Would I like to know that some economist discussing financial reform on CNBC also happens to be a paid consultant for Goldman Sachs (GS)? You bet. But I'm skeptical that our pundit is going to sever his ties with the investment bank simply to preserve his rep as an objective, independent expert. The financial incentive to work with Goldman is too great.
And that's the rub: The real problem isn't that such arrangements aren't disclosed -- although they should be -- it's that they exist at all.
Imagine this scenario. You're dying of some dread disease, so your physician advises you to participate in an experimental trial for a new drug that may soon come to market. Your doc, following professional ethics guidelines, tells you she's also on the payroll of the pharmaceutical firm developing the drug. Are you satisfied that, having fessed up, her medical judgment is unimpaired? Or do you worry that the doc's financial interest in finding subjects for the trial might color her advice? Me, I worry. (That's why reputable medical journals require researchers who publish in their pages to disclose such relationships.)
To be sure, there are important differences in the standards governing medicine and economics. Most notably, physicians deal with individual patients, while economists typically work with private or public institutions. Standards of conduct are necessarily different. But the professions are the same in one important respect: Conflicts of interest not only are perceived to affect how health care, financial and other professionals act -- they actually affect behavior. Writes Anne Lowrey at Slate:
[T]he economics literature seems to imply yes, if indirectly and not definitively: Conflicts of interest regularly distort a variety of outcomes in a variety of disciplines, from medicine to law to sports to finance.Take bank analysts. It's standard practice for them to disclose their firm's position in a company. But anyone with even a passing knowledge of how Wall Street operates knows that the "Chinese wall" separating analysts from the company's bankers is, in fact, a multi-lane highway. What analysts write is influenced by the bank's business relationship with the company (surprise!).
Mark Thoma, an economist at the University of Oregon (and CBS MoneyWatch blogger), agrees that the American Economic Association's proposed ethics code is unlikely to eliminate conflicts of interest. Here's why, as he detailed to me by email:
The guidelines are a good idea in general; when there are conflicts of interest, for example, they should certainly be disclosed. And economists generally believe that more information is better because it leads to decisions more closely aligned with social interests. But I don't think it will change much about how the profession operates.Again, that's not to say that the AEA isn't right to push dismal scientists to be more forthcoming about who they're shilling -- oops, working -- for. Because economists generally don't offer up such information willingly. Here's what University of Massachusetts economist Gerald Epstein found in a study examining disclosure practices in the field:
First, the vast majority of economists do not have the types of lucrative outside opportunities available to those at the very top. I'd guess that outside of the top 20 departments, such ties are relatively rare, and even within them I'm not sure how prevalent they are. Second, those who do this will simply disclose the ties and keep doing whatever they've been doing, at least for the most part. Third, to the extent that there is an ethical problem, I don't think it is with the journals (where the AEA has the most influence).
So, while it can't hurt, I don't expect it will have much effect on behavior.
[E]conomists almost never reveal their financial associations when they make public pronouncements on issues such as financial regulation. Jessica Carrick-Hagenbarth and I did a study of 19 prominent academic financial economists who were members of two influential groups that have played a key role in the financial reform and regulation debate in the U.S. Of the 19 academic economists in these groups, 70 percent advised, owned significant stock in or were on the board of private financial institutions. But you wouldn't know by looking at their self-identification in media appearances, policy work or academic papers.Leaving ethics to universities, as favored by some economists who oppose establishing a formal code, also isn't the answer. That's because schools, too, are on the take from corporations and other financial interests. For instance, regional banking giant BB&T in 2005 gave $1 million to the U. of North Carolina Charlotte on condition that the school make Ayn Rand's "Atlas Shrugged," a foundational libertarian text, required reading for students. To flog the horse here, the issue isn't whether a public university discloses that it gets big bucks to push Austrian School economic theory -- it's that it takes the money in the first place.
Still, there's another major reason the AEA proposal is likely to fall flat: Unlike the AMA or American Bar Association, the economics group can't punish ethics violations. Perhaps what economics really needs to keep practitioners on the straight and narrow is a full-fledged licensing body to enforce the rules. Lawyers in the U.S. who fail to disclose conflicts of interest may be disciplined in a variety of ways, including disbarment. Certified public accountants may be stripped of their licenses. Architects, too, may be sanctioned.
Should economists, in taking corporations as clients, be any different? Tough one. But what seems clear is that any conflict of interest, no matter the industry, may affect professional judgment. So let's not just disclose such conflicts -- let's do away with them altogether.