An old joke goes that an economist is someone who gets rich explaining to others why they are poor. You could argue whom the joke’s on, but like other professionals, economists need to be truthful about who is paying for their research.
Every January, the American Economic Association has its annual meeting, where thousands of economists get together and generally discuss formal academic research, which holds little interest for most other members of society.
At this year’s meeting in Chicago, however, the group took a step toward addressing a societal concern that economists are not always forthright. The AEA adopted new rules requiring economists to disclose any financial incentives or conflicts of interest they may have in the work that they publish.
Many will say it’s about time. Medical doctors, for example, have long reported funding they may receive from pharmaceutical companies for research on the effectiveness of different drugs.
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Other professional industries also have a code of ethics requiring full disclosure. The Idaho State Board of Accountancy requires all certified public accountants to take four credits of continuing education in ethical issues every two years.
The economic profession has been under strong scrutiny during the past few years. Bankers continue to take flak for their role in the financial crisis, but some also blame economists for not only failing to predict the crisis but perhaps creating it with their economic models.
Critics of the economic profession say that consulting activities for the banking industry and government agencies blinded economists to signs of the crisis. The media jumped on board with the Academy Award winning documentary, “Inside Job.” Economists like former Federal Reserve governor Fredric Mishkin were taken to task for supporting government policies that may have contributed to large losses in the financial markets.
Under the new AEA rules, there will be more transparency in the market for economic consulting. Just as economic theory predicts, transparency makes markets more competitive. Economists will therefore only get paid for what the consumers of this information truly value. The new disclosure rules economists adopted are likely to put a lid on the ways some economists have made money.
The new AEA policy will require that work published by the association be accompanied with a disclosure of any financial support to the author and his or her immediate family of $10,000 or more during the past three years.
Other economic publishers are likely to require the same, and we should see more economists reporting financial backing for all their research work, such as testimony before government panels.
Economic theory predicts that more transparency improves price for consumers. When everyone participating in a market knows what others are paying and receiving, there is more competition. No one party can take advantage of another.
Now we will see whether any economists are really getting rich telling others why they are poor, thanks to full disclosure.
Note: The author received no financial compensation for this article.
PETER CRABB Professor of finance and economics at Northwest Nazarene University in Nampa