Big Society: The wisdom of crowds

24th October 2011

The Wolfson Economics Prize is offering £250,000 to the economist who comes up with the ‘best plan for winding up the euro in an orderly way', with a deadline of January 2012.


Financial reward for solutions

Offering prizes for solutions to big problems is a fresh idea that has gathered support in recent years – particularly among behavioural economists who see it as an effective way of solving problems.

A recent example of this at work is a prize fund that was established in 2006 to reward African leaders who shunned corruption, and demonstrated true leadership. The Mo Ibrahim Foundation handed the prize this month – $5million award paid over 10 years and $200,000 annually for life thereafter – to President Pedro Verona Pires of Cape Verde.


The world has lost faith in leaders

Finding true leaders may be tough, but what are we to do if we face a crisis without one? Given the world is swept up in the worst financial crisis since the 1930s, "if not ever", we need solutions and strong leaders – but neither has come to the fore.

Trust in our leaders is at an all-time low. The economic crisis has required urgent action, with leaders that have failed, or perhaps been too scared, to take action – in some eyes the euro crisis in particular turned into a farce.

Historian Geoffrey Hosking comments on the credit crunch and the importance of ‘trust' in a policy paper. He says that while we put trust in all matters of our lives everyday, without even noticing, it if is broken too frequently the damage is done.

He says: "Trust is one of the most pervasive, but also least noticed, features of social life. We all exercise it unthinkingly every day. For forty-one years I have been trustingly paying substantial sums each month into a pension scheme, without getting a penny in return. Fortunately my trust was justified: when I retired a few months ago, I started to see the benefit…

"Trust is not infinitely elastic, though: eventually counter-evidence has its effect and we turn to distrust, which is equally cumulative and self-reinforcing. This is exactly what has been happening in financial markets."

Awaiting a solution to the crisis has led nowhere. The trust we might have felt in decision-makers, as Hosking suggests, has turned to distrust. So the system needs repairing, but how is this best done?

Hosking adds: "I have been working on the history of structures of trust in various past societies. My findings suggest that, when there is a real crisis of trust, the best way to tackle it is to both broaden and democratise trust."


The wisdom of crowds

There are global problems from economic woes to global warming which demand alternative problem solving approaches. Making use of the collective minds of people around the world through social platforms, as the power of Wikipedia demonstrates, may set us on the right path to solutions. 

Kim Stephenson, Mindful Money's psychologist blogger, says: "…I use the wisdom of crowds idea a lot in management development because it provides a lot more potential answers to real world problems than one person, however clever that one person is."


The need for new institutions

German professor and sociologist Ulrich Beck talks in the Guardian on the need for new institutions and the burden on the individual – the world we find ourselves in lends itself to a fresh philosophy.

He says: "The individual…must cope with the uncertainty of the global world by him or herself. Here individualisation is a default outcome of a failure of expert systems to manage risks."

Perhaps by crowd-sourcing for problem solving we can take the focus off the individual onto the collective.


Applying the approach

One of the greatest problems facing humanity today is global climate change, yet we aren't close to stopping the devastation in its tracks. 

Thomas W Malone of MITSloan Management says on his blog: "In the Climate CoLab project, we're applying this approach to climate change. An online community of people from all over the world is already creating, analyzing, and discussing detailed proposals for how to address global climate change. For instance, last fall we had a global competition for proposals addressing the question: What international climate agreements should the world community make?"

He adds: "One of the finalist proposals came from a team at Tsinghua University in Beijing; another came from a software developer in North Carolina who had no prior professional connection to this issue. The winning "Popular Choice" proposal suggested a creative kind of negotiation between neighboring countries in the Northern and Southern hemispheres that I haven't heard proposed anywhere else."


The big society

The economic crisis, beginning with the credit crunch in 2008, has been a decisive turning point, whose scale has not yet been understood by financial history.

However, like all crises, it one gives us the opportunity to rework current thinking. If we can open key questions to a bigger society than the politicians currently in place this may make prompt essential change – whether they be aimed at the economic crisis or, say, global warming.

More from Mindful Money:

A Net
work of Debt: Why it matters who owns it

Do credit ratings matter?

Does the Occupy Movement need a manifesto?

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31 thoughts on “Big Society: The wisdom of crowds”

  1. Andy Zarse says:

    Merv’s protestations are completely hollow. Gordon Brown must be furious at the implications he’s levelling! And if Merv’s got anything to do with it, appointing Lord “Red” Adair Turner – Chairman of the FSA – as the next Guvenor would seem to be a very long shot indeed. The FSA’s role in the banking disasters must equally be questioned, indeed if the FSA was a regulated firm they’d have been stung with record fines by now…

    Shaun, I’m having a debate with an acquaintance regarding Merv and his inflation predictions and he keeps quoting the Bank of England inflation report for November 2010.…On page 40 it says “CPI inflation is likely to remain
    above the target throughout 2011, reflecting the forthcoming increase in VAT and
    elevated import price inflation.”

    So my acquaintance thinks Merv was right. Based on this he has a point, as there was nothing Merv could do about the VAT rise, and I suppose, oil prices etc.

    However, do you have any links to quotes from Merv or other MPC members who predicted around that time the CPI rate would fall?




    1. Anonymous says:

      Hi Andy

      Back on the 29/09/10 I reviewed a speech by Adam Posen which told us this.

      “Ultimately, though, the MPC has to look forward, and except for the coming VAT increase, all determinants of inflation suggest that declines in UK inflation will occur over the next two to three years to well below target. “Here is also a quote from me referring to Mervyn King and his crystal ball.”Also here is a statement made on the subject by Bank of England Governor Mervyn King from March 2011.The projections that we published in the inflation report a couple of weeks ago have the characteristic that the inflationary pressures are pretty much back to target by around the middle of this year.”Back on target by the middle of 2011?

      1. Andy Zarse says:

        Thanks Shaun, v useful!

  2. Anonymous says:

    Do we need central banks?

    I am sure economists will laugh at this concept but progress usually happens when an unexpected alternative to old thought appears from nowhere. What happened before there were central banks?

    Our current monetary system is a man made construct and as such there must be an alternative to be found amongst the open minds of some economists and philosophers.

    Real change of course only comes about through collapse or disaster.

    1. JW says:

       Hi KitGreen
      An alternative propsal is that ALL money is produced ( and destroyed) by the Government. No money is produced by debt from banks, as is the case for approx 95% at the moment. This proposal cuts through the current problem of exponential growth in debt being required to ‘pay’ for previous debt and interest. It also is more consistent with an economy in a world with finite resources. It tries to align the financial world with the real world. There should still be ‘growth’ but from smarter ways of using resources rather than just more of the same. So no need for CBs and banks revert to a simple model.
      Detractors say this just replaces one centralised control with another. 

      1. Anonymous says:

        Is what you describe the roots of MMT? Why should we believe that government, suitably constrained via sensible legislation (ha ha), would be any worse at money rationing than the current banking system?

        I vaguely remember my history about the debasement of currencies in various eras. I presume this follows the inability of the powers that be (as in the Roman empire) to be trusted with money. If no organisation can be trusted with the responsibility then there will have to be a completely different solution.

        On a slightly different tack, if we have a system linked to a commodity why not let it be a consumable one such as oil. (Cannot remember where I first saw this suggested.) Any thoughts on this purely theoretical scenario?

        1. JW says:

           I think MMT is a different strand. i think the nearest example of what I was trying to describe is a ‘Germanic productivity based’ system. Its fiat, not based on gold etc, but the amount of money is regulated by the productivity of the economy. So never more and never less than you need to pay for and stimulate the ‘real’ economy, but no excesses for speculation.
          Sounds nice and sensible but I have the horrible feeling that it completely misses the effect of ‘human greed’. Whatever system you design, someone somewhere will find how to manipulate it for maximum personal profit. And one does it, the rest follows.
          Thats how we evolve as a species, we continually climb and crash, and out of the ashes comes something else.

  3. Drf says:

    Hi Shaun,

    As you point out here King has failed and has failed dismally in the role.  He actually admitted this in his speech. Well surely the honourable thing to do in that case is to fall on his sword, and resign immediately?  Fat chance of him doing that though, of course. (Nowadays, with big money, benefits and pensions at stake no leader or establishment figure ever does the honourable thing any longer in any situation of ignominy!)

    1. Anonymous says:

      I wonder if he has really failed, as seen from the position of the Treasury. Maybe he is merely doing one thing in public while following another agenda behind the scenes. As you can tell, I am rather sceptical about the theory of the ‘independent’ BoE. If as seems to be the case he simply does as he is told while spouting the opposite, what is the point of the whole institution?

      1. Anonymous says:

        Hi Barncactus

        In my view the Bank of England is no longer independent and all pretence was lost when it used Quantitatuve Easing as that required the Chancellors permission. My arguement for elections would take us away from placemen..

    2. Anonymous says:

      Hi Drf

      I think there was significance in the timing of this and wonder if he genuinely thought he could “spin” past events in his favour. If so it shows how intellectually and spiritually lost he is right now.

  4. Jan says:

    Well Merve has made it to the end of his term without letting the cat out of the bag (until now) and will be able to collect a nice fat pension.  He was a political appointment by Gordon Brown who had the socialist aim of raising living standards for the “poor”; admirable but maybe not by borrowing heavily.  Arguably he got away with it and we are now starting to pay the price. I would propose that they had an (unspoken?) deal that the way to pay for it would be to deliberately stoke inflation whilst actually saying the opposite. That way you take from those who live within their means and actually save for a rainy day. Inflation hurts them as their savings are worth less as time goes by.

     It wasn’t a good example to set but many others are now beginning to see the error of their ways because they are finding their debts burdensome. “Neither a borower or a lender be” is a good way to live one’s life but a bit difficult with current house prices versus current salaries plus the costs of further education.

    1. Anonymous says:

      Hi Jan

      But are the poor really better off? If we assume that a Faustian Pact was made with a good objective of helping the poor is it not failing? Real wages are falling and we can bet that they are being squeezed the most at the bottom end of the scale.

      From another route we got a hint of that today with the poor figures from Argos and I spotted a link saying that it was the C2s and Ds who were the cause. Apologies for reducing people to single letter categories but there is an implied message there..

      1. Jan says:

        I agree GBs strategy has backfired spectacularly.

  5. ChrisLongs says:

    Lets not forget the BoE/Treasury ensured they have inflation linked pension funds unlike us lesser mortals!
    Reward for failure seems the norm these days sadly and Merv provides another perfect example.
    Disgust is insufficient to describe this situation !

    1. Anonymous says:

      And RPI linked, to boot!

      1. Anonymous says:

        Yes it must have slipped their mind to change it in 2002/03 when the inflation target changed. How forgetful…

  6. Tim Young says:

    I followed your link across from FTAlphaville.

    I am sympathetic to most of your criticisms of the BoE, but I do not think that direct democracy is the answer.  Call me elitist if you like, but I think that few people are sufficiently well informed to have a worthwhile view about central bank policy.  I fear that elections would soon degrade into a shallow competition between promises to keep mortgage rates as well as inflation down and that things might have to get very much worse before they got better when the electorate understood.  I think that the present system, of specialists being appointed by elected and hopefully knowledgeable representatives for a long enough period that their actions are likely to affect more than one administration, is probably about as good as we can do.  Even then, I think that monetary policy makers and candidates tacitly position themselves to appeal to the politicians – consider, for example, how the hawkish but precient Andrew Sentance was not reappointed while the dovish David Miles was.  I fear that perhaps the best that we can do is for journalists and other commentators including bloggers to hold the MPC members’ feet to the fire with as revealing and blunt commentary and questioning as possible – in short, refusing to let them get away with bullshit.

    1. Anonymous says:

      Hi Tim and welcome to my part of the blogosphere.

      The problem to my mind with what you outline is what has happened. We have just had an enormous and on-going financial crisis as well as an expenses scandal amongst our Members of Parliament. After reviewing that where are we going to get ”  hopefully knowledgeable representatives” from? the truth is that they have proved to be the reverse. Actually I would also list honesty as a desirable feature but realise that is asking too much of our current political class.

      Also I cannot describe your views as elitist as there is nothing about our political class that deserves such an epithet. I do however have more faith in the average person..

      1. Mac says:

        Pleased you are finally including a ‘political’ element in your
        excellent commentary now Shaun.  I don’t
        see how it could possibly be divorced, even allowing for all the ‘normal’ interfering
        and fiddling to make figures politically acceptable, or a bit more so!  They have spectacularly mismanaged the upside
        is there anyone outside of a mental asylum who thinks these people can manage
        the downside? They have bust the country and most of us already in the process
        of keeping themselves electable.    

  7. Iancsl says:

    Hi Shaun

    I think that there is a compromise here because I agree that directly democratising the MPC and the governorship of the BOE is more likely to be problematic than not. The last thing that we need is a politico running the BOE – although the rather vituperative criticism of MK suggests that some think that it couldn’t get any worse.
    The sensible way to make MPC members and the top tier of the BOE accountable is to have an appointment ratification process via the Commons Treasury Select Committee with the power of veto (and subsequent censure) if necessary.Indirect democracy, perhaps, but at least the process would be much more transparent.

    There is a school of thought that suggests that, even though the BOE’s role (and later rectification measures) in the financial crisis have been widely criticised as either too little too late or plain wrong, few have rationally argued whether things might have been considerably worse with no or different intervention.

    For economic illiterates like me there is plainly some difficulty in proving a negative: but apart from deleting QE as a policy tool, we seldom see a programme of alternative strategies outlined with theoretical outcomes and the extent to which they might have differed from what is happening now had they been implemented from the moment that Northern Rock went bust.

    Perhaps this would form part of your manifesto as the next Governor; and I look forward to reading it in your blog.

    With best wishes and many thanks for your excellent contributions to the debate as ever.

    1. Anonymous says:

      Hi lancsl and thanks for the compliment

      “The last thing that we need is a politico running the BOE “The trouble is that central bankers have in nearly all respects become indistinguishable from politicians. This is one of my themes and a problem of these times.

      It is not only MK but Senor Draghi was playing the same game at the ECB presser today and we saw Ben Bernanke of the US Fed at it last week…

      So we have something for the manifesto as I would be nothing like a politician for the reason that I feel a central banker should behave differently and if he/she does the job well then they will be like the mythical Victorian children rather than the current tv/radio stars.

  8. Rods says:

    Hi Shaun,

    Excellent blog as always and I agree that the BOE needs to be much more accountable.

    Unfortunately, the chances of democracy happening at the BOE is somewhere between none and zero, as it would be considered far too dangerous, after all, we would want to vote you in, who is truly independent, straight talking, very knowledgeable and competent, all far too dangerous, when they can appoint an inept, incompetent, political toady, who’ll do as he is told, will toe the party line and and talk a load of bull, with the present BOE incumbent being a classic example of this.

    John Redwood shows what happens to clever, knowledgeable, people in politics, they get sidelined, where they show up the thick, dull, inexperienced in life politicians we currently have in all of the parties for what they are, mice who think vision is following focus groups results and leadership, conviction and principle is what their latest sound bite tells you. What we currently lack here and in Europe is competent, knowledgeable political leaders of vision, principle, conviction, particularly during this depression, and unfortunately most of the politicians, currently offering some of this, tend to be of the more political extremes, who are being increasing voted for. We are living in increasingly dangerous political times.

    To say that he had no forewarning of the 2008 slow train crash is rubbish as many financial commentators from 2005 onwards were saying that interest rates were too low and monetary policy too loose and it would all end in tears, even though McRuin had apparently abolished boom and bust (so no need to worry then) and extended the economic cycle (to keep borrowing at the peak of the cycle) to suit his political ends, Lord King as the head of the BOE said nothing. To me that is the measure of the courage and competence of the man. He claims to be a hero 5 years after an event,  points the finger at everybody apart from himself where he wants to be Lord Teflon. Decent, competent, principled people stand up to be counted when they are in senior positions, they take responsibility (that’s what what they are highly paid to do) and admit their mistakes (everybody makes them) by accepting responsibility and learning from what they have done wrong, they become better, while those that blame everybody else with their Walter Mitty stories are pygmies in denial who will make the same mistakes over an over again. A fool only stops being a fool when he realizes he’s a fool. 

    Actions speak louder than words. We know what is going to happen now, in the short term, medium term and long term with inflation and currency debasement in the UK. The top Treasury officials have indexed linked their pensions to RPI, I don’t need to say anymore :-((  Don’t live as I do, just suffer by what I do.

    1. Anonymous says:

      Hi Rods

      I am reminded of the words of Sir Frank Gordon who when asked about a candidate for the Governorship of the Bank of England who was both honest and intelligent replied

      “although an innovation it should certainly be tried,,,”

      Yes Prime Minister at its best..

  9. Anonymous says:

    Hi Shaun
    This is a pet subject of mine. Anyone who bothers to read the BoE Financial Stability Reviews of 2005 and 2006 will see all the warning signs – exploding balance sheets,investment banking over exposure,vulnerability to large systemically important financial institutions, over reliance on wholesale funding,funding gaps, liquidity risks through reliance on selling securitised assets – BANG. The BoE hide behind regulatory disenfranchisement but they were part of the TRIPARTITE AUTHORITY tasked to head off systemic collapse. I have called for the publication of the TRIPARTIE AUTHORITY minutes. Noone is interested. Maybe a new inquiry will be. But I have also drawn attention to the academics tasked to advise BoE at the London School of Economic Financial Markets Group….what red flags did they raise? But, Hyun Song Shin is a guy I would like asked about all of this. He was raising the red flags….

    1. Anonymous says:

      Hi Shire

      That subject was raised earlier this evening by someone else who had read those documents and Ed Conway of Sky has said that the Bank of England called him in back in 2006 to say essentially the same thing.

      I cannot avoid the thought that it was hushed up in some way but by whom and why we can only speculate. In a way it is part of my agenda for reform as it was mostly if not all predictable which is very upsetting when you see the suffering that it has and indeed will cause. It didn’t have to be this way…

  10. Ed Rector says:

    So what should the BOE have done during the past 3 1/2 years?? 

     Perhaps you should tell us Shaun.

    1. Anonymous says:

      Hi Ed and welcome to my part of the blogosphere
      I have put my policy prescriptions on here many times in my sections on Quantitative Easing and UK inflation. But here are a some thoughts for you.
      1. We need to fundamentally reform our banking system of which virtually nothing has been done. Ironically Mervyn King implicitly agreed with me in his lecture. My thoughts are here
      2. I would stop the inflexible monster that is QE on three grounds.
      i) There is no evidence of it ever having worked.
      ii) the Bank of England had a much more flexible system called the Special Liquidity System which I belive would help more. So I would restart this scrapped scheme…
      iii) The real problems come when you try to exit it.
      3. It should have been a much more vocal critic of institutionalised inflation which is an issue in the UK.
      4. I would change the inflation target to something which includes asset prices too.
      5. I also have plans (off the usual central banker beat) for tax reform as shown here.
      That would keep me busy for a bit but there is more…..

  11. Gareth White says:

    “Back in 2002 the then Chancellor of the Exchequer proposed a change in the UK’s inflation target from the  Retail Price Index to the Consumer Price Index and this was implemented in 2003. I was not blogging back then (did bloggers exist?) but was fuming at the stupidity. The UK has a level of owner-occupation of its houses which is internationally high so switching to an inflation index which ignores this was a mistake. ”
    …but if you compare RPI-X to CPI for the period it can be seen that not switching to the new CPI target would actually have made very little difference. It seems like a big deal until you look at the data.
    It is inflation targetting itself that is the problem (even if we had an MPC that had any intention of hitting 2%, which we don’t!)

    1. Hi Gareth and welcome to my blog
      There are plenty of issues with any form of target which was probably illustrated best by Goodhart’s Law where any target you aim at is assumed to immediately lose its usefulness. However as I wrote in the article whilst RPI-X would not have been a great improvement some more ground would have been gained by looking more directly at RPI. For example it was over the 2.5% target level used for RPIX from 2003 onwards until the credit crunch hit. And even RPIX went above target in 2006.
      So I think it is likely that we would have done better. As to going forwards I would modify the inflation target to include asset prices and more crucially retain some intellectual flexibility. It is perhaps the latter most of all which saw us move into the credit crunch with our monetary policy caught on the wrong foot which then led to panic actions from which in my view we will have to pay for in the end.

  12. I agree that it was a mistake to move to the CPI measure before it had a homeownership component attached to it. In fairness to Mr. King it was imposed on him by Gordon Brown, and in fairness to both of them, they probably thought that Eurostat would be adding a housing component to the HICPs sooner rather than later. I am a member of the RPI CPI User Group and if you check my posting on “The Future of the UK CPI” you will see what I would recommend for adding homeownership costs. To summarize: keep council taxes out, keep mortgage interest out, put home purchases in (including lot prices). Every part of the Eurostat recommendations is good except for keeping lot prices out of the index. If the Bank of England had been following an index like that from 2003 forward, there might not have been a housing bust. As a Canadian, I envy you British. When the Bank of England gets its CPI with a homeownership component based on net acquisitions, and I am sure it will, if not in 2013 then the next go around, it will make the inflation indicator of the Bank of Canada look positively shabby by comparison.

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