Code of conduct for economists

But it is a much smaller piece that should catch the eye of readers, especially current Princeton students, professors and all the way to President Tilghman’s office. Way back on page 42 is a short piece by Zachary Goldfarb ’05 titled “Gerald Epstein [GS] ’81 on conflicts of interest.” The piece is about Epstein’s confrontation of the economists’ establishment, in calling for a code of conduct that would reverse the recent trend of economists failing to disclose their conflicts of interests when they testify before Congress or appear on Fox News to advise the American public on how to resolve the major economic problems of the era.

Epstein, a professor at University of Massachusetts Amherst, recently released a paper that “scrutinized the behavior of 19 economists who made policy pronouncements about financial reform after the 2008 [banking] crisis. Thirteen of them, it turned out, worked as consultants, as directors, or in other capacities for banks, rating agencies and investment firms ... And only two of those 13 economists routinely disclosed those financial ties in their academic papers and in their news-media appearances.” (Chronicle of Higher Education, Jan. 7, 2011.)

Such nondisclosure of actual conflicts of interests — there’s nothing merely “possible” about it — would be punishable for an attorney, who could be censured, perhaps even disbarred, for not disclosing a serious conflict. But, according to Epstein, economists have no such strictures; they can expound on the glories of the free market and attack regulatory miscreants wrapped in the cloaks of Harvard or Columbia — or, theoretically, even Princeton (although this writer knows of no such instance involving his alma mater) — unrestrained by a code of conduct.

That said, Princeton does have a rather loosely worded (at least to this lawyer’s eye) code of conduct that goes something like this: “The risk of conflict of interest or serious appearance of conflict can arise when a University investigator ... has significant financial interests in an external enterprise engaged in activities closely related to [his or her] line of university research. Counted as ‘significant’ are paid consultantships, paid service ... substantial equity holdings or royalty income ... etc.”

So far, so good. But then comes the escape hatch: “By no means does the existence of such interest necessarily imply conflict.” Oh yes it does. The essence of a conflict is the need to make a choice between two or more pay masters. Should I advise for or against President Obama’s financial reform or environmental polices if doing so will upset my lucrative consulting arrangement with Wall Street firms?

That’s a conflict. For, if you have to ask the question, you have a conflict, and the minimal right thing to do is to declare to all listeners, be they cable TV viewers or senators or Princeton students sitting through lecture: “In the spirit of full disclosure, I have a conflict of interest since I’m being paid to advise such-and-such-firm on this same topic, but here’s my professional opinion ...” and then give it for all it’s worth.

What then to do? The PAW article refers to a petition circulated by Epstein and signed by 300 like-minded reformers calling on the American Economic Association to endorse a code of conduct that “at a minimum requires transparency with respect to potential conflict of interests.” Nothing in the code would prevent an economist from weighing in on any public issue of the day while also garnering a retainer from, say, the Koch Brothers or the American Federation of Labor and Congress of Industrial Organizations, but it would say that full disclosure must be part of every public message.

Curiously, of the 300 academic economists who have signed the Epstein petition, as of January there was not a single Princeton professor on the list. Perhaps that has changed since then. Or maybe they, like Mr. Former Everything — former president of Harvard, former Secretary of the Treasury, former chief economic advisor to President Obama — Lawrence Summers, “agree with the basic point,” to quote Epstein, “that there should be more disclosure ... He didn’t think the AEA was the right place to enforce this code.”

Maybe Summers is right. Maybe the AEA is a sideshow. The first line of enforcement must be the conscience of each economist who knows in his or her heart what is right, but that “conscience code” must be backed by a strong university code of disclosure that has some bite to it. The University’s current code is a good start but it needs work. Let’s get to it.

R. William Potter ’68 is an attorney in Princeton and a frequent preceptor in law-related courses at the University. He can be reached at potterrex@cs.com.