law' that Roger has put out in _Climate Fix_ (societies will tolerate very little reduction in economic growth in return for sustainability) is a pretty accurate description of much of human behavior in the modern economic era. But that behavior may get tested pretty hard as the sustainability limits are reached, whenever that might be. I think it already happening, and will accelerate over the next couple of generations.
Climate science is no different than Wall st., culturally.
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