Many apologies for the lack of posting — busy busy busy…
In the context of a discussion I have been having I found the following piece in an email I sent to my colleagues in September. It is an argument against the idea (popular with George Osborne) that what the economy needs is a restoration of “confidence”.
I have been thinking a bit more about “confidence,” which I talked about yesterday. In the 1980’s TV series “The A Team,” when a member of the team or the team as a whole was in the mood for intelligent risk-taking it was said that they were “on the jazz.” Why is it “confidence” that is lacking in the economy, and not “the jazz?” When one is on the jazz, one enjoys taking calculated risks in the pursuit of an objective, and it strikes me that this is just the kind of attitude that the economy needs — a bit of entrepreneurial spirit. What is more, unlike the “confidence” analysis, there is empirical support for my jazz theory, inasmuch as growth in the US was stronger in the three decades of macroeconomic volatility before 1980 than in the three decades of stability that followed that year. The jazz, you see, requires real danger, and less danger means less jazz. As B.A. Baracus says to John “Hannibal” Smith on one occasion: “Hannibal, when you’re on the jazz, you’re dangerous”. In the present environment the problem is that, to be on the jazz, one needs to see a reasonable prospect of success in a dangerous situation. Deleveraging, austerity and weak economy have robbed people of this prospect. Thus the prescriptions of the jazz analysis are just those policies that will create enough macroeconomic volatility to bring some success to people (and thus to give everyone the prospect of success and promote a general restoration of the jazz). This means debt- or money-financed fiscal stimulus and further unconventional monetary easing measures.
Of course, neither the “jazz” analysis nor the “confidence” analysis is a good one. My point is that the former is just as compelling as, and has more empirical support than, the latter. But neither is a proper model of how the economy works. I think that the popularity highlights the fact that the most common mode of human reasoning is not deduction or induction, but analogy. The “confidence” theory is appealing because, when a person loses his confidence, he looks depressed — and the economy looks depressed. What this means is that we have to be careful with the analogies we use. There are reasons to think that we cannot understand the economy intuitively like we understand a person: empirically, this method does not seem to allow people to make good predictions, and other successful theories about the world (such as quantum physics) are not intuitive; and theoretically, mathematicians have given us the theory of complex systems that tells us that the outputs of such systems can be highly counterintuitive.