The shadow banking sector has performed a minor séance, and conjured a shadow economist sector. We now have a better idea just who the Americans are who currently inhabit this shadow economist finance sector. Charles Ferguson, in his book Predator Nation, describes many of the key players by name: he covers Glenn Hubbard, Larry Summers, Fredric Mishkin, Richard Portes, Laura Tyson, Martin Feldstein, Hal Scott, and John Campbell.120 The University of Massachusetts economist Gerry Epstein has taken a different tack, with a somewhat different roster. Epstein and his collaborators have collated two data sets linked to economists regularly summoned to pronounce upon financial regulation during the crisis, comparing the positions taken in their academic work and their “outside” positions and consultancies (derived entirely from public sources). Since it would be a daunting task to subject the entire profession to audit, he chose to pursue the prosopography of the manageable subset of financial economists who had presented themselves as “faceless” representatives of the orthodox economics discipline, either through the Squam Lake group (covered above) or the Pew Economic Policy Group Financial Reform Project.121 By keeping the target group limited to nineteen prominent economists, his team was able to explore the nature of ties to financial firms in somewhat greater depth than one encounters in the news media. However, working only from open sources, the report depends entirely upon some manifestation of self-disclosure turning up in some public context; therefore, it necessarily underrepresents the true nature of financial connections. His summary report concluded:
We find that 15 of 19 economists had private financial affiliations over 2005–09. The norm for economists was to not identify their private financial affiliations, establishing the need for a code of ethics prescribing disclosure guidelines.
These same economists who mostly failed to warn of the increasing financial fragility and impending crisis also have developed a basic consensus view that favours more market-based reforms and relatively less government regulation as a way of preventing future financial meltdowns.122
This work documents a number of facts on a somewhat larger scale than the previous collection of individual anecdotes.123 It reveals that ties to the financial sector are extensive and pervasive among those economists who specialize in the technicalities of finance, and that they are closely correlated with intellectual positions that actively absolve the financial sector of all responsibility for the crisis. Furthermore, these economists rarely disclose these patent conflicts of interest when they perform in the media and in political hearings their pronouncements upon what we should do about the crisis. They are invaluable for the industry because they appear in public as an independent academic elite, when they are something else besides. They are the same people we encounter throughout this book: Alan Blinder, Charles Calomiris, Richard Herring, John Taylor, Jeremy Stein, Andrew Bernard, John Campbell, John Cochrane, Douglas Diamond, Darrell Duffie, Kenneth French, Anil Kashyap, Frederic Mishkin, Raghuram Rajan, David Sharfstein, Robert Shiller, Hyun Song Shin, Matthew Slaughter, and Rene Stulz.124
We could go on and on in this vein, but there is little point in choreographing this virtual economists’ perp walk. There are further European and Asian economists who would need to be added to the list, because of their affiliations with international banks and other central banks. London is another special hive of this activity. Well before the census of these ranks was even partially populated, I expect my audience would have thrown in the towel. Charles Ferguson’s Inside Job has just scratched the surface of paid-but-not-quite-disclosed behavior by prominent economists; what is now needed is some comprehension of the aggregate systemic character of what has become a conventional career path. If you are lucky enough to write a few macrofinance papers that attract the attention of people that matter, and then garnish a plum political job such as under-assistant-subsecretary of the Treasury/Council of Advisors, touching the right political bases, then it just follows that you will in the fullness of time become absorbed into the corporate/financial sector in some reasonably lucrative capacity, and even perhaps later on become a regional Fed governor, all the while speaking out as an “independent” academic voice for the public commonweal. This career trajectory has been a conveyor belt for some time now, at least back to 1970, when Paul Samuelson helped found the hedge fund Commodities Corporation. The issue is not possible compromise of personal virtue of this or that individual in the face of tempting blandishments; it is rather that the proud pretense of “independent expertise” has become thoroughly undermined within the current economics profession. This has been the bane of academic economics, but also, after the crisis, the vessel of its deliverance.
Because this is a book intently focused on the interplay of the crisis and economics, in this section and elsewhere we have devoted the bulk of attention to the subterranean connections of economists to the financial sector. However, we would be remiss if we neglected to point out that hidden ties to other private firms on the part of those who purport to speak for “the public good” are in fact ubiquitous, wherever neoliberal doctrine has inspired initiatives to reengineer markets with the help of state power. For instance, neoclassical “experts” on global warming who promote emissions trading as the solution to environmental degradation have been demonstrated to have extensive ties to private for-profit firms benefiting from permit trading, which they rarely acknowledge.125 Indeed, one can understand the co-optation of climate activism by pollution permits as the engulfment of science by the financial sector, ever in search of new fields to securitize. Much the same has happened in health economics. It is not just macroeconomists who have succumbed to the siren song of paid advocacy: it is the entire economics profession.
To recap: the academic-governmental-financial complex has had profound intellectual consequences. Because the banks, hedge funds, and ratings agencies all dodged the bullet in the crisis, this enabled and empowered the economics profession to do likewise.
The Immunity Conveyed by the Neoliberal Restructuring of Universities
It was not just the turbocharged finance sector that provided cover for economists. Another major factor in the maintenance of the untouchable reputation of the orthodox economics profession has been the progressive commercialization of the totality of university research since the 1980s. This is a very large topic, and I have dealt with it in detail elsewhere.126 The central observation for our present purposes is to realize that, if one wholeheartedly subscribes to the neoliberal doctrine of the market as über–information processor, then “reform” of the university prescribes the monetization of knowledge in all its forms. Since the 1980s, the most prominent academic prophets of this reform have been members of the economics profession. Indeed, so zealous were the boards of trustees and state governments to bring about this change that neoclassical economists were frequently installed as presidents of many major universities: Summers at Harvard, Hugo Sonnenschein at Chicago, Harold Shapiro at Princeton, Richard Levin at Yale, and more at lesser schools.127 Summers, in particular, was brought on board at Harvard to induce what was perceived as a relatively recalcitrant bunch of pampered faculty to become more responsive to market signals.128 These captains of erudition then set out to shrink the footprint of the humanities and expand the natural sciences at their institutions, since that was where the money was purportedly to be found. But a little-noted subsidiary trend was to further expand the representation of economists within the academic walls.
Curiously enough, there are no good aggregate time series of proportions of distinct disciplines’ representations within any national university system. There have been a few stabs at performing a retrospective census at a few key junctures for limited geographical areas. For instance, one paper documents the recent incursion into law schools: Of the 1,338 faculty members at the top twenty-six American law schools, beyond the J.D., 27 percent had PhDs, with economics the most common concentration at 7 percent. Another 13 percent had PhDs in some social science other than economics, while 7 perc
ent had PhDs in a non-social-science discipline. This is a substantial increase from merely a generation ago. Another work attempts to break down faculty representation across a sample of British Commonwealth universities in a few selected years over a century concludes: “Although it is good to understand why university economics prospered more than psychology over the 20th century, it would also be good to know why at the end of the century economists were ten times more common on average in the world’s universities than psychologists.” Marion Fourcade estimates that economics grew from roughly 1 percent of all university faculty in 1900 to about 4 percent by 2000. While all of these gauges are impressionistic to varying degrees, they do point to an important trend in academe, which is the expanding proportional representation of PhD economists in universities, especially over the last three decades.129
Any generalizations in this area are bound to be controversial, so let me simply suggest how this issue impinges upon the question at hand. Let us take as given that economists have come to occupy proportionally more positions and more strategic positions within the modern university; and let us also accept that the Great Transformation of the modern university since 1980 has followed the imperative to restructure research so it becomes more responsive to commercial imperatives. It remains to be demonstrated beyond a reasonable doubt, but there is plenty of circumstantial evidence to suggest that these two trends have been intimately related to one another. Economists have theorized and promoted the benefits of the commercialization of knowledge; and in turn, universities have hired more economists for their expertise to both preach and effectuate this commercialization outside the standard compartmentalization of departmental organization.
This goes some distance in explaining why economists would not readily be punished by universities for their undistinguished track record in the crisis. Within universities, economists have rendered themselves indispensable as the new arbiters of human-capital bestowal and commercial validation. Harvard’s Rakesh Khurana has written, “As the Academy Award winning documentary Inside Job finds, highly reputable business schools and university economic departments now perform the same functions as college football or basketball programs: bringing in large dollars for the university and individual faculty, but increasingly divergent from the overall educational, intellectual, and societally oriented ideals of the university.”130 They occupy key posts in business schools, law schools, and medical schools, propounding doctrines both mathematical and cultural. When an academic economist ventured beyond the ivy walls to retail her expertise and preach the virtues of the marketplace, she was simply foreshadowing for other faculty members the behavior that would be required in the twenty-first-century university. Their sometimes shadowy positions in the financial-governmental-academic complex were occasions for pride and pomp in the eyes of university trustees, not of intellectual compromise or culpability. It would be a tremendous repudiation of everything the university had striven to become after 1980 to downsize or close an economics department as a cost-saving measure, unlike (say) the odd department of geography, or philosophy, or astronomy, or area studies.
Hence any academic status degradation of the economics profession on its home ground would entail an implicit repudiation of the trajectory of university restructuring, which had three decades of impetus behind it. In other words, absent the world being turned upside down, or another great wave of university restructuring, the economics profession would continue to enjoy shelter from the impecunious storm within the modern university.
Neoclassical Economic Theory Denies That Academic Markets Can Ever Be Corrupt
Essentially, the indictment by Inside Job and many commentators was that the crisis had revealed that the economics profession was rife with intense conflicts of interest, and this, in turn, had so corrupted the actual orthodox doctrines of the profession that its analyses of the crisis had become untrustworthy. What was missing from these screeds was an appreciation for a major escape hatch: that immersion in neoclassical training produced adherents who lived by the motto that the very notion of conflict of interest was unprepossessing, and that corruption of market-based research was essentially impossible. Rephrasing the insight, economists were fortified to dodge the bullet because they denied the bullet had ever taken flight.
The literature on the prevalence and management of conflicts of interest in the modern university is huge, and getting bigger by the hour.131 Much of it has been centered upon the sphere of biomedical research, for the reason that biomedicine was one of the earliest research fields to become thoroughly commercialized in the modern university, and consequently a plethora of debacles in the arenas of lethal drugs, abused human subjects, botched pharmaceuticals, and outlandish expenses have drawn the attention of many to search for the explanation of such corruption of the research enterprise in the midst of largesse. Within the perimeter of university research, “financial conflict of interest” has come to be defined as the actual conduct of research in an environment where relevant financial interests of the researcher and/or his institution might conceivably influence the outcome, embedded in a larger societal context where impartiality is expected or presumed. Interestingly, sophisticated observers realize that even this definition is conditional upon a presumed list of goals of the research enterprise: in biomedicine, should the objective be simply to increase the stock of human knowledge, or is it the promotion of human health and welfare, or is it much more narrowly just to make money?
Confining conflicts of interest to a circumscribed set of phenomena is like herding cats; but that has not stopped medical journals from striving mightily to control it, the National Institutes of Health to legislate its permissible boundaries, and science-studies scholars to characterize its effects. The empirical literature reveals that instances of such conflicts are pervasive in biomedicine, and, not surprisingly, “Strong and consistent evidence shows that industry sponsored research tends to draw pro-industry conclusions.”132 Perhaps because of its ubiquity in the modern commercialized university, bureaucratic approaches to conflicts of interest in biomedical research tend to congregate in the area of risk management—that is, formal protection of the university from the lethal fallout from conflicted research—rather than proactive attempts to control bias and corruption in the research itself. If one detects certain affinities with the concepts of risk in the banking sector, one would not be too far off.
If academic biomedicine provides one pole of an institutional approach to conflicts of interest, then the financial community anchors the opposite pole. In finance, conflicts of interest are deemed so pervasive that they are generally ignored. Financial services professionals have little in the way of standardized legal or moral obligations to avoid such conflicts, except when their behavior rises to the level of fraud, or violates insider trading laws.133 This is one very salient reason why Goldman Sachs was widely excoriated for essentially betting against its own clients in the sale of CDOs and the simultaneous offerings of credit default swaps on those CDOs it knew were more likely to fail, for instance as detailed in the U.S. Senate crisis inquiry, but was treated on Wall Street as nothing exceptional, and therefore morally unremarkable.134 Similarly, when the LIBOR rate-setting scandal broke in 2012, the reaction of the Street was that everyone knew Barclays, JP Morgan, and all the rest were lumbered with conflicts of interest in reporting interbank lending rates; no insiders were shocked that the “truth” was a flexible concept. This attitude can be traced back to the expectation that if, as a client, you wanted safeguards against such conflicts, then it was incumbent upon you to negotiate them beforehand into your contract.
Another major reason the economics profession has managed to dodge the bullet of the crisis is that its default stance toward conflicts of interest is much closer to that of the financial industry than academic biomedicine in the grand continuum of professional governance. Orthodox economists tend to see nothing wrong with conflicts of interest, since they have generally subscribed to the precept th
at market arrangements are capable in principle of monitoring, restricting, and resolving any such conflicts in the course of normal operation. Readers of this volume will recognize this as a corollary of the basic neoliberal precept that the market is a superior information processor to any other human or institutional intermediary when it comes to the revelation of knowledge. This has the curious implication that, whenever the economic orthodoxy has written about the “problem of corruption,” it parsed the problem as besetting only those individuals working in the public sector. Since everyone else employed in the private marketplace is known to be motivated by private gain, and the market turns that into public welfare, then by definition, there are no conflicts of interest in the private sector, only lax imposition of contractual protections. As usual, MPS economist Gary Becker boiled this down to a pithy epigram in his Business Week column: “if we abolish the state, we abolish corruption.”135
Whenever neoclassical economists then reflexively apply these core theoretical principles to themselves, and it comes to issues of conflict of interest, they come off sounding a bit Pecksniffian. Conveniently, George DeMartino has collected together the whole litany of excuses that orthodox economists proffer as to why a code of ethical conduct should not apply to themselves; I urge the reader to consult it himself during an interval when his blood pressure might be a little sluggish.136 However, DeMartino devotes only a page to the notion that contemporary neoclassical theory, and especially the variant known as “public choice” theory, tutors them that conflicts of interest are best dealt with by the market, and that they stand exonerated to the extent they pledge their troth to said market. The financial sector and the economic orthodoxy are melded not only in personal roles, but in convictions as well.
Never Let a Serious Crisis Go to Waste Page 29
