(Corrects identification of Dimensional Fund Advisors in fifth paragraph of editorial published Jan. 17. For more Bloomberg View, click on VIEW <GO>.)
Jan. 17 (Bloomberg) -- Economics, at its best, has a noble goal: Figure out what makes people better off and how we can have more of it. Its practitioners in academia need to do a more effective job of defending that ideal against private interests.
Academic economists have recently become the unaccustomed subjects of intense scrutiny. The 2010 documentary “Inside Job” drew public attention to the board seats, consulting gigs and sponsored research that tie many of them to Wall Street. They often failed to disclose such conflicts of interest in their research papers and public comments on topics such as financial reform -- omissions that could influence decisions affecting the lives and livelihoods of millions of people.
At its annual meeting earlier this month, the American Economic Association took a step toward solving the disclosure problem. It adopted guidelines requiring economists, when making public comments or publishing papers in AEA journals, such as the American Economic Review, to detail any funding they have received from interested parties.
Universities and other research institutions should follow suit, and some already are. As employers, they have more power to turn guidelines into rules. And by adopting common standards, they can help academics avoid confusion over what needs to be reported.
Disclosure Not Enough
Disclosure, though, won’t eliminate the actual conflicts. Even the best-intentioned economists -- and particularly those in the area of finance -- face a litany of influences pushing them toward a rosier view of the industries they study. In a yet-to-be-published paper, Luigi Zingales, a finance professor at the University of Chicago’s Booth School of Business, likens the pressure to regulatory capture. A pro-business attitude, he notes, can increase an economist’s chances of landing lucrative consulting, expert-witness and research contracts, and can facilitate publication in academic journals whose editors are themselves captured. (Zingales is a contributor to Bloomberg View’s Business Class blog and has accepted money for speeches to Dimensional Fund Advisors, an investment company, and Banca Intermobiliare, an Italian private bank, among others.)
As a small test, Zingales looked at the 150 most-downloaded papers that had been done on executive pay -- a subject he reasoned could legitimately be argued either way. He found that papers supporting high pay for top executives were 55 percent more likely to be published in prestigious economic journals, suggesting that the editors, also academic economists, have a bias.
Economists’ ties to industry have been particularly noticeable amid the debate over how to fix global finance. Consider the Squam Lake Group, a panel of influential economists formed in 2008 to propose reforms of everything from credit derivatives and money-market mutual funds to bank-capital requirements. Thanks to the disclosures on their websites, we know that 13 of the 15 members have received money from the financial industry or its lobbyists, for activities ranging from speaking engagements to directorships.
For example, in 2010, as regulators were working out how to shore up the banking system, two members of the group -- Anil Kashyap of the Booth School of Business and Harvard economist Jeremy Stein -- co-wrote a paper on the potential economic costs of bank capital. The sponsor of their research: the Clearing House Association, a trade group that represents JPMorgan Chase & Co., Bank of America Corp. and other major financial institutions. Theirs is just one of many examples in which widely respected economists have done research funded by interested parties.
Some conflicts might not be as bad as they look. Kashyap and Stein fully disclosed their source of funding, and their paper actually supported higher capital requirements. Kashyap said he saw the offer as an opportunity to make some extra money while exposing a new audience to research he was already doing (Stein wouldn’t comment because he awaits review of his nomination to the Federal Reserve). But here’s the problem: Nobody, not even the authors, can be 100 percent sure what they would have said if they hadn’t accepted money from the industry. Later papers by others, for example, sought to quantify the benefits -- not just the costs -- of higher capital.
Appearances matter. They can undermine the authority, and hence the impact, of otherwise excellent work -- a reality that other professions have recognized. Journalists at places such as the Wall Street Journal and Bloomberg News must eschew financial ties to the industries they cover to avoid the perception of impropriety. They sign codes of conduct to confirm the absence of conflicts.
Social norms in academia probably haven’t progressed to the point where a code of conduct would stick. Also, a blanket ban on income from industry would almost certainly be too extreme. Consulting gigs, for example, can give academics a more practical and nuanced understanding of their subjects.
Hence, the immediate task is to get economists to recognize that, like all mortals, they may be reluctant to bite the hand that feeds them. We at Bloomberg View will seek to highlight problematic conflicts, and we encourage others to do the same. Zingales, for example, envisions a university center that would name and shame academics who do suspect research for money. That sounds like an excellent idea.
True, if such efforts succeed in preventing economists from accepting some industry money, that could make a career in academia less lucrative. But the loss would be more than made up for in improved credibility.
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