As economists search their souls, a view is emerging that human social and psychological factors should have a far more central role than the hard science of economic modelling gives them. If that's the case, while stimulus packages and regulation are all as we cope with the aftermath of the crisis, in the longer run it may be that we should look to education to save us from ourselves in future.
Incidentally, I say this as one of the select band of people who, in a small way, predicted the financial crisis. And it's a status I hold in common with a taxi driver who gave Robert Shiller a lift recently.
Shiller was giving a seminar at the RSA this morning (and will be speaking here again on Thursday) about his new book Animal Spirits. He happened to mention that he was in a cab with a taxi driver in New York. As they drove past the big cranes working on a series of new developments, the driver turned to him and said something along the lines of 'there's something wrong here - it can't last'.
For my part, I have had the deposit for a house set aside for several years now, and have been resisting calls from my family and friends to buy a property. I know very little about economics, but I had a completely unscientific idea that the plethora of property obsessed shows on TV were both reflective of and actively selling the idea that prices would go up forever. And that idea, well, it just didn't feel right. It felt like people's descriptions of the early 1990's. So I held off.
In their zeal for accurate scientific models economists missed the housing bubble coming. Shiller argues this was, at least in part, because they don't account for human psychology ('Animal Spirits' he calls them, and which are the title of his new book) which in fact plays a major role in driving economies. So me and the taxi driver managed, however dimly, to see something coming when they didn't.
Shiller makes the simple point that people tend to respond to stories, not facts. If people see data that contradicts a dominant narrative they tend to dismiss it, or rationalise it away somehow. So, in a boom we ignore the fact that house prices have gone done as recently as the 90's.
Today, now the bubble has burst, we have an equally damaging narrative about pessimism for the future, and a lack of trust in financial institutions and political leadership.
If human psychology is central to driving markets, it would seems that some degree of boom and bust is probably inevitable. But we could manage the consequences better if we solved two problems.
1. How do we help people deal critically with the dominant stories around them, and avoid groupthink?
2. Part of dealing with a bad time is to behave responsibly in the good times. But in such times, the pressure on politicians is to deregulate and spend, precisely because we feel good. How can we create the conditions where democratically accountable politicians can resist this popular pressure?
I have two suggestions as to how education could, in the longer run, further the above ends:
1. Realise that history might be the best popular guide to financial future: just as geography as a subject has connected intimately to the challenges of climate change and international development, so history could play an important role in informing our stories about our economic present with our past. History could help develop a shared understanding of good times and bad times, and the painful social realities of inflation and deflation. We should stop boxing financial education in, and let it permeate the curriculum in this sort of way.
2. We should decouple the story about greater wealth from the story about happiness and wellbeing - we can use education to embed the idea that happiness and wellbeing are just as linked to helping others and pursuits with intrinsic worth (learning musical instrument as opposed to earning more).
Is this a line of thought the RSA should pursue?