The Unprincipled Randomization Principle in Economics and Medicine

Over the past decade, randomized field experiments have gained prominence in the toolbox of economics and policy making. Yet randomization enthusiasts have paid little attention to the ethical issues, economic costs, and theoretical difficulties caused by the so-called randomization principle. Randomized trials give placebos or no treatment at all to vulnerable individuals and withhold best treatments from the control group. Randomization has been proved to be less precise and less efficient than “Student’s” balanced alternatives—particularly when effect sizes and confounding from unobserved systematic effects are large. From medicine to economics, randomized trials are rarely if ever repeated. Using new evidence from a 25-question survey of randomization, statistical significance, and validity applied to articles using randomization techniques, the authors conclude that the most reliable ethical character of economics, Adam Smith’s “impartial spectator,” would not approve of randomized trials as practiced in economics and medicine.

The Skin-in-the-Game Heuristic for Protection Against Tail Events

Standard economic theory recognizes the agency problem but not the compounding of moral hazard in the presence of informational opacity, particularly concerning high-impact events in fat-tailed domains. Nor does it look at exposure as a filter that removes nefarious risk takers from the system so they stop harming others. But the ancients did, and so do many aspects of moral philosophy. The authors propose a global and morally mandatory heuristic that anyone involved in an action that can possibly generate harm for others, even probabilistically, should be required to be exposed to some damage, regardless of context. In the language of probability, “skin in the game” creates an absorbing state for the agent, not just the principal. Although insufficient, the heuristic is necessary to counter risk hiding—and risk transfer—in the tails. The authors link the rule to various philosophical approaches to ethics and moral luck.

First Tell No Untruth

This chapter argues that the precept “first tell no untruth” is the initial premise of an ethical code for economists. Unjustifiable claims of truth for economic statements cause harm when people act on them, when different actions could have produced better outcomes. The harm is avoidable if known critical practices give grounds to doubt the claim of truth. This harm arises from not from the malign intent of economists but from their relation with society, which introduces “misleading bias” by expecting them to certify as true assertions that benefit their employers. This gives rise to “monotheoretic practice,” the production of single answers by means of single theories. The alternative is “systematic pluralism”—the provision of a range of possible answers derived from relevant legitimate theories. This code would be mutual, recognizing the joint responsibility of economists and society, and collective, holding economists ethically responsible for their profession’s output.

Lady Justice Versus Cult of Statistical Significance

Economics and other sciences use null hypothesis statistical significance testing without a loss function and avoid asking “how big is a big loss or gain?.” Statistical significance is not equivalent to economic significance; the mistake is evident when one reflects that the estimated payoff from a lottery is not the same as the odds of winning that lottery. Yet a widespread failure to make the distinction between an estimate of human consequence and an estimate of its probability—between the meaning of an estimated average and the random variance around it—is killing people in medicine and impoverishing people in economics. The ethical problem created by a test of statistical significance is made worse by the method’s blatant illogic at the foundational level, a fact unacknowledged by most of those depending on it. Several changes to the literature and a recent Supreme Court decision could help.

Introduction, or Why This Handbook?

For more than a century, the economics profession has extended its reach to encompass policy formation and institutional design while largely ignoring the ethical challenges that attend the profession’s influence over the lives of others. Economists have proved to be disinterested in ethics, which, embracing emotivism, they often treat as a matter of preference, and they seem hostile to professional economic ethics, which they incorrectly equate with a code of conduct that would be at best ineffectual and at worst disruptive to good economic practice. But good ethical reasoning is not reducible to mere tastes, and professional ethics is not reducible to a code. Instead, professional economic ethics refers to a new field of investigation—a tradition of sustained inquiry into the irrepressible ethical entailments of academic and applied economic practice. The risks and costs of establishing the field are real, but a profession that purports to enhance social welfare cannot avoid them.

“Econogenic Harm”

Economists have long recognized that virtually all economic policy interventions that they advocate entail foreseeable and/or unforeseeable harm to some economic actors, even while promising benefits for others. And yet there is no tradition in economics that explores carefully the harm that economists cause as they try to do good. “Iatrogenic harm” (from the Greek, “doctor-originating”) refers to the harm that results from medical practice. This chapter proposes the term “econogenic harm” to name the harm that results from economic practice. Despite the ubiquity of econogenic harm, economists have failed to give a good account of the complex nature of economic harm or to wrestle with its ethical entailments. Instead, economists have relied too eagerly on the Kaldor-Hicks compensation test, often operationalized through cost-benefit analysis, as a sufficient ethical guide for their own conduct in policy formation. But Kaldor-Hicks cannot serve the ethical purposes to which it has been put.

Ethics and Learning in Undergraduate Economics Education

To address the epistemic asymmetry and insufficiency that characterize the role of the undergraduate economics educator, the author advocates (pace DeMartino 2011) an ethical turn in the scholarship of economics education. The ideals of liberal education and academic freedom are widely admired among economics educators. To expand professional understanding of how and why undergraduate economics courses should foster liberal education outcomes, such as the expansion of students’ capacity for reflective judgment, mainstream and heterodox economists should acknowledge and explore the ethical dimensions of their dual role as disciplinary experts and academic citizens.

Honesty and Integrity in Econometrics

After considering the appropriate definitions of honesty and integrity the chapter uses a framework of behavioral economics to discuss plagiarism, its payoff, its frequency, and its risks. It then discusses outright fraud, that is, the making up of alleged results out of thin air. But its main emphasis is on econometricians distorting their findings either for material gain, or to support their biases, or else to make their work seem more impressive. It discusses ways of doing this, such as biased data mining and misusing significance tests, and also ways by which such maneuvers could be reduced. The picture that emerges is that lack of integrity is a more serious problem in econometrics than is widely assumed.

The Ethics of Economic Decision Rules

The purpose of economic decision rules is to guide decision makers who have competing goals or are uncertain about how their goals can be fulfilled. This chapter discusses the assumptions underlying major decision rules such as expected utility maximization, discounting of future events, maximin, and various types of efficiency criteria including cost effectiveness and Pareto efficiency. All of these decision rules impose restrictions on the information to be taken into account, and since these restrictions are value laden, so are the decision rules. However, in the process of applying decision rules, the value assumptions are often put out of sight instead of being brought forward and discussed.

The Ethical Economist

Potential market failures in economic research are addressed in part through enlightened self-interest (reputation building) and strengthened through nonconsequentialist ethical traditions that emphasize duty and virtue. To illustrate, this chapter follows a hypothetical student researcher making ethically laden professional choices; it draws attention to the moral hazards in truth seeking and the ways in which socially enforced norms can reduce cheating. The often-unstated yet critical role of an academic mentor is to indoctrinate students in the ideology of science and the virtues of integrity—in opposition to utility maximization. Critical thinking can be enhanced when these considerations are elaborated using the theory and evidence of Adam Smith and Vernon Smith, respectively. The chapter also explores the role of the economics profession in promoting ethical conduct among its members.