We must be wary of economic groupthink, says HAMISH MCRAE

There’s a handy rule of thumb in economics that when all the experts agree on something, you have to start wondering if they’re right.

The reason is that economics, more than most disciplines, suffers from “groupthink” – where a group of insiders come up with an opinion and rule out the possibility that they could be wrong-footed.

Outsiders – people who disagree with this view – are dismissed as foolish or decide to keep quiet because of the social pressure to keep out of line.

There is nothing new in this. The expression was coined by the American journalist and author William H. Whyte in 1952 and reflects the idea of ​​George Orwell’s ‘doublethink’ in his great novel 1984, which appeared three years earlier. But there are at least three examples in finance and economics right now where groupthink has come to the fore: the causes of inflation, what has happened to US stock prices, and the performance of the UK economy.

The former was highlighted last week by Lord King, former governor of the Bank of England. He said: ‘I think the problem is not with the central banks. It stems from the economics profession, the academic profession, which has produced a lot of very brilliant young economists, but they’ve all been trained to believe the same thing and they’ve all gone on to work in central banks. So what is it that they think is a mistake? The big mistake is to think that money has absolutely nothing to do with inflation…”

That’s pretty devastating. Mervyn King is arguably the best British economist of his generation, so to say that students are no longer taught about the relationship between money supply and prices shows that something has gone seriously wrong. You don’t have to be a die-hard monetarist to know that there must be a connection. Those of us who learned our economics under the Bretton Woods fixed exchange rate system and then lived through the great inflation of the 1970s and 1980s know that. The interesting questions are about how the links work and the delays between action and results.

But I think he is too generous not to blame the central banks. When the Bank of England introduced its ultra-easy monetary policy after the banking crash of 2008-2009, I went to a seminar there to explain how it expected the policy to turn out.

After reviewing how lower interest rates would lower government bond yields, stimulate demand, and so on, the conclusion was that this would ultimately increase inflation. Central banks seem to have forgotten what they used to know.

Plus, they hired all those brilliant young economists. They could have gotten people with more experience in the financial markets.

However, people whose job it is to predict how markets will move also suffer from groupthink. A good example is the way top strategists upgrade their estimates for US stock prices. In early January, when the S&P 500 index was at 3,824, most expected it to end the year at around 4,000. There were some outliers on the downside, such as BNP Paribas at 3,400 and Barclays at 3,725. At the top was Deutsche Bank with 4,500 and Fundstrat with 4,750. But most were in the middle.

Now the S&P 500 is above 4,500. So anyone who followed the herd’s advice would have missed out on a blistering market. As Mark Haefele of UBS Global Wealth Management put it, “Most expectations, including ours, were that broad stock market indices would fall this year as earnings growth slowed. Still, the S&P 500 has had the second-best first half of the last 20 years, driven by a robust US economy, some inflation-driven nominal earnings growth and plenty of optimism about a handful of companies associated with artificial intelligence.”

There may be a sharp drop. London-based Longview Economics, whose judgment I respect, thinks the US is in recession and equities are overpriced. But so far, groupthink about US equities has been abysmal.

And the British economy? Here the negative groupthink has gone completely wrong. Remember all that stuff about the worst outlook of all G7 economies? Now not to continue as I wrote about this before, but keep in mind that we had stronger than expected retail sales and much stronger than expected tax receipts on Friday. That shows that the economy needs to grow.

The moral is that we need real diversity of opinion on everything, with different viewpoints welcomed, expressed and discussed. To much asked? Of course not?