Letter to the Queen: Why No One Predicted the Crisis
Her Majesty The Queen
Buckingham Palace
London
SW1A 1AA
29 July 2009
MADAM,
In response to your question why no one predicted the crisis you have recently received a letter from Professors Tim Besley and Peter Hennessy, sent on behalf of the British Academy. They claim economists’ failure to foresee the crisis was the result of a “failure of the collective imagination.” That claim is tendentious and will mislead you.
The failure was due to the sociology of the economics profession. This failure was a long time in the making and was the product of the profession becoming increasingly arrogant, narrow, and closed minded. One was compelled to adhere to the dominant ideological construction of economics or face exclusion. That was the mindset of the IMF and the World Bank with their “Washington Consensus”, and it was the mindset of central bankers (including your own Bank of England) with their thinking about the sufficiency of inflation targeting and hostility to regulation.
The crisis was predictable and was predicted. See, for example:
(1) “The Weak Recovery and the Coming Deep Recession,” Mother Jones, March 2006.
(2) “Debt and Lending: A Cri de Coeur,” Levy Institute, April 2006.
(3) “The Fallacy of the Revised Bretton Woods Hypothesis: Why Today’s Financial System is Unsustainable,” Levy Institute, June 2006.
Professors Besley and Hennessy’s letter is another example of the economics profession’s complete inability to come to grips with its sociological failure which produced massive intellectual failure with huge costs for society. This is a very serious social problem and we will all continue to pay the costs as long as it is unaddressed.
Respectfully yours,
Tom Palley
July 30th, 2009 at 6:52 pm
I agree!
July 31st, 2009 at 6:01 am
not to mention (admittedly, from summer ‘08, when you had to be, well, an economist, not to see which way things were heading):
http://www.motherjones.com/politics/2008/07/gops-december-surprise
JG
July 31st, 2009 at 6:23 am
Robert Prechter, Jr., of Elliottwave, also predicted the
current depression in “Conquer the Crash” published 6 years ago.
July 31st, 2009 at 11:50 am
[...] by nick Via Econospeak (which is quickly becoming one of my favorite blogs), Thomas Palley has written a response to the Queen of England’s request for an explanation on why no one predicted the crisis. He [...]
August 1st, 2009 at 7:04 am
With all due respect to my betters, Misters Palley and Galbraith, our present disaster was not the result of any failure at all. It was the result of our economic, social and political institutions working exactly as they were meant to work. That is why we see traders in CDSs given million dollar bonuses, regulators who don’t regulate being promoted, and Wall Street investment bankers being given high government postings. This doesn’t happen because these people failed. These things are happening because they have succeeded. Naomi Klein’s Shock Doctrine is a better map to what is going on than most things I read from economists.
August 1st, 2009 at 8:32 am
The failure of prediction may also be due to the superior planning of those who organise globalisation, wars on terror and engineer mindsets that don’t ask deep questions such as:
– who controls the supply of money?
– who controls the controllers?
– who controls the supply of dollars vs Sterling vs any other currency?
– who controls the percentage of Cash vs the percentage of Credit in the system?
– who created the economic profession in whose interest?
Sighingly yours,
Sabine
Organiser, Forum for Stable Currencies
August 1st, 2009 at 10:50 am
Not predicted? I think Hyman Minsky (may he rest in peace) would have a thing or two to say about that! I fondly recall when he was a DVP at my undergraduate university in the early 1990s and that he spent the better part of his week with us talking about this stuff!
August 1st, 2009 at 12:50 pm
Tom Palley’s perspective is high level, or global, by looking at central banks and interest rates, and observing the “institution” of international financial institutions, the diagnosis of economic mismanagement. If I may be so bold as to add to Thomas Palley’s comments on the problem of mainstream economic mindsets. All too often, many university economics departments have continued to place greater emphasis on microeconomics at the expense of educating students on macroeconomics. For this reason, many critiques on the challenges facing mainstream economics departments worldwide is the lack of understanding the relationship between macro and microeconomics in a complex world.
August 2nd, 2009 at 2:58 am
The letter from the LSE professors was rather pathetic but then I may be biased as I was accepted to do a PhD there on the civil division of the English legal system but was ever so gently dropped. I tried elsewhere but could never come up with a proposal which would have been accepted by the Dept of Law and Business (big clue in that title).
In his book The Hidden Wiring, Professor Hennessy addressed “Monarchy, Premiership, Cabinet, Whitehall and Parliament” but not the enforcers, the judiciary.
English judges are neither independent nor impartial but are ordered in royal charters to protect corporations, wrongdoing notwithstanding, just as ministers are ordered to serve them.
The problem is constitutional in the UK. In the US, the corporation is the means by which the few control the outcomes for the many.
August 3rd, 2009 at 2:18 am
[...] asked recently: why didn’t anybody see it coming? Well, here is an interesting answer from Thomas Palley who advocates Economics for Democratic & Open [...]
August 3rd, 2009 at 4:09 am
Wonderfully put Tom. But I would have to add that the arrogant neoclassical economists, have no claim to any superiority at all. See, big business funds business schools to come up with economically unchecked ideas, then most economists steal their ideas from them and borrow something from the mathematics department and “Voila”! For too long now, as you mention, economists have copied or stolen some smoke and a mirror from someone else, hoping to ride in on some fame that they did not even create. Thank you very much Tom for pragmatically addressing the issue and searching for your own theory. And not to mention, most common people where hemming and hawing “this can’t last” (whether it be stock or housing market) before reporters even had a clue.
August 4th, 2009 at 12:50 pm
[...] don’t you recommend to your fellow participants at the British Academy the examples of the predictability of the crisis as cited by Dr. Thomas Palley, who obtained his economic degrees in Oxford and [...]
August 7th, 2009 at 2:51 am
[...] challenge on why their profession failed to predict the credit crunch. Pick up the trail with Thomas Palley, Lawrence Haddad or William Easterly, (among a lot of [...]
August 7th, 2009 at 6:03 am
[...] This letter to HM the Queen was it. Written by Thomas Palley, who advocates Economics for Democratic and Open Societies, it is based on a letter from the British Academy which describes the supposed cause of the crisis: a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole. [...]
August 12th, 2009 at 8:28 am
I agree with Tom. I want add just a remark from a European point of view. The European Central Bank, which is the most relevant institution of Eurozone, including 16 member states, has denied the crisis (also the possibility of a crisis) until the Lehman Brothers collapse. It has increased the interest rate (until 4.25 percent) in the summer 2008, arguing that the true risk was the inflation. Was it a pure technical mistake? Not at all. Since the creation of the Euro, in perfect accordance with the dominant economic ideology, the European central bankers have theorized the so-called “structure reform”: that is, wild labor market deregulation and wage flexibility along with the retrenchment of the social policies as crucial means to generate growth and full employment. The finance was in this context a separate auto-regualted world. For them macroeconomics had an important role: but just in the direction of the (neo-liberal)” structure reforms”. The consequences? Ten years of an average law eurozone growth and a relative high unemployment. If the Tom’s argument is true (as, in my view, it is), we need an intellectual revolution vis à vis the mainstream economics of the last three decades.
Rome, Italy
August 13th, 2009 at 9:05 pm
“Failure of collective imagination” sounds alot like group think! No matter how you want to analyze the past two years in economic terms, the amateur economist did a better job in predicting the near future than professionally trained economist who now must go around and apologize for their “failure of collective imagination.” Imagination has nothing to do with it. What was required was intuition and the ability to see how the otherside lives.
Danny L. McDaniel
Lafayette, Indiana
August 14th, 2009 at 8:12 am
Does what Dr. Palley has to say apply to Germany, Norway, Sweden, Finland, Denmark? This is a real question.
August 21st, 2009 at 6:36 pm
Here’s another letter to the Queen:
Your Majesty,
We, the undersigned, noted with interest the letter to Your Majesty of 22nd July 2009 from the British Academy in which they respond to your question about how the current economic meltdown was missed. They talked of a “failure of the collective imagination of many bright people” and a “psychology of denial”.
The Academy wrote “It is difficult to recall a greater example of wishful thinking combined with hubris.” You will be aware of HRH The Prince of Wales’s speech on 9th July 2009 in which His Royal Highness focused on far more serious examples of wishful thinking and hubris. We are writing to you because we are concerned that the British Academy’s letter focuses on one particular aspect of current insecurity, namely financial, failing to address the wider context of more serious macro issues facing mankind. We are also writing to the Academy to invite them to debate these issues with us.
Symptoms of a much greater systemic failure
We live in tumultuous times. Many developed world citizens are losing their livelihoods. The effects on the world’s poorest will, as ever, be dreadful. However we are surprised that the Academy has not addressed anything outside the narrow remit their letter covered. Far greater insecurities threaten the world’s poorest due to our effects on the natural world.
The letter ignores the physical constraints which are central to this bubble and indeed most bubbles. It speaks of “the bigger picture” and of “individual risks being small” and “the system as a whole being vast”, yet, for us has a limited horizon.
(Go here to read the rest of the letter.)
August 29th, 2009 at 9:56 am
Maybe you, heterodox economists, face exclusion. But, somewhere in the world and somewhere in the time you are very admired, specially in peculiar moments.
September 22nd, 2009 at 5:49 am
[...] economist, Thomas Palley, called out the narrow vision of the Besley-Hennesy letter. According to Palley, the cause of the failure cannot be ascribed to the failure of the collective [...]
November 16th, 2010 at 4:19 am
[...] serious social problem and we will all continue to pay the costs as long as it is unaddressed”. (http://www.thomaspalley.com/?p=148). Judging by the neoliberal policies currently favoured by the government to correct the financial [...]
December 13th, 2010 at 7:40 am
[...] failure which produced massive intellectual failure with huge costs for society” (http://www.thomaspalley.com/?p=148). The economic theory presumed to explain and predict the workings of financial markets is based on [...]
December 30th, 2010 at 4:04 am
[...] which produced massive intellectual failure with huge costs for society” (<a href=”http://www.thomaspalley.com/?p=148″>http://www.thomaspalley.com/?p=148</a>). The economic theory presumed to explain and predict the workings of financial markets is [...]
December 23rd, 2011 at 8:57 am
[...] sociological failure which produced massive intellectual failure with huge costs for society” (http://www.thomaspalley.com/?p=148). The economic theory presumed to explain and predict the workings of financial markets is based on [...]
October 3rd, 2012 at 10:02 am
[...] economist, Thomas Palley, called out the narrow vision of the Besley-Hennesy letter. According to Palley, the cause of the failure cannot be ascribed to the failure of the collective [...]
October 8th, 2012 at 4:13 pm
[...] economist, Thomas Palley, called out the narrow vision of the Besley-Hennesy letter. According to Palley, the cause of the failure cannot be ascribed to the failure of the collective [...]