I am teaching a new course on “Economics and Ethics” this semester. It is oriented towards students doing joint degrees in philosophy, politics and economics – a strand of work that follows a famous degree offered at Oxford University. It came at a convenient time given that, for the last year, I have been reading in the area of applied ethics and have developed an interest in this subject.
As part of this course I will give classes on business ethics and discuss Kenneth Arrow’s ideas about how ethical codes might develop in business. Arrow was one of the early thinkers to see “soft” ethics solutions to difficult problems in business, for example those raised by quality issues, such as George Akerloff’s “lemons problem”. In some cases these ethics solutions might outperform institutional arrangements, such as liability laws, but the way such codes might come about can be a problem. There are Hobbesian, “Prisoner’s Dilemma” issues that made it desirable for individuals to opt out of such socially desirable arrangements. The right institutions (industry or consumer associations) can help but so too can ethical codes.
As a sequel to the class on business ethics I thought I should think about such ethical codes for my own profession namely, economics. So I read George DeMartino’s (2011) The Economist’s Oath: on the Need for and Content of Professional Economic Ethics that is the primary recent reference on such issues. For some earlier reviews of this work see here, here, here. This book is not the only voice seeking better ethical standards in economics – the American Economic Association have recently advocated fairly narrow ethical standards for the profession relating to issues involving “conflicts of interest”. As far as I know the Economics Society of Australia has not considered such issues. I have also purchased the film “Inside Job” that identified links between prominent economists and firms that subsequently went bust in the recent financial crisis – the video at this link suggests that conflicts of interest arose among several very prominent economists associated with the financial services industry. I’ll show this video in class. However the ethical issues this movie raises are private issues that can be addressed (if not resolved) quite simply, at least in principle.
DeMartino believes there is an urgent need for a broad professional economics ethics simply because economist-inspired interventions have such enormous social impacts. If economists certify the health of a bank that subsequently collapses under a mass of bad debt, then the skills or “probity” (here the notion that reasonable people would judge such forecasts to be acceptable) of economists can be questioned. I summarize the main points of DeMartino’s book below.
Case for an ethics
DeMartino believes economists tend to be naïve, in displaying hubris regarding their policy prescriptions and that this problem goes beyond private ethical concerns such as acting dishonestly. Even if economists are honest and understand exactly the knowledge they profess they can still behave unethically. The difficulty lies in the failure of economists to appreciate that their policy advice constitutes a form of social engineering. In short economics has public consequences. However economists often deal with their subject as if it is ethics free. Their technical capabilities are often strong but they often lack ethical sophistication. A code of ethics seeks to establish economist awareness and provide a standard by which the public can assess economist work. It emphasizes the harms policy prescriptions can cause, seeks to maintain an attitude of humility reflecting recognition of imperfections in economic understanding and the intrinsic uncertainties that arise as well as the value of plurality and open inquiry.
A core part of DeMartino’s case is based on the failure of US economists to appropriately regulate the US financial sector. This led to the collapse of Long Term Capital Management – an institution with a key role for Nobel Prize winning financial economists (Robert Merton, Myron Scholes) – that used sophisticated financial theory to invest in capital assets. LTCM collapsed under overwhelming debts threatening the entire world financial system.
Even more broadly the 2007 global financial crisis represented a continuing failure to appropriately regulate financial institutions that dates back to the 1980s. Economists (including Fed Chairman Allen Greenspan) argued against regulation on the grounds that financial liberalization would improve economic efficiency. The consequences of this view were disastrous and Greenspan later admitted he was wrong.
Another policy failure was the failure to consider the complexities associated with “free market shock therapy” as a policy prescription for developing and formerly socialist countries such as Russia. Communities were unable to manage such rapid changes. The ethical problems here included the fact that advice was given by economists, such as Milton Friedman, to authoritarian regimes (e.g. Pinochet’s Chile) where citizens had no influence over policy that ultimately caused huge social costs.
Hubris was shown not only by economists on the right in demanding market liberalization but also on the left by those favoring public ownership.
In all these situations the case for an ethics code is not primarily based on preventing deliberate wrongdoing (though that is part of it) but in improving the outcomes virtuous people would provide by emphasizing the ethical implications of their work. Martino targets intellectual and pedagogical practices. Ethical codes might emerge in specific areas of economics but the main emphasis should be in creating a professional emphasis on ethics.
Economists work in many settings. Indeed without licensing or certification it is difficult to identify who is an economist. In the US most economists work for government where the applied work they do impacts on public decisions. They face ethical problems because they are more than technical experts. Some pressures arise from time and budget constraints that occur because advice typically needs to be delivered by deadlines creating pressure to provide inadequately thought through ideas. There are also pressures to provide findings that back up an institution’s mission or advance manager interests. This can create incentives to preselect particular types of economists to undertake projects. For consultants there are also pressures to bias conclusions to gain ongoing work. Then bad consulting practice can drive out the good.
In addition, reports may be suppressed if they provide conclusions that are unsought.
Groupthink, the conventional wisdom and guru-worship (particularly of academic economists by non-academics) can be an issue. Speaking-one’s mind can be difficult when there is a duty to serve an institution. Even refusing to express a view can be wrongly interpreted.
Economists may also act as social engineers, particularly those working for international financial institutions (IFI). The IFI may provide resources to get a client out of a difficult situation and the economist needs to work out what to do. There might be no time (and this may even be undesirable) to understand consensus views of those exposed to reforms. The core issues: Should economists act as social engineers? If so what ethics apply? If there are autocratic local leaders should economists “dirty their hands”?
Case against ethics
Why have economists resisted professional ethics? One reason is claimed “economic exceptionalism”. One version of this is that economics is a detached and non-partisan like a physical science and is ethically neutral. The economist is viewed as a technocrat whose only obligations are to not plagiarize, to not falsify empirical results and to not rely on personal biases. Economists are viewed as advising policy-makers not policy-makers themselves.
It can also be claimed that economists are only morally responsible for actions they cause to happen. Even then they are only responsible for intended consequences not unintended adverse effects. These arguments, if correct, substantially reduce any ethical obligations economists face.
Others argue that economics, while requiring extensive training, is not a profession since there is no explicit commitment to the public good during that training as there is in law and medicine. Nor is there any attempt by the economics profession to self-govern nor have there been attempts to control entry to the profession by establishing minimum credential criteria. Indeed economists have a natural antipathy to professional organizations they see as restricting competition. Licensure is an extreme form of such restrictions since an effect is to restrict consumer choice and discourage innovation. An industry economics example is the licensed taxi industry.
Without a strong central professional body ethical requirements are then likely to reduce to a stream of platitudes that can be safely ignored.
Also consequentialist thinking of the type used by economists may inhibit the idea of adhering to principals since motives are then irrelevant.
A final argument is that consumer sovereignty dictates against prescribing the types of services an economist should offer. Competition is enough to ensure that shoddy economists are put out of business.
DeMartino’s Refutation (of case against ethics)
The arguments economists advance against ethics are better viewed as arguments within professional ethics. They affect the type of ethics espoused.
Ethics need not and should not comprise a binding code of conduct with legislative force. Instead ethics should promote inquiry into promoting professional awareness of ethical issues and good behavior. There should be investigation and evaluation without legislation. Issues of consumer sovereignty and monopoly power are therefore irrelevant.
Because economists assume people are motivated by self-interest they are cynical about professional ethics. But this view of human motivation is excessively narrow. Moral values that advance such things as community service can undermine self-interest.
Nor does the role of economists as advisors eliminate ethical concerns. Certainly the advisor should emphasize sensible options even if they are unpopular to their principal. They should be particularly careful to advise of actions that could produce significant costs. Advice should not be framed in a way that favors advisor’s prejudices. It needs to be recognized that advisors are often not neutral technicians. Economists inevitably have an advocacy role.
The claim that economics is not a profession because it is not committed to public service and is not self-governing just seems wrong. Many business schools and their students commit to engaging with ethics. Most economics sees itself as serving the public interest even if, paradoxically, its own discipline assumes self-interest. Economics has not sought self-regulation but this only matters if ethics is seen as a code defining membership of a group with suspension of membership being associated with violations of the code.
The same point follows from the view that consequentialism provides a basis for not wanting ethics seems invalid. This only suggests ethics should be concerned with consequences not only ethical codes.
Positive case for economic ethics
The core case for professional economic ethics is an agency issue because professional economists know more about economics than their clients. This creates both the prospect of opportunism and skepticism towards (and perhaps reduced demands for) economists.
Economics meets the criteria for being a profession. Specifically training & abstract knowledge (e.g. mathematical formalism and econometrics) are important; economists feel they have the right to pronounce on issues related to their area of expertise; tasks undertaken by economists have social significance since economists believe they are working for the public good; economists claim to be governed in their behavior by role-specific norms rather than general social norms; many economists work in bureaucracies.
What tare the ethical obligations that derive from economics being a profession? What obligations do economists have? This can be summarized as an agreement (or covenant) between economists and their clients.
Certainly economists must display practical wisdom that shows how best to proceed to resolve economic problems in an efficient way. Fidelity concerns are important. This involves both truth-telling to others and not deceiving one-self because of selfish motives. Candor about the limitations of expertise can be important. While hubris is often inadvisable in some cases exaggerated confidence in a policy may improve that policy’s credibility and have self-fulfilling effects in achieving success. Finally public spiritedness means advancing the interests of others even when such actions may be costly and actions are not being monitored.
There are 5 substantial positive arguments for a professional ethics:
1. Intellectual monopoly economists enjoy. The core case for an economic ethics is simply that economist actions (warnings, advice, counsel…) impact on others in consequential ways. They impact on the circumstances of those in the economy. This impact is not an unintended byproduct but the point of activity.
The types of policies advocated matter. Should they target equity or efficiency? Should those communities impacted on have a say since they bear consequences? The answer to the latter is not obvious: One can imagine situations where good policies are advocated that the community abhors. Then the economist might seek to sustain a distance to avoid pressures from special interests. As noted above there are circumstances where economists might have reasons to exaggerate the confidence they attach to recommendations in order to foster credibility. But if this is true then why not misrepresent data if doing so improves policy credibility? One purpose of a professional ethics is to resolve such issues. What principles and virtues should economists have?
2. Institutional power has boosted the economist intellectual monopoly. Economists have become central people in key institutions that have increased power. An example is central bank which have gained independence. Generally international financial institutions (IFIs) such as the IMF, the OECD and the World Bank are powerful in driving such things as privatization policies that have strong ethical implications. Financial liberalization has also driven a key role for economists in private IFIs because of opportunities for massive financial gain although with potential obvious conflicts of interest.
That economists now govern and are involved in financial dealings with huge payoffs raises non-trivial ethical concerns.
3. Unevenness and anticipated harms. Economic interventions affect different groups unevenly. There are gainers and losers. There are well-known arguments against simple utilitarianism and, while this case improves if compensations are made to losing parties, they often are not compensated. In addition there are specific difficulties if the losers are the worst-off in society. It is simple-minded to ignore these issues. Ethical sophistication is required.
4. Uncertainty, Risk and Unanticipated harm. Error and ignorance are intrinsic to most economic problems and subjectivity is inevitably involved, There is then always the risk of policy failure and unintended consequences even if nothing is done. Life outside of models drawn on whiteboards is messy. Economists operate in a world of “epistemic insufficiency”.
Such risks and associated possible harms need to be confronted ethically.
5. Influence without control. Interventions proposed by economists can be high jacked by interest groups. Economic advice is often only one of many inputs to a policy decision. Moreover even if economist policy positions are accepted economists typically do not control policy implementation. Ethics needs to consider situations where economists enjoy influence but exert incomplete control.
Each of these 5 arguments provides an independent case for a professional economics ethics. The form of such ethics has not been discussed. Should it be consequentialist or deontological? How should human rights be incorporated? The general insight is that we can learn from other professions.
Content of ethics
What ethics insights can economists import from other professions? A number of principles recur across professions. Relying on these is principlism that would itself be contested by virtue ethicists. Two principles of particular relevance to economics are non-maleficence and autonomy. Fields such as bioethics include beneficence and justice.
Nonmaleficence is a concern for harm that a professional may cause. In medicine it is the admonition “First, do no harm.” This is weaker than “heal the patient” which is too dangerous in a world of uncertainty. In environmental protection the contested “precautionary principle” is widely advocated. It suggests that the obligation for the burden of proof that an action is safe is borne by the proponent of the action. DeMartino refers to “harm avoidance” across various professions as the prudential principle.
Autonomy is concern for the agency of those whom the professional serves. It rules out paternalism in a Kantian way by respecting individual integrity. This rules out utilitarian concerns for the greater good since pursuing community interests can forego consideration of the rights and interests of individuals. It also drives truth telling. Enforcing principles of “prior informed consent” advances autonomy although there is ethical disagreement about the ethical desirability of this even in one-on-one situations but more particularly when groups of people are affected by an action. For example is unanimity required?
Apart from principlism, professional ethics also considers practical issues that arise in professional work. There are several important issues:
“Dirty Hands” Problem. Can a professional do wrong in order to do right? This has been discussed in relation to exaggerating the confidence of belief in a policy to improve credibility and the prospects it will be effective. Should bad options be suppressed to a client out of fear that they might prove attractive? Should negative consequences of policies be suppressed in order to achieve important objectives?
“Too Many Hands” Problem. An organization can pursue a course of action that causes terrible harm but each individual in it is acting in ways consistent with the norms of their professional roles. There can be “administrative evil” as arose during the Holocaust. Even the railroad managers, the sanitation engineers conspired to create a complex killing machine with each party “doing their job”.
The inference here is individuals cannot only focus on their own conduct alone. They must also concern themselves with the goals and conduct of the organizations they work for. Issues of humility and loyalty inevitably compete with those of autonomy and individual responsibility.
Conflicts of interest. Asymmetric information can create opportunities to act opportunistically and to exploit relationships for self-interest. This can be complex because conflicts of interest are seldom clear-cut. Rules alone will be insufficient. They must be augmented by self-policing by those with integrity.
Corruption. Obviously to be avoided but what should be done when corruption occurs among others. Should the offense be reported? How to deal with a project manager found to be stealing small amounts from a charitable organization that will become nonviable if the corruption is detected? How are the consequences of reporting corruption assessed?
Whistle blowing and resignation. It can be difficult to reveal bad practices. Reporting inside an organization may leave the problem unresolved. Can a public condemnation be made which identifies the wrongdoers? Given that information in such situations is likely to be imperfect and that motives may be questionable, whistle blowing is unlikely to always be appropriate. If the situation cannot be changed the observer’s resignation from the organization may make sense.
The strength of the need to formulate professional ethics can be examined in relation to important recent events such as market liberalization moves in developing and transition economies and with respect to the campaign to prevent financial regulation in the US during the 1980s and 1990s.
Ethics of Market Liberalization
An important project in recent years has been the promotion of market-oriented economic reform in developing and former socialist countries. One can argue that the non-maleficence (or prudential, “do no harm”) principle and the autonomy principle have largely been abandoned in such endeavors. The failures for the most part have been professional rather than individual since they accorded with the predominant norms and expectations of the profession.
The Washington Consensus entailed the replacement of state direction of activity with markets. This required privatization of enterprises and resource, the enhanced protection of property rights, extensive deregulation, internal and external financial deregulation, trade liberalization and the establishment of macroeconomic discipline. The reforms were often carried out over the heads of and despite opposition from those affected. Moreover, the reforms were to be implemented “as fast as possible”. The reforms were enormously risky given the pace and scale at which they occurred.
The social engineering that occurred could not meet any imaginable viable professional economics ethics. To DeMartino the ethic adopted was a version of Nozick’s (1974) utopian “maxi-max” principle. The decision maker selects the policy option that “has of its many possible consequences one which is better than any possible consequence of any other available action” (p. 298).
The enormous risks involved are dismissed by choosing an option with the best possible consequence without regard for the probability of that outcome. Applied to personal finance it suggests investing only in lottery tickets with the largest prize.
For the Washington Consensus the best payoff was yielded by an ideal liberalized market economy. There was confidence in such policies and on the underlying economic theory on which they depended. No other possible outcome was entertained and the prospect of policy failure was ignored. An uncompromising utopian spirit prevailed.
In fact the policies had disastrous economic effects in Latin America and Africa while in the former Soviet states a massive theft of state assets occurred. Other countries such as China pursued development more successfully, without severe dislocation, using piecemeal reform. The maxi-max attitude to policy was hubristic/ideological rather than humble/pragmatic. It was inconsistent with non-maleficence because it did not seek to limit avoidable harms. It also violated autonomy since it ignored self-determination. Indeed it explicitly did not require “prior informed consent”. The approach was paternalistic.
By asking current generations to experience huge costs – lower living standards, increased morbidity and mortality rates, increased crime and alcohol abuse – so that future generations could be better off it implicitly applied a negative discount rate. The idea that lives could be traded against lives is clearly ethically contentious.
Global Economic Crisis
The 2007 global economic crisis, the major global economic failure in 70 years, was by in large unanticipated by economists. Critics have alleged that theoretical models that ignored the possibility of financial turbulence in fact led to the crisis. Few economists recognized that lending practices were impudent and that US housing prices were unsustainably high. The belief that market forces would impose discipline on financial markets was wrong.
In some respects arguments for deregulating financial markets were analogous to those for market liberalization in developing and transition economies. Again there was excessive faith in theoretical beliefs and implicit use of a utopian maxi-max decision rule in situations where this was too dangerous. Insights from experimental economics and economic history that focused on the possibilities of boom-and-bust in financial markets were ignored. The potential costs of financial market failure to the community were ignored.
In the US the Glass-Stegal Act was repealed in 1999 so that boundaries between commercial and investment banking were dissolved. Moves to increase regulatory oversight of financial markets introducing subprime lending, derivatives markets and collateralized debt obligations were rejected. The logic was that risk would end up being borne by agents with the strongest preference for it so efficiency would obtain.
Part of the reason for the economics profession’s failures was a consensus devotion to theoretical elegance and the efficient markets hypothesis in particular. Irrational pricing couldn’t occur since irrationality implied profit-making opportunities that markets would identify. Bubbles were ruled out with sufficiently efficient markets.
There were alternative views (e.g. Shiller, Roubini) and a long-tradition of concern for crises in capitalism induced by financial markets (Marx, Minsky) but the vast majority of economists ignored this advice. Indeed there is evidence of substantial “groupthink” particularly around the efficient markets conventional wisdom.
Searching for Professional Economic Ethics
DeMartino sees ethics as “keeping economists up at night” rather than “sleeping well”. There are no simple ethical rules since the relevant ethical universe is irreducibly complex and contradictory. Practitioners in econometrics, experimental economics and in the use of randomized controlled trials (RCTs) have only begun to explore the ethical implications of their research. Seeking results that are robust and which have economic significance, examining potential harm and exploitation of subjects in experiments and RCTs are important.
Prudential principle. Concern for the harms actions can cause is important particularly in situations of high Knightian uncertainty. The maxi-max principle certainly makes no sense but alternative rules such as minimax don’t work well either. In addition the prudential principle is conservative and biased towards the status quo. It would rule out most policy innovations even when the associated risks were acceptable to the community so it is paternalistic. It might also perpetuate oppression and injustice. The example of land reform that displaces the rich and imposes huge risks on the poor makes this clear. The prudential principle places too much weight on possible harms. It is necessary but, on it’s own, inadequate as an ethical principle.
Autonomy. The right of the community impacted on by policy to autonomously determine their own future is important. Prior informed consent should be given to the economist or to policy-makers the economist is advising. Clearly ethical doubt must arise when an economist advises an autocrat for “many hands” reasons.
Engaging with a community to understand their interests and to reduce the knowledge gap between expert and non-expert suggests that ethics will at best be pragmatic in managing tensions. Ethics will not eliminate such tensions.
Autonomy can be narrowly equated to “freedom” in the sense of absence of government constraints. It can also, more convincingly, be interpreted, following Sen (1999) as an expanding range of opportunities especially for those deprived of capabilities.
Building capacity. Employing the prudential principle and creating autonomy are jointly insufficient as ethics for dealing with a vulnerable community. In addition economists must enhance the capacity of such communities to risk urgently needed policy reforms. This means enhancing the capacity to succeed with policy, reducing expected harms and increasing the capacity to manage any harm that does occur. Without such capacities, communities will opt for the status quo not risks of innovation. Enhancing capacity is connected to building social capital and working on the basis of accepted social norms. This is not straightforward.
Humility and hubris. Economists are sometimes incautious in making policy recommendations for such things as privatization and market reforms. People behave in complex ways so there is limited economic knowledge and high uncertainty regarding policy impacts. Humility is important.
Economics produces what Isaiah Berlin called “hedgehogs” rather than “foxes”. Hedgehogs were intellectually aggressive creatures who knew a lot about one thing and who sought, under the banner of parsimony, to expand the coverage of that one thing. Foxes drew from an eclectic array of traditions, accepted ambiguities and were content to accept ad hoc solutions.
As an instance, many economics degrees have no courses outside economics.
Hubris can also be generated by demands placed on economists to solve problems they are poorly equipped to deal with inviting overreach. Economists tend not to decline excessively flattering invitations and can even get a “kick” from undertaking a demanding task where hundreds of thousands of lives are affected. They can also experience overconfidence in expressing views because of homogeneous views within the profession and because economics is a high status profession. Ethics requires humility and honest reporting of what can and cannot be dealt with. Requests for opinions should be responded to cautiously.
Practicing humility and recognizing the possibility of failure gives economic interventions the character of an experiment where full consequences of action are unknown in advance.
Pluralism. There is a need to cultivate (not just tolerate) pluralism and dissent within economics. The consensus around the neoclassical (and mathematical) approach is pervasive and is taken to be a sign of the maturity of the discipline. DeMartino emphasizes various heterodox traditions in economics but pluralism with respect to non-economic social theories (sociology, psychology, anthropology, political science) is also important.
Institutionalizing ethics. The adoption of new ethics may call for new curricula, new texts, journals, faculty positions in ethics and ethics review boards.
Training Ethical Economists
DeMartino focuses on US PhD degrees though the style of such programs is being replicated internationally.
PhD curricula in economics haven’t changed much in many years and, if anything, have converged to a common core. The main recent innovation is that courses in economic history and the history of economic thought have been replaced by behavioral and experimental economics as well as in advanced quantitative techniques.
The criticisms of such curricula stem from an excessive orientation to theory and technical skills rather than applications. These are promoted as being key to achieving career success. Surveys suggest that students see do not see either institutional knowledge or knowledge of economics literature as important. The pedagogical target was analytical cleverness not creative minds.
These raise the prospect of ethical failures because they suggest poor professional judgment is likely. Proposals for reform are split into training non-specialists and training specialists.
For the general student conveying a sense of the complexity of economic affairs and the range of economic views is as important as establishing a sense of awe for the achievements of economics as a unified allegedly dispassionate science. A sense of intellectual freedom should be conveyed rather than a unified economics of control. What economists don’t know should be emphasized as well as what they know.
For the trained economist an ethics is envisaged involving a sustained inquiry, controversy and debate. This cannot be reduced to a set of commandments. The ethics require the capacity for self-reflection and awareness. This does not only involve knowledge of ethical principles and problems. It also involves a different curriculum based on technical competence but also phronesis or practical wisdom. This involves the ability to apply technical theory appropriately and attending to the limits of one’s knowledge. It involves an understanding of the difficulties of maintaining a moral stance and the proclivity to morally lapse.
Training might involve being placed in complex situations that economists experience including policy situations where technical, practical and ethical issues arise. Practitioner led seminars could be led by non-academics.
The Economist’s Oath
DeMartino sums up his views by providing a spoken oath that economists should agree to that emphasizes the harms economists can cause and the ethical questions that should arise for economists. The actual ethics go well beyond this oath however and involve a new outlook on doing economics as well as a new professional structure for the profession. But as a starting point an oath is, proposed for graduation ceremonies.
The oath itself reflects the main ideas of this excellent book. Corruption and dishonesty should be ruled out. Ideas of community autonomy, imperfect knowledge and harm-minimization are stressed. The notion that economic arrangements are contested and contestable, are fraught with conflict and often the site of oppression, inequality and injustice is crucial. The dispossessed should receive just treatment and policies should not simply reflect the aspirations of the privileged.
Finally there is a commitment to pluralism and respecting a range of views.
Robert Nozick, Anarchy, State and Utopia, New York, NY, Basic Books, 1974.