31 July 2009

Why no-one predicted the crisis: a failure of collective imagination or a failure of collective action?

The British Academy is certainly polite. The Queen visited the LSE in November and asked the entirely reasonable question: why had nobody noticed that the credit crunch was on its way? The British Academy answered her in a latter dated July 26. The answer they gave was "a failure of collective imagination". "Everyone seemed to be doing their own job properly on its own merit. And according to standard measures of success, they were often doing it well. The failure was to see how collectively this added up to a series of interconnected imbalances over which no single authority had jurisdiction." But a herd mentality prevailed and most people looked the other way. The full letter is at:


Thomas Palley of Economics for Democratic & Open Societies quickly replied in a letter on his website at: www.thomaspalley.com He says the letter, signed by Tim Besley (an economist) and Peter Hennessey (an historian), makes claims that are "tendentious" and that the real problem is that the economics profession has become too "arrogant, narrow and closed minded".

I am an economist. The claim by Palley about the profession has some truth to it--indeed Dani Rodrik at Harvard repeatedly makes similar points. Palley's claims might have something to do with the "failure of the collective imagination" (which is a neat way of avoiding blaming no-one in particular).

But I think the crisis is not a failure of collective imagination but rather an old fashioned collective action failure--no-one had any individual incentive to protect the collective resource, even though each individual's actions degrade the collective resource. Collective action failure is, of course, a classic example of market failure and as such requires GOVERNANCE.

Simply put, economics needs to be governed better. To the chagrin of other social sciences, economics is the discipline that has the ear of most policymakers. Because of that, it has responsibilities. Big ones. This means checks and balances. The global horizon scanning mechanism proposed by the British Academy is one form of global governance structure and might help serve as a "check" to action, especially if it is multidisciplinary. But "balances" are also needed and one type of balance is for economics and policymakers to actively bring other disciplines into the policymaking process--political science, psychology and anthropology.

There is a Chinese proverb that says "politeness wins the confidence of princes". The British Academy will have to do more than be polite and scan horizons to win the confidence of Her Majesty, it needs to bring together the disciplines to work out how to govern the market for economic advice.

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