Monday, November 8, 2010

Why Don't Economists Have Ethics?

In this piece in the New York Times, the author says economists lack ethical judgment.  (My favorite has always been Andrei Schleifer's run-in with the Russian government!) Economists, she argues, have conflicts of interest we wouldn't accept from others. 

I'm not sure I completely agree about the uniqueness of economists, but her observations raise interesting questions.  (Do you ask all your doctors about their payments from drug companies, or do you only question the ones on 20/20?)  Are the conflicts between economists' consulting and advisory activities and their "public talking head"/academic researcher blindly unethical behavior?  Why aren't economists concerned about it?

First, economics has nothing to say about fairness.  Economics studies the efficient allocation of scarce resources.  Philosophers study the fair allocation of resources.

The best visual example of fairness versus efficiency is an Edgeworth Box.  In a world of  beer and pizza, an infinite set of efficient allocations exists between two individuals.  A philosopher can tell you to split the goods equally.  An economist can only get you to that precise solution with "utility functions" tuned to that outcome.

So, thinking about "fairness" falls outside the professional domain of the economist.

Second, only one area of economics deals in conflicts of interest: Principal-Agent problems.  (How does the owner of a firm ensure her agent, the manager, runs the business according to her utility function, not the managers?)  This research underlies everything from corporate governance in the board room to GEICO wanting your credit score to price car insurance to why Grameen Bank operates differently from Sewa Bank.

In my experience most economists have completely internalized these notions into their everyday lives.  They assume the conflicts exist because people behave more or less in a self-interested, rational way.  Example: I assume every doctor I speak with is paid by drug companies, directly or indirectly, not just the ones on the evening news.  I assume every salesperson is motivated by their contract, not their desire to help me.  I view this as a good thing.  It makes people somewhat more predictable.

This odd notion of fairness: "I do what I do in my best interest, and you do the same, yet we agree to do business" drives an economist's thinking.

So, next time you speak to an economist, ask her about her conflicts of interest.  I'll bet she's not hiding from them.  But, I'll also bet she's thought about them more than you have. 


  1. You were tantalizing enough that I read about Shleifer in Wikipedia. (It was a good read. There's no c.)

    I wonder if economics changes in economies where there is very little access to money. Where I'm living -- in rural Wisconsin -- it is honestly unfathomable that a drug company would give the local doctors any money. I mean, they are making very little money themselves, most people in town are not insured and can't afford expensive drugs anyway, and one of the most shocking things about living in rural America is there is no advertising. It's just gone (aside from feed companies). Because there's so little disposable income.

    So anyway, I was thinking that I wonder if the rules of behavioral economics would change here.


  2. @Penelope,

    I think you're naive about the situation!

    Check out where you can dig around by state and city to see who has been paid...and this is only from the fraction of companies currently reporting! Even rural Wisconsin has payments!

    I think the principal/agent problems may be worse for small, rural providers. My NJ surburban doc's mega practice controls all his drug company interactions. They limit his conferences (one a year, three days, no leaving the country) and they restrict food deliveries to the office. The mega provider probably extacts value from the drug companies elsewhere, and doesn't want the individual docs disrupting that.

    Your rural doc has no oversight because you cannot watch her.