Crises always prompt an anguished and angry search for causes and culprits, and the current financial crisis is no exception. Fingers have been pointed at supine regulators, greedy bankers and investors, naive consumers and feckless politicians. One group, however, that has escaped careful scrutiny has been the academic community, particularly economics departments and business schools. After all, many of the intellectual underpinnings of the causes of the current crisis – be it financial innovations, capital account convertibility, deregulation or stock options – come from the best and brightest in US academia, not bureaucrats in dead-beat third world countries. Indeed, as the size and influence of the financial sector mushroomed in the past quarter-century, business schools and economics departments reaped a rich harvest. Money – and with it salaries, endowments and institutional power – moved in their favour.
While there is widespread recognition that (with a few notable exceptions) academics were caught as unawares as anyone else, there has been little discussion on why this was the case. One likely reason is the type of knowledge that enjoys academic status; basic knowledge of the economy had been seen as old fashioned and a low-brow activity. The crisis has brought this back into fashion, and in this sense academia is self-correcting.
A more troubling reason behind the failure of academics in the current crisis is the nature of their financial incentives and the resulting conflicts of interest – not dissimilar to what so many in Wall Street faced. Academics have stressed the critical importance of incentives in shaping human behaviour. But they have been reluctant to shine the light on how their own behaviour may be affected.