The wrong kind of groupthink

Why do so many economists deny that the value of money is related to its quantity?

Tim Congdon

This article is taken from the March 2024 issue of The Critic. To get the full magazine why not subscribe? Right now we’re offering five issues for just £10.

Economists in the mass — as a profession, no less — have not covered themselves in glory in the early 2020s. Like everyone, they were caught off guard by Covid, but they blundered in their reaction to it. With few exceptions, they forecast that Covid-19 would lead to years of disinflation and perhaps even of deflation. Instead in 2022 inflation reached the highest levels for 40 years.

Yes, there were exceptions who — if I may say so — include the author of this column. Right from the start, in late March and April 2020, I could see that the astonishing money explosion then under way  would have inflationary consequences.  The first result would be too much money chasing too few assets, so that the prices of shares and houses would be buoyant in late 2020 and 2021.

The second would be too much money chasing too few goods and services and that annual consumer inflation might reach a double digits percentage rate in 2022 or 2023. (I really did make that forecast in spring 2020.)

But we heretics were few in number, and are hardly popular with colleagues and rivals in our so-called “profession”. To be fair, the British public debate has noticed us and, perhaps significantly, the latest monetary report from the Bank of England contained a few sentences on recent money growth trends. But on the other side of the Atlantic the attitude of the Keynesian Ivy League economics establishment has been dismissive to the point of rudeness.

one of its members is Princeton’s Paul Krugman, who with his column in the New York Times is widely regarded as the world’s most influential economist. In May 2021 he used his column to sneer at other pundits (including perhaps yours truly) who had been worrying for more than a year about the inflationary dangers implicit in excessive money growth.

Krugman drew a distinction between “zombie ideas”, which shamble along “eating people’s brains”, and the much worse “cockroach ideas”, which despite their falsity “always come back”. Monetarists’ claim of a connection between money supply and inflation was — according to Krugman — merely a cockroach idea.

Far too many economists think that papers with algebraic squiggles constitutes scientific progress

In his words, the emerging “buzz” about the subject was evidence of “an infestation of monetary cockroaches”. The tension between the monetary and non-monetary analyses of inflation has become so conspicuous that non-economists have been alerted to it.

In its sensible report on the Bank of England in November last year, the House of Lords Economic Affairs Committee worried that the Monetary Policy Committee lacked sufficient “intellectual diversity”. It recommended that the Bank become “pro-active in encouraging a diversity of views and a culture of challenge”.

The media summarised this as  an allegation that the Bank of England suffered from “groupthink”. The characterisation was fair in that, through late 2020 and most of 2021, only one mpc member spoke out against the prevalent complacency on inflation. (That was Andy Haldane, the Bank’s chief economist, who resigned in June 2021.)

Is the mention of groupthink helpful? In many walks of life groupthink is not just entrenched, but desirable. Indeed, it could be seen as essential to scientific progress and modern civilization. Surely every physicist agrees with Einstein’s proposition of mass-energy equivalence in the E = mc2 equation and Boyle’s law that gas pressure and volume are inversely proportional (p1v1 = p2v2, for those  who like this sort of thing). Physicists are therefore  subject to groupthink, and quite right too.

The real problem with contemporary macroeconomics is not that policy-makers think together in much the same way, but that their groupthink is plain wrong.

Trying to explain the value of money without reference to its quantity — and hence to understand inflation while overlooking excessive money growth — is preposterous. Only fools could deny that the quantity of money and the price level are related. Am I then saying that at present some people at the top of central banks are fools?

The difficult issue — which brings in politics and ideology, and even the culture of modern universities and the widespread pathology of “physics envy” — is to explain why their folly takes this particular form.

Far too many economists think that, if they write papers with algebraic squiggles, as in the above equations from Einstein and Boyle, their work constitutes scientific progress simply because they contain the algebraic squiggles.

Keynes once said, “If economists could manage to get themselves thought of as humble, competent people on a level with dentists, that would be splendid.” Nowadays the parallel might be with eye surgery, which in the last 50 years has achieved miracles. (I have just had cataract surgery in both eyes and, in my early seventies, am enjoying the best vision in my life.)

Dentistry and ophthalmology are bodies of more or less objective scientific knowledge. This is not at all to decry the special achievements of individual dentists and eye surgeons. They belong to professions of which they can be proud, and can bless their shared and largely uncontroversial scientific knowledge as a kind of groupthink. I wish I could say that I belonged to a similar profession.

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