Andy Haldane thinks we need more folk wisdom in economics – here's why that’s actually a good idea

This key point here, surely, is that we don’t particularly need people to be better educated in economics to improve the understanding of how the Bank of England runs monetary policy, or indeed to influence such policy

Acknowledging that folk wisdom can guide policy is really helpful, and the Bank of England’s chief economist deserves credit for that (Reuters)

We have become suspicious of people who know – or at least purport to know – a lot about a subject. Michael Gove caught that mood when, during the Brexit campaign, he remarked that “people in this country have had enough of experts”.

Whatever your views on the substance of that matter, his point is surely valid. There are some things, of course, where we crave, indeed demand, expertise: you don’t want an amateur surgeon doing an operation or an amateur pilot flying you across the Atlantic. But in the worlds of commerce, economics and finance, there is profound distrust, and understandably so.

Car firms lie about their emissions, economists are hopeless with their predictions, and bankers led us to the Lehman crash and the subsequent recession. I am afraid the media does not come out too well either.

Instead of experts, we trust our instincts and experience. Collectively that is “folk wisdom” or “the wisdom of crowds”. The latter phrase was chosen by author James Surowiecki in 2004 to capture the idea that a group of people pooling their information and experience will reach a better decision than any single individual.

It is a seductive notion. But there is a malign variant: “the madness of crowds”. This is when a group of people get carried away by some enthusiasm or ideology and ignore evidence to the contrary. In finance this creates investment bubbles, such as the dotcom boom (and I think cybercurrencies). In politics and in some other areas when a group of people are so sure they are right that they suppress any contrary opinions, we have dubbed that phenomenon “groupthink”.

So how do you get better policy decisions?

Well, folk wisdom – and how to harness it – is the subject of a lecture by Andy Haldane, chief economist at the Bank of England, at the Bank of Estonia’s 100th anniversary in Tallinn. This is important because he is one of the most thoughtful senior central bankers in the world. His particular concern stems from the sense that central banks do not command the reputation they had a generation ago, yet if anything they are being required to take on more responsibilities.

Haldane’s is a long paper, discussing not only the tension between the experts and folk wisdom, but also alternative models for harnessing the latter, including ancient Athens. So this is coarsening his thoughts. But the core of his argument is that you need some balance between elite decision-makers (the experts) and folk wisdom. As for central banks, they need both to explain themselves better, and to find ways of lifting the general understanding of the subjects of economics and finance.

This second point is vital if we are to get folk wisdom rather than folk madness. The bank is doing a lot already, and this year launched a new education strategy targeted at schools. Apparently some 80 per cent of parents would like economics taught in schools, so there is a clear demand for that. I would also like to see personal finance taught there too: basics about savings, borrowing and investment.

This key point here, surely, is that we don’t particularly need people to be better educated in economics to improve the understanding of how the Bank of England runs monetary policy, or indeed to influence such policy. What we need is people to be better educated in running their own lives.

There are some economic concepts that everyone should know about. As far as public finances are concerned, I would put opportunity cost at the top of my list: asking, when any particular project is put forward, what other projects cannot go ahead because of the decision to go ahead with that one. Or at a personal level, knowing that if you go on that holiday to Dubai, it will be harder to save for your pension or take longer to clear the mortgage on the house is a good example.

The other thing I would like to see taught is how much uncertainty there is in all economic relationships. Here the bank is guilty. Pat McFadden, an MP on the Treasury Committee, famously said Mark Carney, the bank’s governor, behaved like “an unreliable boyfriend” because he kept giving contrary signals on interest rates. It stuck because it was so witty. But actually the governor’s problem was that he didn’t know how rates might need to move because the economy was responding in unpredictable ways to falling unemployment. Inflation did not rise as much as expected.

However, for experts to acknowledge they don’t know is somehow seen as unprofessional. They are paid to know; why don’t they? When I was taught economics, I was told that one of the things to watch for was spurious precision, and not just in forecasts; in current data too. Reports that an economy was growing by, say, 1.8 per cent a year meant that it was probably growing between 1.5 per cent and 2 per cent, nothing more.

Still, acknowledging that folk wisdom can guide policy is really helpful, and Andy Haldane deserves credit for that. Ultimately this is about judgement and common sense. And if, at the margin, those two qualities are nudged up the scale in decision-making, then that will be an achievement indeed.