Ethical economists

What’s at stake: The members of the American Economic Association received on Wednesday an email signaling that – beginning July 1, 2012 – all submissions to AEA must be accompanied by a Disclosure Statement summarizing potential conflicts of interest. The AEA’s move was partly motivated by the public attention the documentary "Inside Job", which outlined ethical lapses within the profession. Although the AEA has no authority to police economists, other journals will probably use the AEA’s disclosure guidelines to formulate their own. And many economics departments and think tanks will likely establish rules that adhere to these guidelines.

The Inside Job effect

Jerry Petr writes that the financial crisis and “great recession” of 2008–09 provided impetus for development of the new guidelines. Journalists and documentary filmmakers, along with political leaders and some economists themselves, questioned the advisory roles played by well-connected and high profile economists who were also closely tied to and financially rewarded by private corporations or institutions who could be impacted by their analyses or policy recommendations. Some of the apparent conflicts of interest were striking. A number of the distinguished gurus offering guidance to policymakers turned out to be sitting on boards of directors of, or receiving substantial payments from, entities affected by those high-level policy decisions.

Christian Chavagneux writes that this problem is typical of periods of irrational exuberance. In his classic on the crisis of the 1930s, John Kenneth Galbraith already pointed out that in the 1920s it was a must for investment companies to have their own economists, citing a few names of economists that have become completely forgotten today, but worked for the interests of financial firms. A recent book by George DeMartino shows that the question surrounding the role of economists arises as early as 1920, around three themes that seem familiar today: 
- the responsibility of economists as advisors to governments and businesses, 
- their direct or indirect financial speculation 
- and the fact that part of the research funding comes from private interests. The American Economic Association discussed these issues several times in the 1940s, 1970s, 1980s, 1990s and 2010s, but it took Inside Job and the related attacks to the profession for it to move in 2012.

From the open letter to the AEA to the disclosure policy

About a year and half ago, Gerald Epstein and Jessica Carrick-Hagenbarth, two economists at the University of Massachusetts Amherst, organized an open letter to the American Economic Association urging the organization to “adopt a code of ethics that requires disclosure of potential conflicts of interest that can arise between economists’ roles as economic experts and as paid consultants, principals or agents for private firms”. In early 2011, the AEA assembled a five-person panel to look into the issue of ethics and economics. Nobel laureate Robert Solow chaired the panel. Almost exactly one year later, the AEA adopted a new code of disclosure aiming to highlight potential conflicts of interest. The new code requires academics to state sources of research funding, memberships of non-profit advocacy organizations and applies to a range of writings, from journal entries to op-eds and testimonies to federal and state legislative committees.

Noah Opinion pointed out that these requirements are similar to what researchers face when publishing in medical journals. Will these guidelines improve policy? Some are skeptical. But I think the important question is: Will the new guidelines hurt anything? I can’t see any way that they could. To argue that the rules will make us worse off, you basically have to argue that more information will make the marketplace of ideas less efficient. I guess that’s a possible argument to make, but it seems kind of unintuitive. In general, it seems to me that more sunlight can’t be a bad thing. And if a policy has potential benefits and no obvious downside, why not do it?

The new disclosure policy for AEA journals

The AEA explains on its website how the policy will work. For papers accepted for publication, disclosure will take two forms: If the disclosure statement is brief, it will be included in the “acknowledgments” footnote. If the disclosure statement is longer, then disclosure will have two parts: (i) a brief statement summarizing potential conflicts of interest that will be included in the “acknowledgments” footnote; (ii) a more detailed description of the activities and relationships that are the source of a potential conflict of interest. This more detailed account will be available to the public, but only electronically, on the journal’s website. Failure to disclose relevant information at the submission stage may result in reversal of acceptance decisions. If the paper is already published, the journal reserves the right to post a note on the journal’s website and in its printed version notifying readers that the authors of the paper violated the AEA disclosure policy. Violations of the disclosure policy will be brought to the attention of the Executive Committee of the American Economic Association who will decide on the appropriate course of action in each case.

The AEA also writes that in cases of uncertainty regarding whether to disclose a particular relationship, a guiding principle should be the answer to the question: “Would I or my institution or a reasonable person be embarrassed if I had not disclosed this relationship and it was subsequently discovered by a journalist, colleague or university administrator?” If the answer to this question is “yes”, the relationship should be disclosed. The AEA provides a Q&A to help clarify the policy. As pointed out, the AEA policy is specifically focused on disclosure of “conflicts of interest” that arise because of potential financial/material gains for the researcher.

The French Inside Job

Although initially limited to the US and the UK, the questioning of the advisory roles played by well connected and high profile economists turned to France with revenge in 2011. Jean-Charles Briquet-Laugier at the website Ressources pour Economistes is the place to go for an overview of this discussion. The author summarizes its different phases starting from the publication of a book by the Mediapart journalist Laurent Mauduit: “Les imposteurs de l’économie – Comment ils s’enrichissent et nous trompent !". Briquet-Laugier has created a Scoop-it that gathers the different columns related to this discussion (see for example, Mediapart, Christian de Boissieu and Jean-Herve Lorenzi, or even Wikipedia).

Interestingly, the move towards more transparency has also followed by organizations such as OFCE, and is apparently under discussion at other institutions.

Ethics and Economics beyond disclosure

The recent measures taken by the AEA highlight some concern for the ethical underpinnings of economics, but leave unaddressed some important ethical issues faced by economists.

Tony Atkinson recently put the spotlight on welfare economics arguing that economists should offer arguments for the ethical criteria underpinning welfare statements. Atkinson stresses that an important number of articles (20 out of the 65 published in 2009 in the American Economic Review) make welfare statements about concepts such as optimality, efficiency and welfare costs. While these pieces draw numerous normative conclusions, the ethical basis of these judgments is often left unexplained.

Daniel Hausman further discusses the issue of economics and ethics suggesting that more attention should be paid to pecuniary externalities. Economic theory classifies externalities into two categories: non-pecuniary and pecuniary. Non-pecuniary externalities directly have an impact on the utility function of the party concerned, as is the case of CO₂ emissions, outside of markets. The consequence of pecuniary externalities, on the other hand, may be mediated via markets. Disregarding pecuniary externalities is the essence of what Schumpeter called creative destruction. But these bring up important moral issues which should be considered by economists.