Tuesday, 25 January 2011

A code of ethics for economists?

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.


Paul Hunt said...

@Paul Sweeney,

An excellent and timely post. The extent to which financial capitalism employed useful, but well-rewarded, idiots in academia, initially in the US, but, subsequently, throughout most developed economies, to dismantle the edifice of financial regulation that had been built up since the Great Depression is little understood or appreciated by citizens in these economies who are now suffering from the implications. The previews of George DeMartino's book (to be published I gather next month) highlight more fundamental problems that go beyond ethics or conflicts of interest. The failure of neoclassical economics to take account of, and to incorporate, key insights of institutional and organisational economics on the ability of firms - in particular, large firms - to exercise and abuse political and economic power is key to undertanding why we're in the mess we're in. And remedying this failure is key to charting a way out.

But I would, respectfully, take issue on two counts. First, I have noted previously JK Ganbraith's observation that 'capitalism' as a term has been conveniently replaced by 'free markets' and this provides capitalists with a functional anonymity. The unfortunate result, of course, is that those on the progressive left now attack markets rather than the capitalists who loath, hate and detest efficient, competitive markets - and will do everything in their power to rig, subvert or undermine them. This 'target-deflection' strategy has contributed to the decline in popular support for left-of-centre parties, as many voters instinctively recognise that markets that are properly policed and regulated can and do generate economically and socially useful outcomes. And many genuinely - and sometimes justifiably - distrust the ability of armies of state bureaucrats to generate similar outcomes. It is time to recognise that the state can use markets to shackle the beast of capitalism in the interests of all citizens.

Secondly, while I accept the lack of a conflict of interests - in contrast to the spokespersons for capitalism, trades unionists primarily represent the interests of producers (or deterred producers), it is problematic when trades unionists seek to leverage this to seek to represent a broader public interest beyond that of their members (or prospective members).

There is a deficiency in the public representation of citizens as citizens and as consumers of the goods and services provided by frims and the state (and in many cases under these forms of economic organisation by TU members). But it is not for TUs to attempt to remedy this deficiency. This is a matter for citizens and their public representaives. There is a certain hypocrisy when TUs claim to be advancing the public interest while defending rent capture by their members and the organsiations which employ them - and which is clearly not in the public interest. And this again, translates into a decline in popular support for the progressive-left.

Rory O'Farrell said...

I think a related point that is mentioned is the role of the media. Its a pet peeve of mine that RTE would put as their correspondent someone without any training on the subject. I think the media should be a lot more challenging to financial institution economists rather than just giving them the space for a soundbite.

I was particularly annoyed about a fawning interview given to Peter Sutherland about the bond market which never once challenged him that, as a chairman of Goldman Sachs, he might be a tad biased.
Also I get annoyed at terms like 'one of Ireland's top economists'. Top writer is a better description. Or how Eddie Hobbes is described as an economist though he is actually a Financial Advisor. I could go on and on.

Paul said...

At a business conference in winter, 2009 KBC economist/part-time pundit Austin Hughes quelled the concerns of Dublin landowners and developers that the economic situation was a natural cycle; that recovery was predicted by the end of 2009.

Minister for Transport Noel Dempsey TD opened the conference. He was half an hour late; stuck in traffic on the M50, which he for some reason found humourous.

Alan Rouge said...

"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."

I have seen this hostility Paul speaks of. RTE gives stockbrokers free advertising on its news bulletins and treats them as some sort of independent expert.

Michael Taft is another who suffers from the "oh he's a lefty from the union cabaal that's fleecing taxpayers, ignore this guy".

Even if economists were to declare their interests they'd still be treated with the same type of deference they enjoy now. It's a deeper issue that is an aversion towards leftist politics where Paul Sweeney is an evil communist and someone like Jim Power is great cause he's working with businesses and it's business that is great and holy etc.

Brian Lucey may be the exception here.

Paul Hunt said...

@Alan Rouge,

The hostility is unjustified; but constructive criticism is valid - and very necessary. The 'aversion towards leftist politics' of which you speak is not entirely groundless and may be related to the two points I raised in my first comment - and which no one, apparently, wishes to address.

The TUs have a moral, fiduciary and professional responsibility to advance and protect the interests of their members in every way they can in the public arena - and I would abolutely defend their right to do so. I also reject the facile nonsense, that just because some workers are deemed to be well-paid, while other are taking pay cuts and are being let go, the former should take pay cuts and suffer job losses without any consideration of the full costs and benefits of their employment. But when any reform of the organisations employing their members is mooted, TUs lose credibility when they retreat behind the veil of 'internal industrial relations'.

The progressive-left is, and should be, much deeper and broader than the TU movement. Some internal conflict is inevitable and it should be addressed and resolved in an open and constructive manner. Seeking to gloss over it in an attempt to present a united front leaves the progressive-left open to a legitimate charge of hypocrisy - and public support is diminished.

Similarly, when it attacks markets, rather than the capitalists who manipulate them in their own narrow sectional interests, the progressive-left loses popular credibility. The focus should be on the policy and regulatory arrangements that are required to prevent capitalists abusing market mechanisms in this way. In addition, the boundaries of the state is an issue that needs to be addressed continuously in all democracies. The progressive-left needs to recognise that a reflexive desire to increase the role of the state when capitalism has one of its periodic bouts of havoc-wreaking will confront a deep, instinctive, but legitimate, aversion to increasing the role of the state. It is a wise society that can form a settled view on where the boundaries should lie, but it requires engagement and compromise - not a polarisation (as in the US at the moment) with each side seeking to crush the other.

paul sweeney said...

I think that it is understandable that progressives confuse markets with Capitalism. Paul, many on the Right equate Capitalism with markets too and place the state as something outside, when its role is vital in the operation of both.

I do not agree that trade unions represent producers alone. That has changed substantially. There is a literature on whether unions are “vested interests” and the broad conclusion is that they are not, as they represent workers at every level (except the top) and in every sector in the economy.

However, speaking personally, I do think that trade unions are conservative. Unions are defensive and not very good at taking and leading political initiatives. That is the role of political parties. It is why Congress set up the Labour Party a long time ago. We concur on this, I think too.

Why is the Left weak when all events – the near collapse of Capitalism and the reversal of 30 years of ultra free markets - say the Left should be in power everywhere in the West?

Those communists who believed that the Soviet Union was the model, saw it implode. So did their faith. Theoretical Marxists still have much to offer intellectually, (Hobsbawn has a new book out on Marx and him over 90!) but most are theoretical and not practitioners, despite the contradiction in praxis. Then there is the ultra Left! They are very impractical comrades!

Most Social Democrats began to believe that there had been a paradigm shift to the right and they foolishly, increasingly and very erroneously, believed that markets were free and worked well on their own! Blair was the epitome of this slide. With the collapse of Ultra free market orthodoxy – which had come mainstream, they are, at last, rediscovering their basis principles, but rather slowly. Society is not well served by acquiesant parties of the left. Many fear alienating the “middle class” whom, they do not recognise, are in essence the new working class – most – nearly all – have to work to live. But this is another long blog!

But I was speaking of all progressive economists getting hostile treatment in the mainstream media….not just trade unionists. The immense economic power of capital, especially finance capital, to pay for opinion formation, to influence up front and also subtly is not well understood. Journalists, producers and editors know where their bread and ads come from.

Since I wrote the blog I got a call from an academic saying that one or two of his colleagues had been funded by bodies, including state bodies, to undertake specific research. He said that later or simultaneously they had written “learned” articles or opinions which praised (faintly or not?) these bodies or policies they favoured, without disclosing any connecting influence. I asked him to put it in this blog –Anon – if he was shy, but he has not done so as you can see. So it is a more opaque and complex area than I had originally thought. Will we see Irish economists self regulating on ethics shortly, or is regulation only for others?

Of course, many of the economic commentariat are not actually economists but journalists with some knowledge of economics or who may have even worked in the field at one time! So they would not be so regulated. But it is the academics whom journalists/editors and especially radio producers must question. They could start with that ever present “Trinity economist” who does not even work there, but who poses as a Trinity lecturer to give the aura of academic independence.

Paul Hunt said...

@Paul Sweeney,

Many thanks for your thoughtful and considered response to the points I raised. I broadly agree with the points you make in the first part of your response. We are not as far apart as some might be encouraged to think; and I believe we are both engaged to ensure the progressive left has a robust intellectual basis to secure popular support.

Going beyond Blair, I think Clinton should never be forgiven for succumbing to the wiles of Greenspan (Fed Chairman), Cox (SEC Chairman) and Rubin (Treasury Sec and ex-Goldman Sachs) and lighting the bonfire of financial regulation that has engulfed many developed economies with predictable results and imposed the clean-up burden on the shoulders of those least economically able to bear it. However, those on the left who advocate radical solutions need to tease through and address the full likely implications of these solutions.

I agree that, in a mixed economy, the state is vital to the effective operation of both capitalism and markets. It is the state that establishes the necessary institutions and oversees the functioning of these institutions. But there is always a tension between where the boundaries of thr state should lie and the liberty of citizens wither individually or collectively. Dieter Helm in the UK (admittedly from a right-of-centre perspective) has penned an interesting paper which may be downloaded at this link:

My proposed solution to the problems you highlight with academic economists and the economic commentariat is quite radical. I have no problems with opinions being expressed by anyone in the mainstream media, but I think that research and analysis that impacts on policy formulation should be entered as testimony before appropriately empowered and resourced Dail Cttees. Any affiliations, funding, etc. would have to be declared on pain of penalty. And there would be opportunities to rebut this testimony and to allow counter-rebuttal. Any research or analysis that survived this would have some credibility; all the rest would be just comment. And the economic profession will have to counter the tendency to batter any insights from organsiational or institutional economics (and other areas) until they fit within the neo-classical canon. Profound insights by many thinkers have been lost or whittled down; and it contibuted much to this ill-applied 'efficient markets hypothesis'.

So, plenty of work for our parliamentarians and academic economists. Let's hope they have the guts and gumption!

Paul Hunt said...

@Paul Sweeney,

Many thanks for your thoughtful and considered response. I think we both share a concern that the compelling narrative of the progressive-left is not being communicated sufficiently clearly, coherently or persuasively. And we both seem to share a concern that the understandable conservatism and defensiveness of the TU may be hampering this. For example, the progressive-left in Ireland might benefit by acknowledging that the TU movement was, to an extent, seduced by the bubble-era largesse authorised by successive governments.

In addition, we seem to share some understanding that the abuse of markets does not imply the requirement to suppress markets or to significantly expand the role of the state; the state needs to control and use markets as an efficient means to an end - the enhanced prosperity and well-being of citizens.

As to the mainstream media commentary and journalism and the 'academic' - in the sense of disinterested - research and commentary that deliberately or unwittingly advances the agenda of the capitalist right - while denying houseroom to the progressive-left - my simple view is that suitably empowered and resourced Dail Cttees should be able to invite, commission and summon presentations of research and analysis that impact on specific policy areas, there should be oportunity for rebuttal and counter-rebuttal and a view should then be formed on the policy or regulatory issues. All government policy proposals should be subject to such scrutiny. Any affiliations or funding would have to be declared on pain of penalty. Only research and analysis that had survived this process would have any measure of credibility; all the rest would just be comment.

And, beyond ethics and the declarations of interests, economists need to refrain from battering any insights from organisational or institutional economics until they fit within the narrow neoclassical canon. Much has been lost; but there is much to gain.

So, plenty of work for our parliamentarians and economists. Let's hope they have the guts and gumptions.