Just a Bit More

“Please, Sir. I want some more”. –Oliver Twist, by Charles Dickens

I just finished Mohamed El-Erian’s new book, The Only Game in Town, which analyzes the post-Great Recession financial world where the institutional response is dominated by central bank monetary policy actions. He does a good job presenting the proximate causes of the financial crisis and praises the coordinated reaction of central banks around the world. He further describes how central banks (with a special emphasis on the Federal Reserve Bank) have led the economic policy response to the financial crisis. They have been “the only game in town”. But central banks did not strive to become the dominant player in financial markets. They were forced to fill the void created by the lack of policy decision making from other government and international institutions. I had previously stated that the Fed had gone “off the reservation” but Mr. El-Erian showed me why the Fed had no other choice. Mr. El-Erian proposes that the “new normal” of low economic growth, low inflation and low interest rates (as described by former Treasury Secretary Larry Summers) can continue for an extended period but is ultimately unsustainable. He asserts that we are coming to an inflection point, or T-junction as he calls it, where the global economy will take on a new course, whether by design or circumstances. If we do not try and shape the structure of this new financial order we will be at the mercy of whatever emerges from the chaos.

I agree that we are approaching an inflection point but the T-junction Mr. El-Erian describes is narrowly focused on financial markets whereas I believe the inflection point will be much broader and encompass major changes in society. Mr. El-Erian cites ten big challenges before narrowing the proposed policy foci down to four. But Mr. El-Erian makes no specific policy proposals except for some organizational changes to the structure of the IMF (where he once worked). For someone with Mr. El-Erian’s presence on the financial world stage, I was hoping for something more tangible. Instead he seems to digress into recommendations on decision-making techniques that sounded like they were coming from a McKinsey consultant (I kept waiting for the PowerPoint presentation). The decision-making techniques are all good suggestions on how to reach a decision but I was hoping that Mr. El-Erian could throw out some proposals to be considered.

Don’t get me wrong. This is a very good book by one of the top insiders to global financial circles. It has great analyses of the situation in financial markets and has some great insights. I was just hoping for a bit more.

Many of the insights presented by Mr. El-Erian offer the opportunity for greater discussion. One that I found particularly relevant to our discussion of principled policies was that of cognitive diversity. This concept, as outlined by Scott Page and others, asserts that a group that consists of individuals of diverse backgrounds and cultures can achieve better results than a single individual or a small group of like-minded thinkers. A single person or small group of like-minded people will seek solutions within a box formed by their own pre-conceived notions, biases and blind spots. Some exceptional people can think outside the box but still they don’t know what they don’t know. Including more people can expand the box while including a diverse cross section of people can expand the box exponentially.

Two points came immediately to mind.

The first was a flash that this same concept is what gives power to the free market economic system and why free markets achieve superior results over socialism, which, by definition, limits the number and diversity of economic decision makers. Adam Smith’s invisible hand is powered by hundreds of millions of people making economic decisions in their own interest. There is enormous diversity in these billions of daily decisions. Under socialism, economic decisions are made by government bureaucrats that, although incredibly numerous within a bloated central government, are much fewer than Adam Smith’s many millions. To the extent that diversity improves decision-making, Adam Smith wins out over Karl Marx.

The second insight I got was that this concept not only justifies diversity but also provides a market-based incentive that should increase diversity within our society. Progressives desire diversity as an outcome while the theory of cognitive diversity seeks to improve results. Diversity as an outcome results in a quota system that demands all opinions and points-of-views be included. But this does not result in the superior results that cognitive diversity theory would suggest. While diverse opinions and points-of-view should be taken into consideration, they cannot all be accommodated.

What remains is to determine the solutions or results to be achieved by this diverse cognitive group. There must be consensus on the answer being sought such as a mathematical problem or the design of an innovative new product. In the world of public policy, this framework is provided by the principles of the social contract as described in my book, Principled Policy.

America is an incredibly diverse country that, combining the principles of the American Social Contract with the free market economic system, has resulted in the most successful economic and political system in the world. These principles must be the basis for a diverse people to discover the best way to deal with the impending inflection point described by Mr. El-Erian.

Note: Amazon will deliver Professor Page’s book soon. I expect that I will soon have some additional essays on this interesting subject.

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