Stanford Progressive

Disclosure ≠ Resolution: Academic economists and the global crisis

By Lewis Marshall, published July, 2011

In September 2008 the United States economy partially collapsed due to a confluence of risk, the housing bubble, and deregulation of systemically important banks. This collapse threw into question the value of every asset that we owned, sowing fear. The effects of this fear were felt around the world.

Between 2008 and today, a moment of crises stretched into the Great Recession. For millions of Americans, this has meant unemployment, foreclosure, and fear that the American dream is lost.

In May 2010, Charles Ferguson unveiled the movie Inside Job at the Cannes film festival. In 108 minutes, Ferguson explained the causes and consequences of the financial collapse. The movie is accessible and well-reasoned, and it will make you angry. It was the most important movie of 2010, the Academy’s assessment of The King’s Speech notwithstanding.

Importantly for Stanford University, the movie included damaging interviews with academic economists, particularly from Columbia. The Columbia Spectator described the situation.

“In 2006, the Iceland Chamber of Commerce paid Columbia Business School professor Frederic Mishkin $134,858 to co-author a report on Iceland’s economy and banking systems. In the report, titled Financial Stability in Iceland, Mishkin painted a bright picture of the country’s economic future, but he did not disclose who was paying him to write it.

“Although Iceland’s economy does have imbalances that will eventually be reversed, financial fragility is not high and the likelihood of a financial meltdown is very low,” Mishkin wrote.

Two years later, Iceland’s economy collapsed.

The movie repeatedly showed academic economists had undisclosed, unresolved conflicts of interest. The implication was, economists could have warned us about the risks, but they had an incentive not to look. This prompted several major universities, including Stanford, to review their ethical policies. Some have called this phenomenon the “Inside Job Effect”.

The Stanford School of Economics has recently and quietly adopted a new code of conduct mandating public disclosure of any conflict of interest:

“Given that transparency is of vital importance in maintaining the integrity of academic inquiry, the faculty of the Stanford Economics Department adopted the following resolution. It is expected that all members of the Stanford Economics Department will publicly disclose any financial or other significant interest that may be perceived to affect the conduct of their research. If a reasonable person would infer that a faculty member’s research conclusions or opinions might be biased by his or her financial or other interests, it is appropriate that the faculty member reveal those interests. Such interests, even if not related to the funding of the research, should be disclosed when appropriate in working papers and publications along with other acknowledgments of financial support and assistance from editors, reviewers, colleagues and seminar participants. Some examples of financial or other interests that could merit disclosure might arise from research funding, external consulting arrangements, service on a board of directors and/or other significant relationships.”

In other words, faculty members are expected to disclose their conflicts of interest, but they are not expected to resolve them. This decision sets the ethical bar very low. It would still allow a country or company to pay a professor for a positive analysis, as Iceland did from Prof. Mishkin at Columbia. Such a report would now have to disclose that it was paid for. [1]

A standard that academics avoid or resolve conflicts of interest would be nothing new. Many professional organizations have similar standards. The American Sociological Association, the American Psychological Association, and the American Statistical Association have ethical codes that demand avoidance of conflicting influences, and the resolution of situations that even appear to promote bias.[2][3]

Obviously, academic economists were not and are not the sole cause of our economic problems. However, their expertise guides a national debate on how to respond to the suffering that economic turmoil causes. This role is inherently both scientific and political. Stanford should be enforcing the highest ethical standards for those who play that role. Anything less is a risk that Stanford’s name will be dragged through the mud in some future crisis.


[1] This middle-of-the-road decision is similar to other post-collapse regulation efforts. The Dodd-Frank Wall-Street Reform bill regulates financial derivatives, which provided some of the hidden, systemic risk in the banking system. There are no restrictions on what types of derivatives are legal. (You can still buy insurance on a house you don’t own, more or less. This activity is difficult to distinguish from out-and-out gambling.) Now all of these derivatives will be traded in public instead of in secret.

[2] It is difficult to see how an economist would justify disclosure as a solution to conflicts of interest. Economics is in large part a study about incentives. A conflict of interest is an incentive — in this case, an incentive to provide a biased opinion. The idea of an unresolved conflict of interest should be anathema to anyone who believes in both the validity of incentive-based models and the importance of academic integrity. Disclosure dose not remove the incentive, it simply makes third parties aware that an incentive exists.

[3] At the same time, corrupting influences are openly seeking to subvert the study of economics, for blatantly political reasons. Insider Higher Education reports that the Koch Foundation (a highly partisan group funded by the  billionaire Koch brothers) is making donations worth hundreds of millions of dollars to the economic departments of collages and universities. These donations come with strings firmly attached. The foundation is allowed to review the hiring decisions of the departments in question, and to some extent to set the topic of research.

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