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Shadow Elite: Do Economists Need a Code of Ethics?

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"An ethical code for economists? That's a bit like adopting a chastity vow at the Bunny Ranch."

-reader comment to the New York Times,
January 4, 2011

This comment is striking, and not just because it manages to put "economists" and "Bunny Ranch" in the same unlikely sentence. It shows the stark disillusionment many feel towards some in the profession who have presented themselves as impartial when dispensing economic advice, even when they may well have a personal interest at stake.

The American Economic Association begins its annual meeting today in Denver and reportedly plans to take up the issue of whether the time has come for a code of ethics for economists. It's about two decades and a half dozen major economic crises too late. Among the most infamous examples of questionable behavior is the case of the economists expensively "commissioned" in 2006-7 by Iceland's leaders to assess the country's stability. Pity the investor who listened to their predictably positive and spectacularly incorrect conclusions.

One would hope economists would be chastened by bad press like this but as Gerald Epstein and Jessica Carrick-Hagenbarth of the University of Massachusetts-Amherst recently found, no such luck: out of nineteen prominent academic economists who gave "expert" advice to the media and public about financial reform, the "vast majority of the time, [they] did not identify these affiliations and possible conflicts of interest."

And borders are not barriers to the most agile players who also populate international institutions like the IMF and World Bank: the researchers note: "...being associated with these important 'public institutions' can enhance the [economist's] credibility... prestige ... consulting fees, travel and research support....access to data and inside information."

Do these economists and development consultants use that inside information to further the public good or to further their own interests? Too often it's the latter and these issues are front-and-center in the recently released book that Janine co-wrote with Lloyd J. Dumas and Greg Callman: Confronting Corruption, Building Accountability, which includes a prototype code of ethics (drafted by political economist Dumas) that might serve as a reference for the AEA should they decide to craft their own code. It sprang from a Ford Foundation-sponsored project and workshop where nearly two dozen current and former officials from countries that had received aid and advice from foreign economic consultants gave their first-hand accounts of ethically-challenged and sometimes culturally obtuse behavior.

What is the MO of some of these consultants (some of whom include academic economists)? As Dumas writes in Confronting Corruption:

[T]he most prominent of [them]are not simply neutral sources of advice....They can be conduits to critical sources of finance. They can be the designated representatives of aid-giving governments who send them into the field to give advice that furthers the aid-givers political and economic agendas. Or they can be freelance technocratic entrepreneurs, changing roles as easily as they change clothes.....playing whatever side of a situation to maximize their own status, influence, and income.

In short, these consultants can be much more powerful than is commonly understood. And where there is power and ... the appearance of great authority, there is always opportunity for corruption. [While] corruption has traditionally been defined as the use of public office for private gain....corruption [can occur] whenever individuals use for their own...gain, the authority, power...information [and implied trust]...given to them for the expressed purpose of furthering the interests of others....The violation of such trust...is the essence of corruption.

Janine in Shadow Elite maps out some of the more egregious examples of economists, some free-lancing, some not, who have undermined the public interest. She traces the connections between Russia's so-called Young Reformers of the early 1990's, led by Anatoly Chubais, and a group of Harvard players, chief among them economist Andrei Shleifer.

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Shleifer headed the (now-defunct) Harvard Institute for International Development's project to reform the Russian economy, which was funded with taxpayer dollars. With the help of Shleifer's close friend in the Treasury Department (and Harvard economist) Larry Summers, Harvard secured tens of millions of dollars in noncompetitive U.S. awards for this work, and Shleifer's team was key in managing hundreds of millions more.

In time, complaints accumulated about conflicts of interest by the Harvard team. Shleifer and the other Harvard principal were investing in many of the same areas in which they were being paid by U.S. taxpayers to provide "impartial" advice to help develop the Russian economy. This led to a massive lawsuit against Harvard, settled out of court. The real losers though are the Russian people whose economic opportunities were stymied by a small group of self-interested players comfortably ensconced in places like Cambridge, Wall Street, Washington, and Moscow.

Even after this failure, Shleifer in 2004 co-wrote a piece on Russia, "A Normal Country", in Foreign Affairs, without making clear his central role in the Russian "reforms." This prompted Janine - along with the lead investigator from the Office of Inspector General of the U.S. Agency for International Development, two former political officers from the U.S. Embassy in Moscow, an eminent economist, and a prominent political scientist - to write a letter to Foreign Affairs' editor, pointing out that this was akin to letting Shleifer grade his own homework. Foreign Affairs did not publish the letter, telling Janine that none of the Russia experts and economists they consulted with objected to Shleifer writing about Russia in a general sense.

So in the midst of the U.S. government's lawsuit against Harvard, Shleifer, and another Harvard principal, Foreign Affairs gave Shleifer a respected platform to legitimate his activities and thus his defense. At the very least the magazine should have identified Shleifer's involvements. Of course, an economist himself should disclose that information to the publication or media outlet, as well as to the public. (Shleifer appears in the current Foreign Affairs, again writing on Russia.)

The prototype ethics code in Confronting Corruption would compel far more explicit disclosure from consultants, as would the code suggested this week by 300 economists in a letter organized by those University of Massachusetts researchers - Epstein and Carrick-Hagenbarth.

We strongly urge the [AEA] to adopt a code...that requires disclosure.... in public speeches and writing, as well as in academic publications......of potential conflicts of interest that can arise between economists' roles as economic experts and as paid consultants, principals or agents for private firms. As the .... profession serves a prominent role in economic policy, the public's confidence .... will, in part, depend on how the issue ... is addressed.

Note that the signatories are not just 300 concerned citizens but 300 economists. They know that corruption not only damages the public interest but also the good name of the majority of professionals who operate day-to-day with honesty and integrity.