The Bank of England’s persistent failure to meet its inflation target over a long period of time is a matter of public record; the huge increase in inflation over the past 18 months or so is simply the most spectacular of the Bank’s errors.
Every single member of the Monetary Policy Committee (MPC), both those currently serving and those in the recent past, has a distinguished CV. They are all completely familiar with the latest fashions in macroeconomic theory. It is exactly this which is the problem. The groupthink of the MPC would not matter if the models on which they rely had genuine scientific power. But for all their seeming sophistication, little or no progress has been made in macroeconomics over the past forty years.
In complete contrast, microeconomics – the study of behaviour at the individual level, whether people or firms – has made huge strides forward. The basic textbook model of the fully rational agent, armed with complete information about the various choices which exist and equipped with formidable computational capabilities in order to assess them, has been left far behind.
A much richer and more realistic description of how people make decisions is now available in economics. The process really started some fifty years ago when George Akerlof and Joe Stiglitz formalised the idea that decision makers might have incomplete information and the amount of information available to different people in the same situation might differ.
Incredibly, an important theme in macroeconomics since the mid-1980s has been to build models based on the old textbook model of the completely rational decision maker. Just when microeconomics was moving on from this, macro made it into the intellectual cutting edge of the discipline.
Such models are mathematically very sophisticated and challenging. But, even more amazing, at the time of the financial crisis they only included a single decision maker, who was supposed to represent the behaviour of everyone. Debt could not feature in such accounts for the simple reason that it is impossible to borrow from yourself.
Alongside these models, which go by the splendid description of “dynamic stochastic general equilibrium”, another strand has developed around what is described as the “New Keynesian synthesis”. All “correct thinking” mainstream economists subscribe to these models, particularly the latter. And only these kinds are appointed to the Monetary Policy Committee.
Central banks believed for a long time that they had solved the problem of inflation, a belief now completely discredited. They need to recognise that current sets of models they rely on have been shown to not be fit for purpose.
It is essential to broaden dramatically the intellectual background of MPC members. It is not just a matter of putting a prominent monetarist on, such as Tim Congdon or Patrick Minford, welcome though that may be.
Members with industrial and commercial backgrounds can provide valuable opinions, as could, especially in the current circumstances, a trade unionist. Even at the risk of provoking mass heart attacks across the entire economics profession, people from social sciences other than economics have a contribution to make.
Managing the economy at the macro level is an inherently difficult and complex task. There are no shortcuts or silver bullets. That is why genuine debates, between people with different perspectives, are needed in the MPC.