The final moments of Queen Elizabeth II’s Diamond Jubilee in June have been described as her finest hour.
But her finest hour really happened some years earlier, in November 2008. She was on a visit to the London School of Economics (LSE), her first visit to that august institution and the first by any British monarch since her grandfather laid the foundation stone of the building in 1920. The LSE is a 20th-century institution, founded by left-leaning anti-establishment scholars who wished to provide an alternative academic centre — more grounded in reality and less weighed down by the baggage of classical economics than the hoary old universities of Oxford and Cambridge.
On her visit, the queen asked a question of Professor Luis Garicano. It was not a televised moment, so there are varying versions of her exact wording. She either said “Why did nobody notice it?” or “How come nobody could foresee it?” Maybe she asked both questions.
The event she was referring to was, of course, the great financial crash of mid-September 2008. Her clear treble rang out and found resonance in realms well beyond the cramped quarters of the LSE, itself a mark of the wish of its founders to locate intellectuals in the midst of the real world rather than in more abundant and verdant acres.
In asking what she did, the queen was giving voice to the voiceless multitudes affected at the time, and it remains tragically and staggeringly relevant today. The recession in the United Kingdom, the unsustainable debt burden of Greece, Spain and Italy, all derive their ancestry from that financial tsunami which swept the world, compounded of course by subsequent policy errors. Not to mention the devastating impact of that event on growth and poverty reduction in the developing world.
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The immediate response by Prof Garicano sidestepped the issue. In his own words, he confesses to having said: “I think the main answer is that people were doing what they were paid to do, and behaved according to their incentives but in many cases they were being paid to do the wrong things from society’s perspective.”
But that was not what the queen asked. Her query was not why the event happened, but why economists could not see it coming. If there was a problem of misplaced incentives, why could economists not see it and warn of its consequences, was what she wanted to know. Unlike a persistent student in the LSE’s classrooms, the Queen could not pursue the point. She is constrained by the terms of her office from saying or doing anything controversial. But her question hung uncomfortably in the air.
However, to do it justice, the letter does make some frank confessions about what led economists astray. “But against those who warned, most ... believed that the financial wizards had found new and clever ways of managing risks... These views were abetted by financial and economic models that were good at predicting the short-term and small risks, but few were equipped to say what would happen when things went wrong as they have.” But it then goes on to wave away that inability by saying: “There was a broad consensus that it was better to deal with the aftermath of bubbles in stock markets and housing markets than to try to head them off in advance.”
The word consensus is used by a minority which tries to stamp its view on the majority that is never consulted. If there was indeed such a consensus, clearly economists in their considered judgement, unlike the queen and her subjects, saw no need to foresee the collapse of the bubble, much less head it off. The letter recovers quickly from the implications of that consensus however to make a pitch, you guessed it, for a new “horizon-scanning capability” so that Her Majesty might “never need to ask her question again”.
In the old days, monarchs would have punished forecasting failures of such magnitude by cutting off grants, and perhaps a few heads as well. But we live in kinder times. And the queen controls no grants anyway. She does not even control her own grant.
Another letter to the queen followed, from a group of economists not at the LSE. It cites the report of a commission set up by the American Economic Association, published in a 1991 volume of the Journal of Economic Literature, which criticised doctoral programmes for “turning out too many idiot savants skilled in technique but innocent of real economic issues”.
This second letter, dated 21 September 2009, is more trenchant in its admission of culpability. It speaks of how the first letter “overlooks the part that many leading economists have had in turning economics into a discipline that is detached from the real world, and in promoting unrealistic assumptions that have helped to sustain an uncritical view of how markets operate”.
Her visit to the LSE was surely the queen’s finest hour.
The writer is Honorary Visiting Professor, Indian Statistical Institute, Delhi