Should there be a code of ethics for economists?

The definition of ethics


KAI RYSSDAL: Forget the Consumer Electronics Show in Las Vegas. Denver is the place to be this week if you really want to tear it up. The American Economic Association started its annual meeting there today. Among the panel discussions on the effect of institutions on wages and breakout sessions on evaluating empirical tools for horizontal merger analysis -- which, by the way, I am not making up -- there's also going to be talk of ethics and whether or not economists should have to abide by a code thereof.

A documentary last year called "Inside Job" raised some pointed questions about conflicts of interests and professional economists. Annie Lowrey covers business and the economy for Slate magazine. Annie, good to have you with us.

ANNIE LOWREY: Thanks for having me.

RYSSDAL: There are some amazing examples in that film, "Inside Job," of really high-profile economists getting some really big consulting contracts.

LOWREY: So one example is that a Columbia Business School professor, and a very prominent economist, took some money from the Icelandic Chamber of Commerce -- essentially to write a paper about the Icelandic banking system and he praised it -- and shortly thereafter, the Icelandic banking system collapsed and then Iceland collapsed. So that's a particularly egregious case where perhaps he should have known a bit better and perhaps he should have looked a little bit closer at taking money to write a paper like that.

RYSSDAL: What does economic research say about the ethics of economists? You've been looking into this.

LOWREY: There's a number of studies that economists themselves have done that show perhaps they are a little bit less ethical than the general population. For instance, in zero sum games they'll tend to keep more money for themselves than average people would.

RYSSDAL: Explain that a little bit -- zero sum games.

LOWREY: Essentially, if you have a pot of money, say like $10. And the game is that you and I are playing, and I get to divvy it up into two portions. And then you can either keep or reject your portion. So if you accept my offer, both of us. And if you reject my offer, neither of us do. Your average person on the street, on average, will wind up keeping about $5.44, something like that. And economists will keep about $6.15.

RYSSDAL: So more than their fair share, right?

LOWREY: Yeah. And that's just one instance. There has been dozens of studies like this that show economists are maybe unsurprisingly penurious and also maybe a little bit less ethical.

RYSSDAL: What about the disclosure of these relationships of the consulting firms and the contracts and the dollar amounts?

LOWREY: There have been two good studies. And the first and the more comprehensive one shows that a number of prominent economists only would give the full extent of their affiliations about 2 percent of the time. So they might be accepting money from a big bank or a mortgage company and they wouldn't be revealing that, even if they were writing about something that was pertinent to the issue. The even more damning one in my mind was a study that looked at economists testifying to Congress -- either to the Senate Banking Committee or House Financial Services Committee -- and about a third of the time, when they were talking about issues relevant to the companies they were taking money from, they still didn't disclose that fully.

RYSSDAL: Here's the thing though, Annie, I mean everybody has conflicts of interest. Journalists have conflicts of interest, politicians have conflicts of interest. What's the practical effect when you have these economists giving this advice and not disclosing relationships or even having the relationships in the first place. What do we know about that?

LOWREY: Well, the issue is the lack of transparency first and foremost. To be surprised on the back end that an economist has, for instance, taken money from a mortgage company, but then also talked about economic policies that would regulate the mortgage business -- that is relevant. What's kind of ironic about it is that, of course, economists know that conflicts of interest create inefficiencies, and asymmetries also work out to the benefit of one side, so we might not be able to say, well this person, for instance, influences a piece of legislation to his direct economic benefit -- it might not be that. But as a broader sort of series of questions, I think it would be a good idea for an economist to at least come out and do this because the downside to them, to me, seems very small.

RYSSDAL: Annie Lowrey, she's the business and economics correspondent at Slate. Annie, thanks a lot.

LOWREY: Thanks so much for having me.

RYSSDAL: We had the director of "Inside Job" a couple of months ago, the documentary that arguably got the American Economic Association talking about ethics guidelines in the first place. You can hear my interview with Charles Ferguson here.

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In true form, it looks like you have some economists posting comments here focusing on only one anecdote in the story: that economists take more than their fair share in the zero-sum game. But, alarmingly, neither comment addresses the other very salient issues, such as only 2% of economists disclosing their interests in the banks or companies they are purportedly objectively analyzing. I suppose economists don't think that the ratings agencies had an ethical conflict when doling out triple A ratings on toxic bonds for a healthy profit?

In addition to some sloppy logical thinking about the Columbia University economist's Iceland report, this piece was rhetorically sloppy with its use of the word "ethical". In the discussion of zero-sum games, the notion that economists as group keep a higher-than-average share of the money does not prove they are "unethical" or keeping more than their "fair share". It may prove they are greedy, not very generous, very strategic, or any number of other things, but it does not inform the issue of ethics. If you did the analysis by religious group, would you conlcude that the group with the highest mean money retained was the least ethical and that with the lowest mean was the most ethical? I suspect not.

"The profession" may not be able to reform on this issue, so how about the universities, which already are accustomed to conflict-of-interest standards for their faculty in other fields?
A few universities could adopt the following policy, and ask their fellow to follow suit:
Our faculty are welcome to earn outside income any way they want, but if their outside income outweighs what we pay them (over either the previous tax year or the previous five), they shall not use our name or their academic title here in any context other than when they are addressing their students here. They shall not speak publicly, or testify before Congress, as "Joe Blowhard, Economics Professor at Harvard," but as "Joe Blowhard, Director at Exxon and two other corporations," or "Joe Blowhard, Investor."

I had the misfortune to turn on the radio this evening during Ann Lowrey's economist-bashing session. As a graduate student in Economics, I can personally attest to the great efforts made by many economists to improve the lives of people around the globe (and not simply in terms of the admittedly-flawed metric of per capita GDP).

Although I believe a code of ethics is important in ANY field, singling out economists in this way seems wholly unfair, as Mr. Ryssdal suggested.
Ms. Lowrey provided a very lopsided perspective of the issues. She raised the point that economists tend to be less altruistic in game theory experiments, but did not acknowledge the possibility that all economists study some game theory, and thus they know the theoretical outcome of the game and strategize accordingly. Additionally, much economic research is funded through grants. Some of these grants come from industries or government entities. As we learn in economics (and hopefully elsewhere), there exists a "post hoc ergo propter hoc" fallacy. This translates to "after, therefore because of." Just because a positive view of the banking system comes after funding from that country, this does not mean an economist was somehow bribed.

I agree that every field has its bad seeds and transparency is essential, but blaming an entire field is over the top. Ms. Lowrey's views give me little confidence in Slate's economic and business reporting.

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