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Posted: February 01, 2012

Guest column: Economists’ ethical crisis

By George DeMartino

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At its annual meetings in Chicago in January, the leadership of the American Economic Association (AEA) voted to adopt new rules that urge economists to give full disclosure of any potential conflicts of interest when they provide economic expertise.

The issue first arose a year ago in reaction to Charles Ferguson's Oscar-winning documentary "Inside Job," which exposes what appear to be stunning failures of leading academic economists to reveal the large incomes they received from business interests when writing reports and taking positions on policy matters of direct concern to those interests. In response to the film the business press hounded the AEA leadership into addressing the issue in a serious way - something the AEA had never done over the course of its 125-year history.

The new rules represent a good first step. But ensuring ethical conduct by economists requires more than disclosure rules. Economics needs to establish the field of professional economic ethics - like medical ethics or journalism ethics.

Why? There are several reasons. First, economists exert enormous influence over the life chances of others owing to their authority in economic affairs. They enjoy a monopoly over a body of knowledge that is vital to social welfare.

Second, many economists today also enjoy institutionalized power. Well over half of all economists in the U.S. today work outside the university. They can be found in virtually all agencies of government and most sectors of the economy. They also enjoy leadership positions in the world's most important multilateral agencies, such as the International Monetary Fund, and they run the central banks.

Third, unlike medical interventions, economic interventions almost always harm some members of society even as they help others. Think of the economic case for free trade. We teach our students that even though eliminating trade barriers will benefit many in society, there will always be those who lose careers, incomes and economic security as a consequence of the policy.

Fourth, economic interventions also entail a risk of unforeseeable harm, and these harms can be considerable. We never know whether an economic policy we advocate will succeed; or what will be the full range of its effects.

Foreseeable harm and the risk of unforeseeable harm imply that economics is dangerous business. Think of the consequences of failed economic reform in Russia in the early 1990s, where attempts by well-meaning but overconfident economists to engineer a smooth transition to a market-led economy led to extraordinary social dislocations (including a dramatic fall in life expectancy).

Or closer to home, think of the current economic crisis. Leading economists including Nobel laureates Joseph Stigliz and Paul Krugman now argue that the economics profession helped cause the crisis by preaching the virtues of unregulated financial markets in the decades leading up to the crisis.

Economists hypnotized government officials and market actors into believing that asset price bubbles just don't happen. As late as mid-2007 Fed Chair Ben Bernanke assured the U.S. Congress that U.S. financial markets had become increasingly stable and sound - just as the financial system was about to fall off a cliff.

Backing this optimism was the "efficient markets hypothesis," which states that in free markets asset prices accurately reflect all available information. In this view irrational exuberance can't drive markets; escalating prices simply imply a favorable shift in underlying economic fundamentals. It's a lovely story, backed by some impressive mathematical models. The only problem is that it doesn't describe the way asset markets actually work.

And today we are suffering the consequences of this extraordinary theoretical blunder. Lives have been destroyed - not because economists were on the take and failing to report their conflicts of interest, but largely because well-meaning economists got it very wrong.

Influence over others and the prospects of harming those we seek to help - these taken together imply that economic practice is ethically fraught. No less fraught than medical, legal or journalistic practice. And yet, while virtually all other professions that share these features have adopted professional ethics to guide their members, economics has refused to recognize its ethical duties.

This represents a gross professional ethical failure - not just by those economists who have failed to report on their conflicts of interest, but by the profession as a whole.

George DeMartino is a professor at the Josef Korbel School of International Studies of the University of Denver.He is the author of "The Economist's Oath: On the Need for and Content of Professional Economic Ethics," Oxford University Press (2011); and a member of the World Economic Forum's Global Agenda Council on Values in Decision Making.
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