Fuelling prosperity and growth

Dealing with the unexpected

The expertise and research of leading economists and social scientists has been particularly valuable to the business and finance sectors as they strive to recover from the banking crisis and subsequent recession. When ‘business as usual’ failed, it was they who played a crucial role in stimulating fresh thinking.

Sir John Vickers FBA, Warden of All Souls College, Oxford, chaired the Independent Commission on Banking, and his authoritative recommendations on the structure of financial institutions and the separation of investment from retail banking are now working their way through the system. The Independent Commission on Banking, Final Report (HM Treasury), September 2011 John Kay’s similarly far-reaching examination of UK equity markets and their capacity to invest for the long term, on behalf of the Department for Business, Innovation and Skills The Kay Review of UK equity markets and long-term decision making: final report (Department for Business, Innovation and Skills), July 2012created, as one newspaper put it, ‘a ground-breaking blueprint for corporate responsibility, investment – even the future of capitalism itself’. ‘Kay review makes mark on culture of the City’, Financial Times, 23 July 2013, page 19

The experience of the financial crisis – foreseen by some, but all too few, or all too little heard – should also remind us of the importance of constantly questioning ideas and asking whether we are sufficiently expert at researching the unexpected. In reacting to the crisis, says Kay – a founder of the Institute for Fiscal Studies (IFS), now an influential Financial Times columnist – policy-makers focused on keeping the system afloat.

A pragmatic response to the financial crisis was reasonable but ‘quite hopeless as a framework for deciding how in the long run you prevent that kind of crisis happening again.’ For that we needed fresh thought, analysis and theoretical revision. Now is the moment, he predicts, when more fundamental thinking and ideas will start influencing policy. In 2007, separating risky investment banking from the ordinary lending and payments systems of high street banks in the UK was impossible to contemplate. Now, distinguishing what Kay calls the utility from the casino in the financial system is becoming public policy.

In an economy addicted to what Bank of England official Andrew Haldane calls instant gratification, scholarship’s longer-run timescales can be a vital counterweight. Research can mitigate the way capital markets focus on the immediate.  Financial Times, 30 May 2013Ideas germinate only in time, says Kay: ‘They influence behaviour, but it is gradual, like dripping on a stone.’ Theory in one area influences empirical investigation elsewhere, finally inflecting practical action and policy in another place. He looks back three decades to the IFS’s work on fiscal neutrality – the idea that the tax system was not designed to secure good or penalise bad behaviour – as an illustration of how previous analysis, once considered marginal, eventually moved into the mainstream. Today, public consensus that the system did not penalise bad behaviour sufficiently would be overwhelming. As the economist Peter Boettke has said, ‘Critics of economics say that economists know the price of everything but the value of nothing. Nothing, perhaps, is so dangerous intellectually in the policy sciences as an economist who knows only economics, except, I would add, a moral philosopher who knows no economics at all.’