Paul Sweeney: The failings of the economics profession in predicting the Crash of 2008 have been a widely commented upon and criticised. One of the contributing factors to the Crash was tainted “advice” and “opinion” which urged people to borrow money from financial institutions and “get on the property ladder”. This too often came from economists with direct or indirect links to the financial sector, while newspapers with fat property supplements or pages of adverts for tax-break investments also regularly relied on such commentators.
This month (January 2011) almost 300 economists haved called on the American Economic Association to establish a code of ethics requiring disclosure of even potential conflicts of interest. And the AEA’s executive has just voted to set up a committee to consider the matter. Prof George Martino of the University of Denver said "There is a lot of hand-wringing in this profession over whether... we may have contributed to the financial crisis." The last time the economists’ ethics came up (in 1994), the AEA dismissed the idea.
What would a code of ethics requiring full disclosure mean for economists in Ireland? First, it would hit many of RTE's radio economic commentators, many of whom have links and agendas which they did not nor do they still reveal. Nor has RTE insisted on such disclosure. Secondly, it may hit those “independent economists” who write articles for the newspapers and magazines and, thirdly, it might make government and its agencies less enthusiastic about hiring advice which is so ideologically tainted.
As an economist working for the trade union movement, I am often taken aback by the hostility shown by some in the media to my critical perspective on markets, and by the contrasting soft interviews with those who worked for financial companies during the boom. The implication is that they are “independent” and I am biased. Yet it was far clearer where I was coming from, representing the largest civil society organisation in Ireland, whereas the “independent economists” were representing themselves or the companies who paid them.
Economists who work for companies in finance or other sectors like transport, whether full-time or as consultants, have urged changes in economic policies which benefit their linked companies, often without disclosing their connections.
It’s true that many academic economists are remote from the real world, and working with industry can help educate them in the workings of the economy. But during Ireland’s boom years the finance sector economists, who seemed to have their own desks in RTE and Today FM, played a very influential role in opinion formation, which was ultimately very destructive on the eocnomy
A study by two MIT academics, Epstein and Carrick-Hagenbarth, examined the work of 19 prominent academic financial economists who advocated financial “reform” (de-regulation) in newspaper and journal articles between 2005 and 2009; the study found that the economists were not honest in pointing out how they were conflicted.
“Our main findings are that in the vast majority of the time, these economists did not identify these affiliations and possible conflicts of interest. In light of these and related findings we call for an economists’ code of ethics which would require academic economists to identify these connections in appropriate contexts.”
The 19 academic economists were consultants, on the boards of financial firms, or had been trustees or advisors to them. They did not mention their affiliations.
Even the Economist magazine recently cited George DeMartino of University of Denver commenting on economists who have pushed free market policies, including financial liberalisation “on the basis of limited understanding or worse, because they ignored ways in which the real world departs from the idealised one of neoclassical economic theory.”
DeMartino says that, in the light of the immense impact that their opinions have had on the lives of ordinary citizens because of the Crash, economists should be a bit more humble about the limits of their knowledge. I add: not just in America.