As GMO's James Montier says in his latest white paper today "it seems one can hardly open a financial newspaper or read a blog these days without tripping over some academic-cum-central banker talking about the once arcane notion of the equilibrium real interest rate."
Sure enough, it is the laughable concept of the equilibrium real interest rate (laugable because if it can be quantified and put into an equation, it becomes tangible and central banks are convinced they can recreate it, perfect it and implement it to "fix the economy"... usually with disastrous results) that is the topic of his latest must read piece "The Idolatry of Interest Rates Part I: Chasing Will-o’-the-Wisp", which not only makes a mockery of central planners but also the intellectual conceits they all hold so dear, and which they will all hold dear all the way until the now inevitable collapse of "New Keynesian" economics.
And while there is much to discuss in his full 13 page paper, the following excerpt discussing how to spot groupthink in crowds (of economists) is what we found most relevant and amusing, perhaps because the entire world is now caught in a groupthink mode, and what's worse, a groupthink that is peddling the wrong solution to the worldwide problem that can be summarized as simply as "$200 trillion in debt."
From Jim Montier:
Wisdom of crowds or groupthink extraordinaire?
One could take the view that so many bright individuals all coalescing around a single framework was evidence of the wisdom of crowds. However, rather than representing the power of consensus, it appears to me to be evidence of extreme groupthink – it is very telling that not one of the aforementioned luminaries has questioned the framework itself.
One of the preconditions for the wisdom of crowds to hold is that people must be independent. This clearly isn’t the case with the above coterie of economists, many of whom trained at the same university under the same teacher. As Steve Keen pointed out, “If I were describing a group of thoroughbred horses, alarm bells would already be ringing about a dangerous level of in-breeding.”
The term “groupthink” was coined by Irving Janis in 1972. In his original work, Janis cited the Vietnam War and the Bay of Pigs invasion as prime examples of the groupthink mentality. However, modern examples are all too prevalent.
Groupthink is often characterised by:
- A tendency to examine too few alternatives;
- A lack of critical assessment of each other’s ideas;
- A high degree of selectivity in information gathering;
- A lack of contingency plans;
- Poor decisions are often rationalised;
- The group has an illusion of invulnerability and shared morality;
- True feelings and beliefs are suppressed;
- An illusion of unanimity is maintained;
- Mind guards (essentially information sentinels) may be appointed to protect the group from negative information.
Perhaps it is just me, but these traits seem to pretty much capture the nature of mainstream economics these days.
No, not just you, although you forgot one bullet point:
- When all else fails, blame weather.
Incidentally, the exact same groputhink checklist was applicable to the economic plenary committees during the USSR's increasingly more "successful" 5 year plans, until one day they mysteriously ended.