Feeling Conflicted about Greed

With jobs disappearing faster than a major league fastball, the public is understandably irate at the damage that greed has wrought upon our economy. Financiers destroy their companies, and our retirement portfolios, and then complain when their bonuses are less than 7 figures.
The greedy behavior in recent headlines has not been limited to Wall Street. Last fall, for example, Congress uncovered the shocking details of Dr. Charles Nemeroff, Chair of psychiatry at Emory University, who had made almost $3 million in consulting fees from the same drug companies whose products he was prescribing. More disturbingly, he was responsible for evaluating these same drugs in federally funded research trials. Then in November, we learned that renowned Harvard psychiatrist, Joseph Biederman, had received hundreds of thousands of dollars from Johnson & Johnson, a company which made medications that, not by coincidence, treated the same childhood psychiatric illnesses that Biederman had become famous for publicizing to doctors.
With all of these disturbing stories, it is natural to attribute our current economic problems to excesses of greed.
Greed is indeed a prominent theme in many recent headlines, but it doesn’t explain what has been happening. Greed is a reliable constant in human affairs. Attributing the current situation to greed is like attributing someone’s headache to the fact that they have a brain. The real explanation lies not with greed, but with our failure to deal with conflicts of interest.
Conflicts of interest have played a central role in many of the disasters that have befallen our economy in recent decades. Enron and other corporate debacles a decade ago were aided and abetted by accounting firms that were providing consulting services to the same companies they were auditing, creating a situation in which the right-hand was expected to raise the alarm about financial practices being suggested or condoned by the left hand. The dot-com crisis was similarly aided by stock analysts who provided buy recommendations for companies whose stock their firms were underwriting. And now in the most recent debacle, it has emerged that credit rating agencies, entrusted to identify risky finances, were aggressively drumming up business from the same lenders whose credit they were rating.
As highlighted by publicity over the payoffs to psychiatrists, conflicts of interest have also contributed significantly to another less acute but equally serious problem plaguing our economy: the ever-intensifying problem of skyrocketing health care expenditures. Despite numerous calls for change, pharmaceutical companies continue to shower physicians with gifts, and an increasing proportion of medical school faculty obtain an increasingly large proportion of their income from industry. (Disclosure: I am an academic physician, but I have made a practice of staying independent from industry funding. That independence has come easily, given that most companies have no interest in a primary care physician who studies decision making and ethics!) As a result, the newest and most expensive interventions are enthusiastically embraced by the medical community, often before their safety and effectiveness have been firmly established.
In the face of economic turmoil, it is tempting to look for greedy villains. By the time there are villains to punish, however, it’s usually too late to fix the problem. Shooting the fox won’t restore chickens to the hen house. Instead, we need regulations to reign in the pernicious effects of conflicts of interest.
How can we do this? Beyond calls to punish perpetrators, the most common response is to call for greater disclosure of conflicts. Medical journals and medical schools, for example, have largely tried to address conflicts of interest by requiring physicians to disclose their outside income. However, disclosures are not a solution. For starters, people often don’t report their conflicts. Nemeroff famously failed to report the majority of his $3 million in consulting fees. More importantly, disclosure can cause outsiders to drop their guard – when a physician readily admits working with a drug company, other people mistakenly assume that he must therefore be being forthright about his research results.
The only way to reduce the effects of conflicts of interest is to reduce the conflicts themselves. Auditors and bond raters shouldn’t be hired by, or provide other services to, the companies they are rating. Stock analysts shouldn’t be allowed to provide buy recommendations on stocks their firm underwrite. Physicians shouldn’t be allowed to accept gifts from pharmaceutical companies.
As Obama continues to implement policies meant to avert future economic disasters, it will be essential for his administration to take a hard look at regulating the conflicts of interest that pervade our economy. Only by doing so can we get our economy back on track, and prevent another precipitous derailment.
Note: I am joined in today’s post by George Loewenstein, Herbert A. Simon Professor of Economics and Psychology at Carnegie Mellon University.
To read more of my blogs, and to learn more about my new book, Free Market Madness, check out my personal website: https://www.peterubel.com
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