The Current Financial Crisis: Are Academics Partly to Blame?

Earlier today I attended a seminar entitled "Interpretations and implications of the global financial crisis: An Asian Perspective", which was held at John Hopkins' School of Advanced International Studies (SAIS) in Washington DC. The seminar is part of a 2-day conference on New Ideas in Development after the Financial Crisis Conference. Devesh Kapur, who is the Director of the Center for the Advanced Study of India at the University of Pennsylvania, brought up a topic that I have never thought about: the role of academics in the current financial crisis. Professor Kapur started by discussing how academics are often interested in how other people react to incentives across a number of fields. But, academics do not often discuss their own incentives, and possible problems with them.

From there, Kapur explained that academics often strive to be published in the most prestigious journals in their fields, which often requires coming up with a new "high theory", instead of discussing practical problems that governments or institutions are facing. Moreover, this "high theory", which is usually not grounded in real occurrences but instead on abstract models, is often used to rationalise policy frameworks. However, optimal policies, from a theoretical standpoint, may not play out well in actuality. (My own thought: One plus of randomised evaluations is that any policy recommendations are grounded in field research, not abstract models).

The above argument is one I have heard before, but then Professor Kapur spoke about the role academics may have played in financial deregulation, and accordingly, today's financial troubles. Many academics in economics or business are on the Boards of hedge funds, own hedge funds, or are advisers to hedge funds. Hedge funds (at least in the short-term) benefit from deregulation, and many top academics had substantial financial interests in these institutions. Therefore, the intellectual underpinnings for deregulation, which Kapur argued was pushed by many top-flight academics, may have been influenced by their own personal financial interests. Kapur then alluded that just like doctors that need to disclose payments from pharmaceutical companies, academics should need to disclose their own financial interests to minimise possible conflict.

Never thought about possible financial conflicts in academia before, but Professor Kapur's argument makes sense. Academics, just like any other group, should be transparent with their financial interests. Anything else would be unfair . . .