Ethics in economics? Who cares?

July 8, 2011

Back in December, a Reuters investigation examined the ties between economists who testify to Congress on financial regulation and big financial institutions.

A Reuters review of 96 testimonies given by 82 academics to the Senate Banking Committee and the House Financial Services Committee between late 2008 and early 2010 — as lawmakers debated the biggest overhaul of financial regulation since the 1930s — found no clear standard for disclosure.

In fact, roughly a third did not reveal their financial affiliations in their testimonies, based on a comparison of the text of their testimonies available on the Congressional committees’ websites with their resumes available online.

Similar issues had been raised in the 2010 documentary “Inside Job” which vilified a number of big-name economists for arguing in favor of deregulation while on Wall Street’s payroll.

In response to the widespread criticism, the American Economic Association earlier this year charged a five-person panel with looking into ethics and economics. The panel, chaired by Nobel prize-winning economist Robert Solow, asked for input from the broader membership, with an end of June deadline, but so far, Solow said, he has received at most a dozen responses.

Read today’s follow-up story “Economists display little interest in ethics code” by Kristina Cooke and Emily Flitter here.

Below, watch a clip from “Inside Job” featuring Frederic Mishkin, a former governor of the influential Federal Reserve Board in Washington, who discusses a glowing paper he wrote about Iceland’s financial system in 2006 — for which he was paid by the Icelandic Chamber of Commerce.

What do you think? Has anything changed since the the financial crisis?

One comment

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There are three things that drive a lack of ethics in economics:

1) Neoclassical economics is not Positive but Normative only. It does not consider what should be, but only how the economy seems to work. This produces economists that are less concerned with ethical questions, because there is no single standard for what is ethical in economics.

Is it ethical for a central bank to inflate, or engage in quantitative easing? Is it ethical for a government to run deficits? Is it ethical for a government to create social programs that will burden future generations disproportionately? Neoclassical economics offers no answers.

2) Academic economists have a need to publish in order to get tenure. This leads to substandard research where data is tortured to reach conclusions, or advanced math is applied in obscure ways to generate unusual findings that are at variance with common sense. They create fake worlds where their policy conclusions are valid, and pretend that our far more complicated world is like the fake world.

3) Economists need to make money using a flexible discipline, so as consultants they can justify the answer needed by the businessman. Consider the cost of capital. I have lost consulting engagements telling clients that their cost of capital is too low. But with Modern Portfolio Theory, you can justify almost any cost of capital if you are clever enough. It’s a fake world that bears little resemblance to the way real capital markets work — but it is standard theory… who cares whether it works or not?

The only thing that has changed for economists since the crisis is that a few of the younger ones see the need to reflect real financial markets in their models, but they are in the minority.

The economics profession needs wholesale change, first realizing that the application of advanced mathematics to the economy has not worked, and that we need to go back to studying economic history, and think more broadly about economics — give up the idea that physics-type mathematics has any relevance, and think more in terms of economies as ecologies. Economics should be more of a qualitative discipline, and recognized for the art that it is, rather than the science that it could never be.

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