Comments on: Ethics in economics? Who cares? Insight and investigations from our expert reporters Thu, 02 Jan 2014 05:21:21 +0000 hourly 1 By: DavidMerkel Sat, 09 Jul 2011 06:27:52 +0000 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.