If a company needs money, it can always go to the bank and ask for a loan. This is certainly something most companies do, so it is interesting to ask why companies don't just exclusively take out bank loans. The answer is because the familiar terms and conditions of company loans are not ideal for companies.
Loans can often be variable rate - this allows the bank to cheaply remain neutral to moves in interest rates - they're passing that interest rate or reinvestment risk on to your company, which will need to manage that risk. At certain times in the business cycle, that risk can be quite substantial. Regular interest payments could increase by 10%, 25%, 50%, 100% even, on a dramatic upswing from a very low interest rate. Of course, that could work in your favour if rates are already high and you have a project whose projected return on capital is higher than the high interest rate, and you expect rates to decrease over the following period.
Also, from a cash flow and accounting point of view, having this variable outgoing on your balance sheet can make it hard to maintain that signal of financial stability your chief financial officer would like to present to the world of potential investors in your company.
One talks of the capital markets as the place where companies try to get equity financing, but it is important to realise that your company needs to be of a sufficiently large size to play in the capital markets. So smaller companies simply may not have this option open to them in a way and on a scale which makes economic sense - investment banking fees have never at any time been called cheap. They're left to negotiate local deals with local banks. Those banks operate in a less rarefied environment, perhaps have less of a capacity to make forecasts of your company's true growth prospects over the medium-to-long term (by which I mean over a 5 year repayment horizon). In other words, your local bank in all likelihood can't afford to make corporate credit assessments beyond this five year horizon. Result? The loans they make tend to fall into this maturity horizon. Bond maturities can be on the twelve year, fifty year, hundred year horizon. This kind of stability allows corporate finance people to plan with more stable cash-flows and fewer trips to the bank manage to arrange shorter-term loans.
Local banks tend to be in more of a position of power with respect to a local medium sized company and their loan terms surely reflect this. Often standard business loan contracts have what is known as an early payment premium, which just means that it'll cost you if you are thinking of over-paying on your loan - i.e. giving your bank more money back than was agreed on the primary repayment schedule of the original loan.
Also, a company often has each loan with a single lending institution - its local bank. Raising debt on the debt markets means in effect there are as many different lenders as there distinct holders of bond or convertible bond certificates out there in the world. This diversification of the investor base is sometimes considered desirable for the management team of the company, on the assumption that it is less likely that a tiny number of hugely important stakeholders will attempt to bully the management team into modifying their decisions to be more in line with what the debt owners want to see happen. Still this does happen, especially when the company comes close to bankruptcy.
Banks often will want senior management in the company to offer some kind of personal guarantee on the loan. With a bond, all the senior managers are in effect personally indemnified in the case of the company subsequently failing to meet its payments. Nice for them.
It has to be said that loans provide a large proportion of how companies get their hands on capital for projects. The debt markets provide the next largest fraction, and finally the equity markets provide the third fraction, so I've kind of introduced them in reverse order of importance.
For all of the above reasons, sometimes companies which are large enough will prefer sometimes to get their capital from the bond markets instead of asking their bank for yet another loan. And so-called 'straight' corporate bonds are the subject of the next posting.
Perhaps you'd only like to sell part of your company conditional on it having made a success some years in advance. In which case you'd sell warrants to raise your cash. A warrant is a call option on corporate shares which you haven't created yet. If the call is on shares which are already outstanding, then no dilution is happening, and instead the call is just a kind of side bet on your company's stock price between two parties, the winner of which gets some pre-existing shares in your company. Perhaps the loser already owned those shares anyway before he made his side of the bet? Perhaps not, and he'll have to purchase those shares in the open market to satisfy his bet. Derivatives exchanges can create markets in call options.
But the company itself can issue these warrants, on a promise to convert the warrant into new shares in the company. That way, they're potentially diluting the share base by the size of the warrant issue divided by the number of shares outstanding. Why's this interesting in the context of corporate finance choices for raising capital? Well, if you get the cash through issuing a warrant issue, there's a chance (for example if the company's share price closes out the option's expiry period under water - i.e. below the strike price of the warrant ) that nobody will want to execute their right to trade in their warrants for shares in your company. In other words, you get the cash now for a potential sell of a part of your company which only kicks in if your company share price has risen above the strike price. This has obvious advantages - you only need to sell that fraction of your company in the happy circumstance that the market rates your company's stock price. Unfortunately, you get less cash for the warrant since you're only selling a possibility - a right to swap for shares. That warrant is always going to be worth less than the actual share itself.
Interestingly, this has a knock on effect for analysts, who track, among other things, how much money your company makes in each year, divided by the number of shares outstanding. This measure, called earnings per share (EPS) explains how much earnings a potential purchase of one of your shares would entitle them to, assuming earnings repeated last year's result (which they rarely do). If you sold new shares and diluted, then your EPS would drop, making you appear less attractive to potential investors who track this kind of thing. If you issued warrants, then for the life of the warrants, you still have the original number of shares outstanding so don't take this up front hit every time you need capital.
Analysts and accounting oversight bodies long since have been on to the potential for abuse in this trick, so you often see 'diluted EPS' reported. This divides your earnings by the sum of all the outstanding shares, plus any shares which could possibly come into existence through the presence of warrant issues. Well, not just warrant issues, but any other asset class which has the possibility of creating new shares. So it is a kind of 'worst case' earnings ratio - the denominator being the largest it could possibly be given outstanding derivative issues.
All the same downsides to dilution we came across here also apply when you chose to dilute your company through derivatives. One upside is that it gives companies whose stock price is somewhat volatile (for example fairly new companies, perhaps in sectors which exploit a new set of technologies) a comparative advantage, since the more volatile the stock, the higher the fair value of a warrant, all else being equal.
Anyway, what's wrong with just going to your local bank manager and asking him for a loan? The subject of the next posting.
How does a company raise cash for its own corporate needs? In general, there are two external categories - equity financing and debt financing. What follows is all quite a lot easier to understand if you assume firstly it is a small company faced with the funding choice; perhaps it owned entirely by one person. Then imagine a second company which is larger (or perhaps the same company at a later stage of its development).
I mention two external categories but there's always the possibility of funding new project internally, through the profits that the company itself makes. Not a lot of companies are in this fortunate position. Certainly some mature companies get to end up like this. But it is in the nature of many corporate projects that first you have to invest to build a potentially profitable line of business, and then slowly pay down the initial investment over the months and years that the line of business is operational (maybe over a longer or shorter time horizon too). Rarely do you find lines of business which have low up front costs and immediate positive profit. You can also sell off various assets your company owns in order to raise capital, with the approval, explicit or implicit, depending on local conditions, of the owners of the company. For example you might sell off assets from pre-existing lines of business whose profits don't meet a certain threshold, within the context of a re-structuring of your business. Kind of like selling a kidney to buy some weights to build up your muscles. You might think of these options as organic and cannibalistic internal funding.
Now, let's look at equity financing. Well, the new money could be self-funded - the owners could just inject capital directly into the company. Imagine a small one man operation, perhaps the owners of a crepes cart which serves up tasty French style crepes at local places where people gather. The owners may need a power generator, to power their oven and fridge on the go. The owners may just pay for it themselves and consider it an asset of the company. By virtue of them being the only owner of the company and all its assets, then still own 100% of the power generator. Of course the generator might depreciate in value, but that's another story. The cash they might otherwise have had in their pocket might be depreciating too through inflationary effects. The large-company equivalent of this is to go the share holders of that company and initiate a rights issue. This is where they go to the owners - i.e. the set of all holders of their shares - and ask them to contribute more cash to the company. This is disguised as the purchase of new shares, but assuming all the current owners take up 100% of their allocated rights, all that's happened is they seem nominally to own more numbers of shares, but just exactly the same percentage stake in the company. Rights issues in reality can get complicated, when there isn't 100% take-up, but that too is another story. If 100% is taken up, the net result is the set of original owners of the company still own the same fractions of the company they once did, but they've transferred additional cash into the company.
After you've tapped your owner (or owners) multiple times this way, eventually they become reluctant to hand over the required cash to the company for its ongoing new projects; then perhaps you can initiate that other kind of equity financing - the issue of new shares to the wider investor community. Here you really are diluting the original owner's fraction. Again, start with a one man band company. The crepes cart. He's the sole owner. But a friend from the local village offers to pay for the power generator, if he can become a 20% owner of the company. So with that cash, he in effect re-designs the ownership structure, so that there are now 5 shares. Whereas there was 1 share, 100% owned by the owner, there are now 4 shares owned by the original owner and 1 share owned by the new investor. So the original investor base gets diluted by the issuance of these new shares. The new owner has bought himself a fraction of that company by paying cash.
That's equity financing. And it happens a lot with growing companies. Private equity funds are specialist lenders in these circumstances. Angel investors another form. That's what happens with IPOs, when you market new shares to the wider investing public. But there must surely come a point where the owner becomes reluctant to dilute the ownership fraction of the original investor base (and in particular, his own ownership fraction) any more.
To see this dilution in action, let's see how many times he can dilute his original 100%, assuming there's a 20% dilution happening every time (you keep 4 for every 1 given away). You can decide yourself at what point you think selling fractions of your company is the best way to get a hold of some money for your company's projects.
100% owned at start
80% owned
64% owned
51% owned
41% owned
33% owned
26% owned
21% owned
16% owned
13% owned
Companies are assumed always have an ongoing need for cash to fund their various projects. Whilst this is not always true it is certainly true, almost by definition, with growing companies. It looks like you'd only need to make requests for corporate funding a measly ten times using this method before you'd given away a large fraction of the company, even assuming you find ten generations of new investors willing to invest in your company.
Why is there a convertible asset class in the first place? Don't we have enough variety already? First, a very high level explanation of what a convertible bond is. An issuing institution (a company) creates a new convertible bond issue because first and foremost it needs money. So in that sense a convert is like a standard corporate bond, or a bank loan. But if you decided to loan the money to the institution, then you get an additional right, namely the right to hand in your fraction of the convertible issue in exchange for a contractually agreed number of shares - usually shares in the issuing company itself. Notice that this is usually a 'right but not an obligation', which means that it is a kind of call option on the company's shares. So the lender transfers a cash amount up front to the issuing institution in return for a convertible security which entitles it to many things, usually including a regular interest payment, just like a bond or a loan, the option to convert into shares, under conditions agreed up front, and the right to ask for your money back, again under certain circumstances; there are also many entitlements accruing to the issuer wrapped up in the legal package too - the right under certain circumstances to hand the money back to the lender earlier. In short, a convertible is a bond with a bunch of additional derivatives buried in the package.
So why not just get a loan? Why go to so much fuss, pay a bunch of investment bankers and lawyers hefty arrangement fees, potentially give part of your beloved company away in form of share options? It all seems ridiculously, fiendishly complex. The answer lies in the domain of corporate finance, which will be the subject of the next posting.
I thought I'd try to understand how securities get priced by taking one of the most tricky of the asset classes, the convertible bond, and breaking it down into its constituent valuation parts, slowly building up my understanding to a stage where it is possible to price a real convertible bond.
This will take time, and along the way, I'll post on rates, yield curves, corporate bonds, equities, options, warrants, exotic contractual clauses, all of which will need to come together to get the fair price of a convertible bond. This will be a long term project but is a well-targeted way of exploring some of the main points of quantitative finance without it becoming a general introduction on quantitative finance. Also textbooks, virtually without exception, are written in too dry a manner. I'd like this exploration of the elements which go into the pricing of a convertible bond to be fun, slowly paced, and capable of taking the time to flesh out any side-track subjects which happen to take my fancy along the way. If I can't write clearly about it then that's a clear sign I don't understand it enough myself yet.
I'll include Anatomy of a convert somewhere in the post title each time I make a contribution to this thread, so it should be, in time, easy to pull all these postings together, though if the posting seems like it could be useful as a stand-alone article, then I'll give it its own title, then link to it from some other Anatomy of a convert posting, so that they could still all be pulled together.
I shall be pitching it at a mathematically literate reader, though not one who knows a lot up front about finance. I don't want each posting to be too onerous so I'll try to make them short.
David Graeber the anarchist anthropologist probably doesn't share much with American neo-liberal deficit hawks. But perhaps he shares this one thing: a desire to engage in a discourse about debt with virtually no mention of the estimated value to society or individuals of the act of borrowing. For the US deficit hawks - especially these days - it doesn't seem to matter that government debt buys you a lot of public goods. Those goods are not often discussed in any meaningful way. Instead, the emphasis is on the danger and downside of governments holding these debts.
David Graeber prefers what he calls human economics over market economies. While he claims not to imply any moral preference over human economies (strange choice of adjective, though), he does see them as having a focus not on the accumulation of wealth, but with the cultural management of human beings. This management though, includes many forms of savagery and many forms of beauty - all the forms of human culture, in other words. For him, something bad happens when we anonymise currencies and overly abstract human motivations and behaviours, especially if we use mathematics to do it.
This seems unfair to mathematics, to the human capacity and desire to abstract, to understand, to get an overview, to take a punt on what is important, but also it seems unfair on the way we anonymise welfare in a modern economy. As a balancing argument in favour of the rather anonymous way we manage our welfare systems, I suggest the book 'The Needs to Strangers', by Michael Ignatieff.
The Jubilee is a wonderful idea. A time when debts are forgiven. This practice dates back to ancient times and it is wonderful as an idea insofar as it, perhaps temporarily, alleviated some of the suffering indebted humans have experienced, a suffering humanely documented in David Graeber's recent book on debt. The idea is that, by order of the king, all debts owed are to be written down to zero. The lender is no longer entitled to get his principal back. Graeber claims to show how this made some economic sense in times when the burden was so great that there was a growing risk of peasants abandoning the fields and becoming masterless men, and hence not as useful to the rich elites; he ends his book with a single concrete proposal - for the world to enact another debt Jubilee. This fits with earlier anarchist anti-globalisation demands (of course the Jubilee 2000 movement takes its name from these cultural phenomena). I accept that debt forgiveness can sometimes be the best economic outcome for society, if the situation for the indebted is great enough. This is a lot more certain in my head if the debt is private debt and not government-routed debt, since that raises a whole number of issues around institutional corruption. Graeber must also likewise believe that debt forgiveness can sometimes be the right thing to do morally, sometimes not. Since if you always forgive debt, then you weren't making a loan in the first place, but performing a more or less random act of charitable giving, which has its own cultural trajectories.
I'd like to look at a couple of simple mathematical models for the Jubilee event. As always with mathematical models, the first steps involve a degree of simplification (just like with cultural histories, which perform radical simplifications of human behaviour, but in their own way).
My first assumption, see if you like it, is to state that the enactment or not of a Jubilee year has no effect on the psychologies or degrees of selfishness of lenders. They are free, of course, to adjust their behaviour, but they still feel the same way about things - about making a profit, about being in the business of lending, etc, regardless of whether the legal domain they're in decided to enact a Jubilee or not. In particular, I assume they aren't overcome with any degree of remorse, and they don't start acting in a more forgiving way in their financial dealings. Nor do I assume they become nastier. They will just treat this a change in the business climate and adjust their workings, then carry on as before.
Second, of the many kinds of Jubilee humans have experienced, from ancient Egypt to the middle east, I'll focus on the 50 year jubilee of old testament lore, in particular the post 1300 version of christian jubilee which happens every 25 years. What's important about the specification of the jubilee in the model is how frequently it occurs, and how reliably. In ancient times, the arrival time was perhaps more random, with a greater or lesser periodic element. However, I don't want to introduce a stochastic element at this poit nor do I want my periods to be variable. So I'll just assume that when a culture is in jubilee mode, this means that debts get written down to zero on a 25 year period. When it is not in jubilee mode, the debtor still needs to pay back the principal.
Next, and solely for the purposes of exposition, I'll assume that everybody's debt matures on the 25 year proposed jubilee year. In other words, that no-one has a choice on the maturity of the debt - it will always mature on the next 'potential jubilee date.' So if we are 3 years away from the next potential jubilee year, then you can only strike a 3 year loan. If you are 24 years away, you can only strike a 24 year loan. This artificial constraint just makes the analysis simpler, and nothing significant to the argument hangs on it.
Likewise to keep this posting short, assume that the borrowers you see in your lending house are all homogeneously of the same credit quality. It would be interesting from a historical perspective to know how lenders distinguished the peasants' credit worthiness in practice, but it is probably fair to say that even amongst peasants in a particular geographic region there was probably an income power law distribution. So your only job as a lender in this simple world I've created is to decide what interest rate (or coupon) you'd like to charge the peasant. In detail, this can be expressed as three elements a so-called risk free element, and then an element based on your estimate of peasants' creditworthiness, and finally an element which represents your own profit. To spell this out a bit, when a peasant approaches you to ask for a loan, you might decide to offer him a loan at 10% per annum, where the 10% is made up of a 6% rate to match local government securities whose investment you forgo in order to offer this peasant your money instead, plus a so-called 'credit spread' of 3% based on your own experiences of how often peasant borrowers pay back.
Where's your profit, you might ask, since this could be considered a 'break even' price. I,e, you could set your credit spread to minimally reflect the aggregate risk of default to you from peasants you make loans to. In other words, if peasants were currently always paying back all their debts, then your fair price would incorporate a very low credit spread, and if there were a lot of peasants who didn't manage to pay back, the credit spread would be higher. You'll always add on a final slice of interest for your own personal profit, otherwise you are running a charity organisation, not a provider of loans. This slice can be a big as you are greedy, or as small as you can bear, in order to feed your family. So what you're doing on each transaction is working out the 'fair' price for the loan for N years to this peasant, given he doesn't have any collateral to hand over to you (if he did you'd reduce the credit spread correspondingly), then adding more on for your own profit. At this point I'd like to point out that many small scale lenders in local communities across cultures and times were only moderately well off - perhaps they live in the same village, or rented a town shop, or had a family of mouths to feed.
Life is simple in this simple world; let's look at two scenarios. In one, we're not in jubilee mode, and a peasant walks in to ask for an unsecured loan. You estimate 10% is a decent rate to offer him. It is 3 years from the '25 year cycle'. so you know this loan is for 3 years. Lets say that all loans are for £1
So you know that on this day next year, you expect a payment of £0.1 from the peasant, and £0.1 in year two, and £1.1 in year 3, where you get not only your final interest payment but also your principal back.
You can place a fair value on this loan right now, in case you ever needed to sell it on to your neighbour lender. It is the discounted present value of all the cash flows. £0.1 in a year, discounting at the risk free rate of 5% is equivalent to about 9.5p. The payment at the two year horizon is worth only just about 9p, and the final payment in today's money is just over 94p. Giving a total in today's money of just a touch over £1.13.
If the king now declares a jubilee, what do you do? What's there to stop a stampede of people knocking on your door asking to borrow a pound, with the prospect of only paying you back 10p next year, 10p in year two and 10p in year 3? That sounds like a great deal. Well, of course, if you're forced to keep your same terms and conditions, then you, and all lenders, would go out of business within minutes of the announcement. Better just shut up shop immediately, save what you have left, and run away to the sea.
In the absence of a mandate to keep rates the same, and to prevent yourself from rapidly going out of business, you need to come up with a new rate which maintains your business conditions. If you really were going to enter into a contract with a peasant whereby you lent him £1 right now, but would only get 3 interest payments back, and not the principal, what interest rate would you chose? Half the work's already done, since we earlier calculated the fair value of the with-principal contract. It is £1.13. So, all other things being equal, what would you charge a peasant on such a contract to get back the same fair value?: 49%
That sounds horrendous. And it is a consequence of a regular jubilee. But it is important to notice that really it just just a kind of accounting trick. Both contracts are worth the same - both to the lender and to the peasant. One is not inherently more unfair than the other - the big interest rate seems usurious but all that's changed is the payment schedule. In technical terms, the duration has been reduced. In layman's terms, you're paying is back in more even chunks (just like we do with our mortgage payments). Of the 49p per year you pay back, actually, only 10% is interest, the rest is early capital repayment. So if we know with certainty we're in a jubilee mode or we're not in a jubilee mode, the fairness of the loan terms need not change - but the usefulness might deteriorate, as I'll explain.
In the limit, if you go to a lender and the contract duration is too short, you might not bother asking for the loan, since supposedly you want it to do your own investment or project and perhaps can't afford to pay 49% or more of the loan next year. So there's a natural floor to the period of certain jubilees. Above that, everybody adjusts to the state of their world.
Now what happens if there's more uncertainty surrounding the declaration of a jubilee. Well, you can imagine something similar - only the mathematical calculations would have to involve a probabilistic element. The result is quite different, since the lender can never be certain they'll get the principal back. Even without running a Monte Carlo simulation you should intuitively appreciate that this uncertainty results in peasant loan interest schedule somewhere between 10% and 49%, based on the probability of jubilee declaration. (In fact, you could probably work out the implied probability of a jubilee by observing real rates in the marketplace).
The painful conclusion is that you've now asked peasants to pay higher annual interest repayments, even when it turns out no jubilee is declared. On the other hand, they'll feel like they got a great deal if the jubilee is called. You've introduced an additional lottery element to lending, and we're all intuitively aware that uncertainty has costs.
So now let's look at the probabilistic process around declaring a jubilee. Remember, if it is predictable, people adjust and it doesn't have any material effect save from the inconvenience of making loan durations shorten, which is generally not very helpful. If they were driven not by political dictate but by a genuinely random source, this too would be adjusted for, and rates would adjust likewise. This lottery dimension has a cost for borrowers and lenders alike in terms of planning their payments. If it is driven by political and economic circumstances, namely, that the king declares when average welfare is just so dismal, then this too will in time become an observable and measurable phenomenon, with the result that rates rise as we enter dire economic times. At best this is adjusted for as before, and at worst this triggers a debt deflation spiral. pointlessly increasing human misery.
Insofar as there is even the political possibility of debt forgiveness surely this must, all other things being equal, have a tendency to increase the cost to peasants. And the moral hazard argument suggests that re-payers subsidise those who fail to pay though having higher rates. This is less satisfactory than the more certain redistributive model where richer people pay progressively more in taxes to subsidise the poor. What you've done is side-lined a useful rich/poor redistributive conversation for a much less morally certain one concerning good payers (both rich and poor) versus bad payers (again both rich and poor). That's a retrograde step.
Anarchist anthropologist David Graeber's Debt, the first 5,000 years is a brilliant, passionate, opinionated, thought-provoking work looking at the history and cultural meaning of debt since human records began. It has been a long time since I've read a book which stimulated so many brand new thoughts as I read it. It also has a number of flaws, some of which I'll address in separate postings, but for now, I'll concentrate on some of the more startling ideas.
Adam Smith in the Wealth of Nations invented a myth around the invention of money by postulating a historically inaccurate myth of primitive barter culture which bears no resemblance to human cultural history
This is part of a neoliberal thesis which tries to construct a history of the Market which is materially independent from the State. This separate history is a fabrication
Credit systems pre-date cash by a long time and there have been major cycles in human history where one predominates
1971 marked a possible return to a largely credit-based rather than money based world economy
Money is and has always been a politically negotiated balancing act between the commodity interpretation and the promise interpretation
For the majority of human history, power has overwhelmingly resided with the lender, to such an extent that borrowers would suffer grievously when they fell behind in their repayment schedule
In many cultures, across much of human history, lenders have cynically constructed loans which have been designed to fail, resulting in punitive and inhuman retribution on the borrower or his family
Many of money's original uses are bound up with slavery transactions, bride payments, honour payments
Money became increasingly linked with transactions which rip humans from their social context. By making them fungible and susceptible to mathematical analysis required much sustained violence. The pre-eminent example is the European involvement in the African slave trade
Slavery has been abolished many times in human history - its re-emergence coincides with the so-called bullion phases of world economic development and becomes diminished during humanity's credit phases of economic organisation Bullion cycles are associated with expansionary war efforts, the development of anonymous coinage systems, and markets develop to serve occupying armies
Bullion can be stolen by invading armies, and can be used to pay soilders who represent poor credit risks
Credit records can't likewise be stolen, but they can be smashed in revolutions, and many of the world's revolutions have been associated with destroying unbearable debt records
Modern materialist philosophy developed almost contemporaneously with widespread use of coinage in the greek city of Miletus; this heralded the possibility of radical simplifications of human motivations
Islam more than any was the world religion which most embraced the possibility of free markets
Adam Smith's famous example on the essentially human quality of exchange : that no-one ever saw two dogs exchange a bone was found in Islamic authors from the eleventh and thirteenth century. So too was the pin factory example of the benefits of specialisation
The Islamic perspective on the morality of accepting interest on a loan interest has deep Christian roots
I'll only mention one criticism which is worth mentioning now: virtually nowhere does he point out any positive cultural or economic benefits to some of those loans he decries throughout the book. If human economic history were like the history of a corporate balance sheet, the author's book is a history of the liabilities only, and not the assets. Compare this to Kaletsky's Capitalism 4.0, which is largely an economic history of the asset side of the balance sheet. Each book separately is incomplete in its focus.
In this post from INET on ethics in economics economist Ha-Joon Chang makes a fairly weak defence of the economics profession by comparing the profession's behaviour to that of doctors who take implicit payment from drugs companies. He's comparing the actual behaviour of doctors in the face of codes of ethics which aim to prevent just such influence with the possibility or desirability of an economics code of ethics. As such it is a very poor comparison which is utterly unconvincing and adds nothing to the debate.
Having said that, I'm not sure what role a code of ethics would serve. It would have to be at the level of the policy/governmental activities which economists find themselves in, not at their activities as academics, which I'd prefer to be as free as possible. And I don't think I'm being too dyspeptic to believe that the possibility of a political code of ethics to be almost an oxymoron. Those ethical constraints, where they exist, should best be thought of as political - ideally embedded in the political institutions which use the policy guidance of economists.
