Economists' Tribal Thinking
Cultural anthropology can help explain why the downturn caught everyone by surprise: Experts around the world tend to focus on the same mathematical models, looking for patterns in the same limited number of places.
The Queen of England was standing in a hall at the London School of Economics looking a little perplexed. The date was November 4, 2008, and she had arrived to open a new building on campus. Cheering crowds of tourists, students, and children lined the narrow streets, waving Union Jacks, as she arrived.
The event was supposed to be a celebration of academic achievement, but the timing was poignant. Two months earlier, the financial crisis had erupted in London and many other parts of the West, leaving hordes of economists and pundits scurrying to provide analysis. As the Queen toured the building, Luis Garicano, one highly regarded economist, presented her with some charts that purported to show what was going on in finance.
The Queen peered at the brightly colored lines. “It’s awful!” she declared, in her clipped, upper-class vowels. “Why did nobody see the crisis coming?” she asked.
In short, the answer is that networks of experts can become captured by silos, in the sense of displaying blinkered thinking and tribal behavior, even if they work in different institutions and countries. “Why did the crisis happen? It was partly about epistemology, the knowledge systems that we used,” Paul Tucker, the deputy governor of the Bank of England, later observed.
The tale of Paul Tucker’s own journey through the tribal world of economics illustrates the problem of silos well. He went to Cambridge to study mathematics and philosophy, and never set out to be an economist. He vaguely liked the idea of public service, so in 1979 he applied for a job at the Bank of England, and though he lacked an economics degree he was accepted. “In those days nobody thought that everyone had to have a Ph.D. in economics to work at a central bank,” he explained. “We had people who [majored in Greek and Latin], history, and things like that.”
That reflected the particular vision of economics at that time. The root of the word “economics” comes from two Greek words: the noun oikos, meaning “house,” and the verb nemein, meaning “to manage.” Originally, oikonomia was considered separate from markets and trading. It referred to “the imposition of order on the practical affairs of a household,” or putting one’s “house in order,” as the anthropologists Chris Hann and Keith Hart have pointed out. Echoes of that original sense have appeared in subsequent decades: Jane Austen writes about her female characters being “skilled at economics,” while cooking and sewing classes in 20th-century American and British schools were sometimes called “home economics.”
This vision of “economics” being akin to “stewardship” influenced the development of the Bank of England in its first two centuries of existence. However, as Tucker ascended the Bank’s hierarchy in the 1990s, he started to notice a subtle shift in how economics, was perceived—and practiced. Economists started to use increasingly complex quantitative mathematical models to identify and make sense of economic trends. Most ordinary onlookers had little idea how economists actually made these seemingly impressive predictions. The mathematical models they used were as mysterious to nonexperts as the Latin that priests spoke in the Catholic Church in Europe during its Middle Ages. To outsiders, these models seemed powerful and the economists almost priestlike.
In 2006, to most observers, the West seemed to be experiencing an economic golden age. Conditions seemed so upbeat that economists had christened the first decade of the 21st century the era of “Great Moderation” or “Great Stability.” If you imagined that the economy was like an airplane, it was heading in the right direction, with most of the dials on the pilot’s instrument board signaling that all was well. Everyone could relax.
But there was one other economic statistic, or dial on that instrument board, that made Paul Tucker uneasy. This was the statistical series called “broad money,” or M4, which showed how much cash and credit was floating around the economy.
Tucker asked some of his staff to carry out some detective work, to work out why M4 was expanding so fast. His team had told him that the main reason was a rapid increase in the amount of borrowing and lending by a group of entities labeled “Other Financial Corporations” in the statistics. This OFC bucket was essentially the “miscellaneous” box, where statisticians put anything that did not fit into the normal classification system. These were entities that were defined by what they were not—not banks, brokers, insurance companies, or the other entities that statisticians knew well.
Tucker asked his staff to dig into that miscellaneous OFC box. They uncovered a second miscellaneous category of unidentified entities inside the OFC box called “Other Financial Intermediaries.” Tucker later summarized his findings in a December 2006 speech: “Over the past year, the largest contributions to OFC money growth have, in fact, come from . . . what the statisticians label ‘Other Financial Intermediaries’ (contributing a whopping seventeen percentage points),” he said.
Did that have any significance for the economy as a whole? It seemed impossible to tell, since the people doing macroeconomic analysis had not tried to link the trends in the core economics statistics to what was happening in this murky OFC world. The area was a blank space on the map. Economists spent hours questioning the finer details of their mathematical equations. However, they rarely pondered the classification system they used or noticed the boundaries this imposed.
From time to time, Tucker wondered what might have happened if he and others had spoken out more forcefully about his concerns. Might the Bank have been able to prick the bubble at an early stage? Nobody could know. But what Tucker did know was that it would take more than a bureaucratic reshuffle or rhetorical declarations to fix the problem of insulated experts. “Breaking down silos isn’t about series of actions but an attitude of mind—it’s about having curiosity and a generosity of spirit [to listen to others],” he explained, and went on, “When things are working well, no one wants to know about silos.” Or to put it another way, the really crucial time that a group of experts needs to start a debate about how they classify the world is not when there is a crisis. Instead, it is at the moment of success.
This article has been adapted from Gillian Tett's book, The Silo Effect: The Peril of Expertise and the Promise of Breaking Down Barriers.