13 January 2016

Economic success this year will need more than “good fundamentals”


No one’s perfect, and the popularity of new year’s resolutions suggests that most people agree. Whatever your latest resolution, my Cambridge college, Gonville and Caius, has a clear idea of the kinds of personal qualities we should all aspire to, so much so that students pass through three symbolic gates on their academic journey, representing honour, virtue and humility. Of course, we economists don’t spend too much time thinking about the merits of these types of individual characteristics. You could say, more fool us.

A growing body of research suggests that personality traits can be just as important for individual success as is human talent. We probably all know about the famous Stanford marshmallow test, where a child’s ability to resist a sweet treat at a young age appears to correlate nicely with their future achievement. Taking this one step further, a recent paper by Bhash Mazumder from the Chicago Fed concluded that inequality in non cognitive skills “explains as much or more of the variation in intergenerational mobility than inequality in traditional measures of cognitive skills such as numeracy, literacy and problem solving”. What is true for people should also be true of economies. To succeed in the long run, economies need to have more than ability and endowments.

Working and teaching in the ivory towers has certainly taught me that however “clever” an individual is, they need to be open to the ideas of others and willing to actively look for and accept criticism if they are to thrive in the longer term. Western brains are no cleverer than those elsewhere in the world. What has instead advanced Western science, intellect and business over the last two centuries has been a temperament of humility. If the West is to find the economic holy grail, defying the story that “every dog has its day” and sustaining its economic leadership in the years to come, economists need to think beyond the usual set of “economic fundamentals”. As our parents taught us in our youth, personality matters, and, if the economy was a person, it would do well to keep checking-in at my college’s gate of humility.

Unfortunately, it doesn’t look like that will be happening this year. Whilst China lurches from one stock market crash to another, and as falling commodity prices wreak havoc in Russia, the Middle East and Latin America, the United States and Britain seem to have a lot to boast about in comparison. Combine that with an American presidential election and a potential British vote on its membership of the EU, and the year ahead looks like it will be one of the leading economies parading their greatness – of showing that they can do perfectly well on their own, thank you very much. Whilst poorer economies such as China will no doubt be learning from their current woes, placing themselves in an even stronger relative position in the longer term, we in the West will be interpreting our relatively better economic performance as a sign that we are destined to stay ahead – and blaming any setback that comes or way on foreign shocks.

This is nothing more than foolhardy. Throughout history, great and glorious civilisations have faltered, and more often than not for what seem to be inexplicable reasons, and despite having ability and endowments. If the fall of Rome or the decline of the historically innovative Chinese and Middle Eastern civilisations had been easy to explain, they wouldn’t still be preoccupying historians – and the minds of those beyond academia – to this day. If America and Britain are to avoid the same fate, they will need to keep their eyes open to their weaknesses, to learn from others, and not be blinded by their success.

For a small company or a poorer economy, such humility would of course seem entirely natural. China and India have come on leaps and bounds by addressing their own weaknesses and adopting some of the better aspects of the “Western” economic model. Smaller economies and quasi-states which have instead chosen to turn their backs on the rest of the world, demonising external influence and believing in their own inherent greatness, have, by contrast, condemned their people to poverty.

However, not only can a lack of humility cost poorer economies. For a large company or prosperous economy in a dominant market position, overconfidence and a feeling of superiority are the enemy of continued progress. If you are successful, it’s easy to assume that there is nothing to be learned from those around you – that the rest of the world needs to learn from you and that you have nothing to learn in return. Whether we are talking about a large business or an entire economy, rise and decline is, however, seemingly difficult to avoid, and the only way to forever postpone the inevitable is to regularly engage in self-criticism – to learn from those that are smaller, just as a parent learns from a child or a teacher learns from a student. To borrow the title of Peter Blair Henry’s book, there are “third world lessons for first world growth”.

In the real world, we operate on continually shifting sands and so, in the words commonly attributed to Charles Darwin, “it is not the strongest of the species that survives, nor the most intelligent, but the ones most responsive to change”. Humility is what provides economies with such responsiveness. Like people, economies are all imperfect. Continued success requires overcoming our weaknesses whilst we are riding high on our strengths. If we don’t, and as the weather turns, the dark horse wins the race. Success turns to decline.

With countries from Brazil to Russia having missed out on their own opportunity to fix the roof whilst the sun shines, it’s important that we don’t now do the same. Even though things look relatively calm on our own particular economic surface, there are still underlying economic problems that need to be resolved, from fixing the architecture of financial regulation, which Howard Davies warned this time last year was well off the mark, to the labour market and welfare policies that now require a radical rethink in the face of modern day forces such as the “uberisation” of employment. Whether it’s Trump and his wall, or Britain and the EU, we therefore need to be careful not to be overcome this year by pomposity. Humility is the true source of all greatness. To stand still we need to keep on improving.

Dr Victoria Bateman, Economic Historian and Fellow in Economics, Gonville & Caius College, Cambridge, and Fellow of the Legatum Institute, London. She is author of the book Markets and Growth in Early Modern Europe, published in 2012 by Pickering and Chatto.