Academic Choice Theory and the Corruption of Economics

Last week, Yves Smith at Naked Capitalism posted a satirical letter by ‘Outis Philalithopoulos’ (Outis means ‘nobody’ in Greek) about another problem facing the economics profession–corruption of its practioners. Outis/Yves writes (boldface mine):

Soon after receiving tenure, it occurred to me that we were being profoundly inconsistent. While we had correctly criticized the previous mainstream view that politics involved benevolent efforts to serve the common good, we had failed to apply the same rigor to the community of academic economists. As a result, we were modeling both economic and political actors as self-interested utility-maximizing agents, while continuing to see economics professors as idealistic pursuers of truth. I decided to correct this oversight by developing my theory of Academic Choice, in which economists are theorized as rational agents who continually seek to maximize their future earnings potential.

The theory begins by identifying three principal ways in which economists try to maximize their utility. First, they receive salaries from universities, which can be increased if their course enrollment increases. Course enrollment is primarily driven by students with future careers in business and the financial sector, so an economist has an incentive to propound theories that CEOs and financial institutions find attractive. Even if adoption of these theories leads to substantial public costs, these costs will not be shouldered by the economist personally. Second, by developing such theories an economist can open the door to future wealth as a lobbyist or consultant. Third, the support of economists is critical to creating and maintaining special privileges for the financial services industry and for top corporate officers. By threatening to withdraw this support, economists can engage in rent-seeking. I call this last practice academic entrepreneurship.

Regarding ‘academic entrepreneurship’, Yves/Outis brings the hammer (boldface mine):

Is it really plausible that economists threaten top banks that in the absence of some kind of payoff, they will change the theories they teach in a direction that is less favorable to the banks?
There are certainly cases in history of the following sequence:

a. Economist E espouses views that are less favorable to certain special interest groups S. Doing so threatens the ability of S to extract rent from the public.
b. Later, E changes his view, thereby withdrawing the prior threat.
c. Still later, E is paid large amounts of money by representatives of S in exchange for services that do not appear particularly onerous.

For example, let E = Larry Summers and let S = the financial services industry. In 1989 E was (a) a supporter of the Tobin tax, which threatened to reduce the rent extracted by S. This threat was apparently later withdrawn (b), and in 2008 E was paid $5.2 million (c) in exchange for working at the hedge fund D. E. Shaw (an element of S) for one day a week.

However, it is naturally more difficult to witness the negotiations in which specific threats were appeased with specific future payouts. This is a problem that also bedevils Public Choice theory, in which it is likewise difficult to show exactly how a particular politician is remunerated in exchange for threatening businesses with anti-business legislation. The theory assures us that such negotiations occur, although they are difficult to observe directly. Perhaps further theoretical advances will help us to close this gap.

I recently watched the movie Inside Job, which is about the collapse of Big Shitpile, and there is an exchange between John Campbell, the chairman of the Harvard Economics Department, and the interviewer:

INTERVIEWER: Does Harvard require disclosures of financial conflict of interest in publications?
JC: Not to my knowledge.
INTERVIEWER: Do you require people to report the compensation they’ve received from outside activities?
JC: No.
INTERVIEWER: Don’t you think that’s a problem?
JC: I don’t see why.
INTERVIEWER: Martin Feldstein being on the board of AIG, Laura Tyson going on the board of Morgan Stanley, Larry Summers making $10 million consulting for financial services firms. Irrelevant?
JC: Yeah. Basically irrelevant.

This leads to this exchange:

(If you can’t view the video:
INTERVIEWER: A medical researcher writes an article saying, “To treat this disease, you should prescribe this drug.” Turns out the doctor makes eighty percent of personal income from manufacture of this drug. Does not bother you?
JC: I think it’s certainly important to disclose the, um… The, um… Well, I think that’s also a little different from cases that we’re talking about here because, um…)

I won’t even pretend to claim that professors in the biomedical sciences lack potential conflicts of interest–some are heavily involved in for-profit medical research. But a biologist who made most of his or her money from industry would be seen as conflicted–or at least would have some serious explaining to do upon entering the public arena. But economists, like retired generals, can’t be statesmen and salesmen–you have to choose one or the other. It doesn’t work when former generals do it, and it doesn’t work when economists do it. I call bullshit. Or ‘call Summers’, if you prefer.

‘Academic’ economists who want to partake in the public sphere–and especially advise the government–should have to disclose who really pays their salaries.
That, or else be forced to publicly swear that people are not “self-interested utility-maximizing agents.” Which would also be a good thing.

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4 Responses to Academic Choice Theory and the Corruption of Economics

  1. Greg says:

    Maybe there’s room in the world for a natural history of economists and the worlds they inhabit? My fear is that those worlds are closed systems, and that us outsiders won’t every be able to comprehend the reasoning that goes on within.
    Or we might discover that Economics is just the whore of Politics, and that’s the end of it.

  2. travc says:

    As a corollary, there is a damn fine argument in there for supporting academics at a reasonable (and stable) standard of living from the public kitty.

  3. HFM says:

    It would have to be a damn fine “reasonable” standard of living for an academic not to be tempted by a seven-figure sinecure. Empirically, the salary of a tenured professor/administrator at Harvard is insufficient (e.g. Summers).
    I’m not sure I buy the theory about course enrollment; to what extent is the average undergrad aware of the business-friendly leanings of a particular professor? I’ve seen courses recommended because of “real-world” case studies from a professor’s consulting gigs, but beyond that, they’d be better off giving lots of A’s and researching whatever they please.
    The rent-seeking angle I can see. If research generating the “right” answers leads to nice, profitable consulting gigs, and the “wrong” answers do not…your average self-interested utility-maximizing agent will find more of the right answers. There doesn’t even need to be any bad-movie hijinks involving henchmen and suitcases full of money.
    Also, why doesn’t anyone pay me millions of dollars to be wrong about stuff? Hmph.

  4. Wow says:

    “It would have to be a damn fine “reasonable” standard of living for an academic not to be tempted by a seven-figure sinecure.”
    Also, given the number of executives on such salaries also are tempted to undertake if not outright illegal actions, questionable ones, in the interests of gaining more money to themselves.
    And if “pay them better” (the call for why senators need higher pay) to remove the temptation to defraud is correct, then surely the solution to workers “stealing internet access” or corporate espionage is to pay the workers more.
    Or count the loss of productivity and secrets as the cost of low wages in the workforce.

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