Over the top lads: Why Intelligent People are Getting it Wrong

Rory O'Farrell19/12/2010

Rory O'Farrell: During a walk through Passchendaele in Flanders one is confronted by monuments to the stupidity of man.

During the First World War defence was the most successful strategy. However the commanders at the time were schooled in an earlier age, before defence had been mechanised. Their training and prior experience led them to believe that attack was the only way to win a war. By 1939 and 1940 much had changed. The French generals during the start of the Second World War had gained their experiences and training in the trenches. They did not realise that attack had been mechanised, and invested millions of Francs in the Maginot Line. Those in charge look to their past experiences for solutions to current problems, and can persist in viewing current problems through expired modes of thinking.

Fortunately we are not at war, and our troubles are minor in comparison. However the psychology of those commanding our economic policies is perhaps not so different to those of past generals.

During the Great Depression most economists had been schooled in the belief that economic problems are problems of supply. Politicians persisted with using flawed policies for several years. During this time Keynes showed that the problem of the Great Depression was one of demand. In the post-war years economists came to believe almost all economic problems were ones of demand, as these were all the problems that had experience of. However, when the oil crisis hit, and the supply of oil was reduced, demand side policies could not end stagflation. Economists and policymakers at the time lacked the mental tools to deal with stagflation. Now most economists active today have been trained during a period when supply side policies have held supremacy. However, the current economic problem, in Ireland and the rest of the world, is a demand problem caused by the financial crisis.

When all one’s experiences have been of a certain problem, it is hard to conceive of current problems as different to those in the past. During the First World War, when throwing 50,000 soldiers at the German machine guns did not work, the generals threw 100,000 soldiers at the problem. Alternative solutions could not be conceived. The strategy failed because the strategy was wrong, regardless of how obvious it may appear now.

The EU and Irish government use economic models to provide ‘insights’ into solving our problems. However the models being use ignore the core causes of the crisis, namely the lack of demand due to a poor distribution of income. Even where the IMF correctly identifies problems, such as substandard infrastructure, they can not bring themselves to offer demand side solutions (like stimulating demand by investing in infrastructure). When their policies fail (such as current Irish bond prices remaining prohibitively high) they offer nothing other than the same policies applied more intensely. They are using models for a different crisis to the one we face.

Despite 11 failed attacks on the Isonzo in northern Italy during the First World War, in which hundreds of thousands died, the Italian elite continued with their failed policies, ignoring alternative solutions. Mark Thompson, in his superb narrative of the Italian Front describes their mode of thinking as follows:

The corollary of paternalism is infantilisation. What bound journalists, ministers and staff officers was a deep conservative assumption that ordinary people – unlike themselves – were incapable of grasping their true interests.
Over the past months we have been told that a budget and four year plan must be passed prior to a general election. The thinking of the governing elites has not changed much in 100 years.

Dr Rory O'Farrell     @r_o_farrell

O'Farrell, Rory

Rory O'Farrell is an economist lecturing in TU Dublin. He previously worked for the OECD and for NERI.




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