The deep recession that followed the near-collapse of the global financial system in 2008 caught nearly everyone by surprise – including the experts who were presumably the best equipped to see it coming.
In November 2008, less than two months after the failure of the US investment bank Lehman Brothers, a visibly irate Queen Elizabeth II, visiting the London School of Economics, famously asked, “Why did nobody notice it?”
Over the last decade, a range of answers has been offered, with experts being blamed for arrogance, complicity, or being just plain overrated. And the context was dire, with jobs lost and balance sheets shrinking. The queen’s own personal wealth had fallen by £25 million ($32.1 million) since the start of the crisis (though the decline was from a very high base.)
Now, with the perspective offered by the post-crisis decade, we may be in a better position to answer Queen Elizabeth’s question. But we must first consider more broadly the challenges confronting economists and financial experts in today’s world – challenges that remain poorly understood, by contemporary economics’ critics and defenders alike.
The first problem is that for certain types of economic phenomena – such as financial recessions, stock-market crashes, or exchange-rate fluctuations – it is logically impossible for anyone to be known to be forecasting accurately far in advance. This does not mean that no one has the ability to foresee a crash, but rather that no one can be known for having that ability. If someone does have such a reputation, their predictions can become self-fulfilling prophecies: if they predict, say, a stock-market crash, everybody will begin to sell their shares, bringing about the predicted outcome.
A second problem of expertise arises from the fact that it is not always in the interest of experts to reveal what they do and do not know. Most people would prefer to show off their expertise, perhaps exaggerating how wide a field it covers.
Of course, this does not negate the value of experts. For example, when I was an adviser to the Indian government, a decision was taken to sell some 3G spectrum. Some of us argued that the government should use professionally designed auctions – an area where economists have expertise akin to engineers – instead of selling the asset for a pre-determined price. India’s political leaders listened, and the spectrum, which had been valued by bureaucrats at $7 billion, sold for an astonishing $15 billion.
But there are many fields where economists’ knowledge is highly imprecise and comes with significant provisos, which may not be fully understood. This may be because decision-makers choose not to pay attention; but it may also be because economists themselves do not spell out the risks.
This risk is all the more acute in a world where scientific and technological progress is taking us into uncharted territory. The decisions that must be taken in response to these developments – those related to the nature of the world or those we have created ourselves – require as much accurate information as possible.
Increasing complexity is reflected in contemporary law and policy. It is common nowadays for people to conclude contracts that are so long and convoluted that signatories do not know what they entail (this was a major factor contributing to the subprime mortgage crisis in the United States, which fueled the global economic crisis and subsequent Great Recession). Likewise, central banks nowadays intervene in ways that often are poorly understood by those most affected.
The upshot is that we are increasingly reliant on experts. And experts may decide to use their know-how not just to address the challenges ahead, but also to serve their own interests.
This is an age-old problem. In the seventeenth century, the economist and investor Sir William Petty was tasked with surveying large swaths of army land, much of which lay fallow, in Ireland. He did a good job, using some truly innovative methods. But he also ended up personally owning much of the land he had surveyed.
This “Petty problem” is likely to become worse, as the world’s complexity – and, thus, its reliance on expertise – increases. This will do nothing to endear experts to ordinary people. Already, many parts of the world, from the US to India, are experiencing a surge in right-wing populist sentiment that is rooted at least partly in mistrust of experts, who are perceived as self-serving.
It is not immediately clear how the Petty problem can be solved. But we must acknowledge its existence – and recognize that it is intimately connected to high and rising inequality in much of the world. Moreover, we must address inequality head on, by limiting the gap between the richest and poorest. If, for example, it becomes impossible for a CEO to earn more than a certain multiple of what the average worker in his or her firm is paid, there will be a limit to how much ingenuity the CEO directs toward pure self-enrichment.
Of course, imposing caps on executive compensation is a blunt instrument for fighting inequality. But more nuanced policymaking – often based on the misguided assumption that companies can be trusted, or induced, to self-regulate – has failed. The time has come for measures that everyone can understand.
Kaushik Basu, a former chief economist of the World Bank, is Professor of Economics at Cornell University