“My theory of the world was wrong. My framework was wrong”. Alan Greenspan, Chairman of the American Federal Reserve from 1987 to 2006, the second longest tenure in that capacity.
Greenspan’s confession was quoted by Nobel Prize winner for Economics, Daniel Kahneman at a conference on economic behaviour in Germany.
The 2010 World Economic Forum conference put much emphasis on values in business. It’s a pity I can no longer fit into an orange mini-skirt. I could have done some ambush marketing for my book Value through Values. Greenspan’s confession and the fact that some of the world’s top business leaders could spend hours on such a “mushy” subject are only a small reflection of a new wave of thinking best captured in the emergence or perhaps re-emergence of a discipline of knowledge called “Behavioural Economics”.
This discipline is enabling the more serious minded innovative socio-economic thinkers to take a helicopter view of the point we have arrived at in the history of exchange – a point that has been forged by some 200 years of behaviour from the industrial revolution and Adam Smith’s “Wealth of Nations”, through two world wars, the great depression, the great split in economic ideology bringing the world to the brink of self annihilation, to the era of technology and monetary manipulation of today. From their vantage point they can see the cracks, the severe imbalances that have emerged between:
- Population and the planet,
- Growth and resources,
- Behaviour and nature,
- Expectations and reality,
- Happiness and prosperity,
- Rich and poor, and
- Money and tangible added value (which has already led to a financial earthquake.)
I have travelled a quarter of this road. I remember well the fervour of the divide between Red and Blue in the 60’s and 70’s, blinding us so that we could not examine anything beyond our Western self righteousness. I recall too the victory of a crumbling Berlin Wall in the 80’s, whose chunks of falling concrete severed the chains of self constraint, and with the earlier seeds planted by Milton Friedman, gave momentum to unbridled greed, consumption and acquisition as the ingredients for sustainable prosperity beyond our wildest dreams. Occasional questions were asked, precipitating some aberrations such as the crash of ’87. But no-one took that too seriously for too long.
Earlier, in 1979, gold, not too happy with the window being shut in its face a few years before challenged the mighty Dollar suffering from rampant inflation unprecedented in peacetime. We all hovered around the Reuters screen at the International Monetary Fund meeting in Belgrade; awe struck at the occasional $80 dollar spike between fixings to hit a high of $850 an ounce a few months later.
That period also saw the emergence of an economic phenomenon called “stagflation” – inflation accompanied by low economic growth and rising unemployment. But soon, the monetarist marshals were on the march under the command of Ronald Reagan and Margaret Thatcher to at least temporarily put an end to the madness, immortalizing them in Reaganomics and Thatcherism.
But for me, the most memorable was my first real taste of the meaning of behavioural economics. A retired Chairman of the American Federal Reserve, Arthur Burns, (whose job no-body really wanted until Paul Volcker entered the fray with his 2 meter frame) explained his role in the inflation debacle. Delivering a key note lecture he attributed inflation to a hangover of the great depression, the shattering of the American’s belief in self help and Roosevelt’s New Deal which in a swoop changed behaviour from being based on high aspirations to one of high expectations. That speech convinced me that no system can cope permanently with inappropriate behaviour. It makes me wonder whether we may still have to deal fully with the after effects of that time…high expectations and low aspirations: perhaps no longer a hangover, but more seriously, liver damage. You simply cannot cure a tumour with a band aid.
I too played the new computer games of the mid 80’s into the 90’s. During a training spell at the Oxford Centre for Management studies, (my prize for being the first winner of the Rosholt Fellowship), our group was split in two teams to punch keyboards in an exciting simulation of the British Economy called an Econometric model. I headed the one team whose composition I believed was clearly some form of punishment. It was a motley crew of a Bulgarian who could not speak a word of English, two Koreans who never slept, and two stern looking British Navy Admirals in uniform, who were as far removed from Economics as the width of the Pacific Ocean. The other team was headed by a formidable economist from Unilever, a British broadcaster who parachuted to the venue because he was late, and a number of aspirant CEO’s. I had no clue about what to do. The bleary eyed Koreans, who could have taken the ancient computers apart and reassemble them in the blink of an eye, were clearly reminiscing about their last haircuts. The Bulgarian kept staring at me as a caution not to mess up or I would face the ricin laced point of his umbrella. The two Admirals went AWOL.
And we won! Probably because a kind lecturer took pity on us and touched a few keys while the human monitor was not looking, or perhaps the threatening glare of Jani the Bulgarian got to her as well.
I witnessed then how measurements mesmerize. There was an unshakeable belief that by inserting the right numbers we could accurately forecast British GDP up to a year ahead. And if you can forecast something a year in advance, with the right numbers, charts and lines, you can with certainty buy or sell something in advance. You have created money today for something to come tomorrow. These futures and options had existed years before, but they took on a new exponential dynamic with an unshakeable belief in the infallibility of computer data processing and a “web” connecting the smallest to the biggest, the smart to the not so smart, the cunning to the naïve, and the villain to a victim. Enter the cappuccino economy.
From their helicopter vantage point, our “out of the box thinking” bunch may reflect on Einstein’s words: "Not everything that counts can be counted, and not everything that can be counted counts."
But new exciting measurements are on the brew - such as the Happiness index, and the Life Satisfaction Index. Some are already well established such as the Human Development Index, the Gini co-efficient and Ecological Footprint and have gained a good measure of popularity and authority. This is all flying in the disgruntled faces of hard core human calculators and “ism” fanatics. Their time is done. And hopefully, to their chagrin, we can all, the media included, have great fun exploring the import and interpretation of these new indicators. At its core, behavioural economics is bringing together the disciplines of psychology, sociology, anthropology, empirical economics, statistics, development economics and other “human” sciences.
Perhaps it’s been there all along. After all, Adam Smith was a moral philosopher and “humanist” before being classed as one of the world’s first economists.
In years to come, in reflecting on these times, Dickens’ famous line “it was the best of times and it was the worst of times” may become as relevant as they were in the industrial revolution.
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