We must be wary of economic groupthink, says HAMISH MCRAE

Concern: Lord King, former Governor of the Bank of England

There is a useful rule-of-thumb in economics that when all the experts agree on something, you should start to question whether they are right.

The reason is that economics, more than most disciplines, suffers from ‘groupthink’ – where a band of insiders comes up with a view and excludes the possibility that they might be misguided.

Outsiders – people who disagree with this view – are either dismissed as wrong-headed or decide to keep quiet because of the social pressure not to step out of line.

There is nothing new in this. The expression was coined by US journalist and author William H Whyte in 1952, and echoes the idea of George Orwell’s ‘doublethink’ in his great novel, 1984, published three years earlier. But there are at least three examples right now in finance and economics where groupthink has been very evident: the causes of inflation, what has been happening to US share prices, and the performance of the UK economy.

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

That is pretty devastating. Mervyn King is arguably the best British economist of his generation, so for him to say that students were no longer taught about the links between money supply and prices shows that something has gone seriously awry. You don’t need to be a hard-line monetarist to know that there must be some connection. Those of us who learnt our economics under the Bretton Woods fixed exchange rate system and then experienced the great inflation of the 1970s and 1980s know that. The interesting questions are about how the links work, and the lags between action and outcomes.

But I think he is over-generous not to blame central banks. When the Bank of England started its ultra-easy monetary policy after the 2008-9 banking crash, I went to a seminar there explaining how it expected the policy to pan out.

After going through how lower interest rates would cut gilt yields, boost demand and so on, the conclusion was that it would eventually increase inflation. Central banks seem to have forgotten what they used to know.

Besides, they hired all these brilliant young economists. They could have got people with more experience of financial markets.

However, people whose job it is to predict how markets will move suffer from groupthink too. A good example is the way in which top strategists are upgrading their estimates for US share prices. Back in early January, when the S&P 500 index was at 3,824, most of them expected it to end this year at about 4,000. There were some outliers at the bottom end, such as BNP Paribas, with 3,400, and Barclays at 3,725. At the top there 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 took the advice of the herd would have missed out on a sizzling market. As Mark Haefele at UBS Global Wealth Management put it: ‘Most expectations, including our own, were for broad stock market indexes to fall this year as earnings growth decelerated. Yet the S&P 500 has enjoyed the second-best first half in the last 20 years, powered by a robust US economy, a little bit of inflation-driven nominal earnings growth, and a lot of optimism about a handful of companies associated with artificial intelligence.’

A sharp fall may be coming. London-based Longview Economics, whose judgment I respect, thinks that a US recession is brewing and equities are overpriced. But so far, the groupthink on US shares has been wide of the mark.

And the UK economy? Here the negative groupthink has been totally wrong. Remember all that stuff about the worst outlook of all the G7 economies? Not to bang on now as I have written about this before, but note that on Friday we had stronger-than-expected retail sales and much stronger-than-expected tax receipts. That shows the economy must be growing.

The moral is that we need real diversity of opinion on everything, with different views welcomed, expressed, and discussed. Too much to ask? Surely not?