Steps Taken Forward but Sleepwalking Back Again
J.K Galbraith once wrote ‘in economics the majority is always wrong’ and with the publication of the Nyberg Commission Report, the latest of a trio of Government commissioned reports to examine the catastrophic collapse of the Irish banking system, so it has proved. Nyberg concluded that the majority were indeed wrong and that throughout the ‘Celtic Tiger’ boom a chronic all-pervasive ‘groupthink’ afflicted the Irish banking system, government and society at large.
Nyberg’s report frequently found behaviour exhibiting bandwagon effects both between financial institutions (herding) and within them (groupthink), reinforced by a widespread international belief in the efficiency of financial markets. This was compounded by a conspicuous lack of timely critical debate and analysis by bank analysts within institutions (read: economists) and among the public at large. According to Nyberg, the complacent views of Government, other authorities, banks and their customers appear to have been very well aligned with each other. Public policy and discourse seems to have almost unanimously accepted and encouraged views and practices that later proved disastrous.
Nyberg’s contribution is valuable in so far as it clearly enters within the lexicon of published research on the global financial crisis the very strong tendency within societies towards conformism, disaster myopia and the marginalisation of contrarians. As Galbraith put it ‘ it is a far far safer thing to be wrong with the majority than to be right alone’. These conclusions should have wider relevance and application to prevent other disasters from occurring in the future – within and outside economics. Unfortunately however, similar to so many other discerning reports, Nyberg has now been largely consigned to the dusty shelves of history in the Government publications office. When the next disaster occurs it will no doubt be referenced, just like Galbraith’s prescient musings.
What is surprising however is Nyberg’s genuine surprise at the pervasiveness and zeal within Ireland for the free-market paradigm and the attendant laxity in banking and regulatory practices. Of course, this was not as an accidental consequence of any unthinking groupthink but a result of quite deliberate and conscious policy choices which, due to a number of fair wind factors over the past few decades in the western world (most notably the relatively low and stable price of energy), has instilled the naive ideological belief and the self-reinforcing consensus view within governing and business classes of the supreme efficiency of deregulated markets. More and more governments worldwide have succumbed to its temptations and the political allure of its considerable short-term rewards. It is referred to as neo-liberalism (This term does not appear anywhere in Nyberg’s report but is alluded to as the ‘paradigm’). The fact that Ireland enthusiastically embraced this orthodoxy does not account in Nyberg’s view for the failures in the performance of the people in private and public positions responsible for financial stability and prudent banking. Not so, while these people should be accountable, it is clear that Ireland was simply a particularly fanatical follower of the faith.
But why? Nyberg’s chief research question asks why did so many professionally adept Irish bankers and public servants (as well as politicians, entrepreneurs, experts, media and households) simultaneously come to make assessments and decisions that have later proven seriously unsound in a number of ways? The answer to this question remains unsatisfactorily answered in Nyberg’s conclusions. Simple greed or incompetence cannot account for the dalliance of entire societies in bringing upon themselves an economic calamity. Passing references do appear here and there which point to perhaps the real answer but Nyberg (an economist) clearly does not believe it or think it so. In fact references to it rarely occur in Nyberg’s 172 page report. Maybe it is so implicit and entrenched in our conventional consciousness, popular opinion and economic belief system as an unquestionable good so that it simply cannot be seen in any way as the answer or the problem at all. Maybe even thinking it so would be so taxing and would precipitate such a fundamental reconsideration of our economic model so as to provoke instinctive denial. The answer is however glaringly simple. The reason that, over time, regulatory controls were gradually weakened and dismantled by a deliberately complacent government was quite simply to allow for the holy grail of all economic policy – increased economic growth.
Mainstream economists will no doubt chuckle at this daft heresy and even have a sense of mild embarrassment for such ignorance of economic theory. The pervasive assumption of the need for continued economic growth as the central objective of all government policy is near universal. The conventional view goes that the unwitting policies of Government (cheered on by the same economists) throughout the past decade simply overcooked the economy and in no way undermines the validity and centrality of the growth objective. Moreover, had a more prudent and restrained course been taken the natural order of ‘sustainable economic growth’ would have been assured which would have provided the Irish economy with the resilience to ride out any global market turbulence and continue to grow endlessly for ever and ever.
With the inexorable succession of generations the supposed virtues of economic growth have become habituated within economic teaching and thinking. Contrarians who do question this orthodoxy remain marginalised since they emerged in the 1970s. While the mainstream herd of-course have a strong vested interest in maintaining the status quo they would do well to consider Nyberg’s conclusions that groupthink occurs when people adapt to the beliefs and views of others without real intellectual conviction.
Nobody within the mainstream has grasped the nettle that the roots of the economic crisis stem from a concerted international effort to free up credit, the primary objective of which was to promote global economic expansion. As Tim Jackson writes in his paper Prosperity Without Growth – ‘the market was not undone by isolated practices of rogue individuals. Or even the turning a blind eye by less than vigilant regulators. The very policies that were put in place to stimulate growth in the economy led to its eventual downfall. The market was undone by growth itself.’ Ireland’s economics fraternity continue to ignore this inconvenient truth and appear to have loftier economic debates to concern themselves with which are far too complex and important for those of us ‘who just don’t get it’. A plethora of blog sites have popped up on the web where our vaunted economic peers discuss the finer technical issues of everything from bondholders to interest rates. A war of words has even broken out as to which blog site is best. Ireland’s economic sage, Morgan Kelly, latest random sensationalism did not miss the opportunity (presumably aimed at his competitors) to put on the record that the ‘namawinelake’ site was best, proving another of Galbraith’s truisms – ‘economics is extremely useful as a form of employment for economists’.
In 2009 French President Nicholas Sarkozy said that ‘the crisis doesn’t only make us free to imagine other models, another future, another world. It obliges us to do so.’ Sarkozy even went so far as to commission Nobel laureate economist Joesph Stiglitz to prepare an in-depth report on the merits of economic growth (GDP) as a measure of human progress. Stiglitz’s report confirmed what most economists already secretly know but never state publicly. It is the elephant in the room, the unspeakable truth- GDP is a highly deficient and insidious measure of prosperity. However, this report, like Nyberg’s, has also been consigned to the dusty shelves. The achievement of a positive GDP growth rate remains the sacred cow of all government policy, including in France. As governments cannot spend and banks cannot lend, the standard conventional means to achieve this elusive sustainable economic growth is by boosting export growth. Yet this is the exact same solution that each and every country in the world is pursuing to achieve growth, including all of our major trading partners. It can’t work for everyone or maybe anyone. As we try to out-compete the herd, a race to the bottom will surely ensue, eroding the quality of life of citizens and place Ireland slap bang across emerging fault-lines when the next global crash inevitably occurs.
And we blindly go on. Our never discredited and well rewarded economists gaze into the unknown and make predictions on the growth of the economy. They are always wrong (technically termed ‘downgrading’). But because what is predicted is what we wish to hear, we celebrate, even welcome the error. Our belief in the faith remains undiminished. The blind lead the blind.
Nyberg’s enduring contribution to public policy should be that the solution to any given problem as espoused by virtually everyone in the mainstream should be very seriously questioned as a means to prevent similar crises from easily happening again. Consideration must be given to the long-term consequences of unchallenged conventional wisdom and to potential alternatives, including the minority views of outliers, which might mitigate risks. For example, in Ireland’s case our past performance as an export driven economic powerhouse in the late 1990s should not be used as a reliable guide to inform current policies. Looking only in the rear view mirror we will fail to see the cliff before us. Our collective inability to see growing world energy prices and shrinking fossil fuel production as a very serious policy problem for an export dependent island economy, our denial of the physical limits to the world’s resources and the fundamental relationship between energy and the economy , an unwillingness to recognise the existence of long-standing inter-generational problems and equity issues associated with promoting continued GDP growth and the very real human anxiety that accompanies the inherent instability of global capitalism, may mean that when alarms are finally sounded, they may once again be too late for meaningful action.
The present global economic crisis offered a once in a generation golden opportunity to rethink the basic growth model for maintaining a stable economic system involving difficult political decisions and the reconceptualization of the fundamental economic relationships between nations. Abstract technical debates between economists which fill the column inches of our newspapers about interest rate changes and bond yields are irrelevant when the basics which underpin the entire economic system are unsound and fail to acknowledge very serious emerging resource challenges. Conservatism and business-as-usual however has once more reigned supreme and the medicine being administered to revive the patient continues to be the same as that which caused the highly contagious disease in the first instance – more economic growth .
The world’s slumber continues, sleepwalking towards the next catastrophe. Until we begin to challenge the unanimously accepted and encouraged groupthink that economic growth is a universal good we will continue to follow the herd and pursue public policy choices and practices that will later prove disastrous.