The economy changes faster than anyone can learn about it. All of us look to others in forming our views; experts too factor in the views of others to leaven their own analyses and judgement. There are too many uncertainties about the economy for anyone to work things out from first principles. It is much harder to be credible if one is out on a limb.
There are useful connections to be drawn between the way media forms beliefs and the role it plays in driving economic behaviour, and an astute analogy used by Keynes. Keynes compared stock market investments to beauty contests. In a form of contest popular in England in the early years of the 20th century, a newspaper would print a hundred photographs, and people would write in and say which six faces they liked most. Everyone who picked the most popular face was automatically entered in a raffle, where they could win a prize. Of course only an innocent person would rely on his or her own conception of beauty to rank the pictures.
The analogy fit investor behaviour now as then. Mutual fund managers for example, operate in a world where, while it is rewarding to do well, it is more important to not do worse than others. Thus they look to others and invest in what others invest in, so that they do no worse. With each investor trying to predict what the market will do, the instinct to herd rule investments. Beyond financial investment, many aspects of consumer and producer behaviour share this contagious aspect.
Not all investors are alike. At the very top of the pyramid are the most sophisticated. Keynes continued his analogy: It is not a case of choosing those [faces] which, to the best of ones judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practise the fourth, fifth and higher degrees. Each contester tries to second guess the others reactions, and then sophisticated ones would attempt to second guess the others second guessing, and so on. So it comes to be that people of all levels of sophistication, from the naive to the razor-sharp, come to be united in reinforcing any trend that is going. First principles and fundamental values become irrelevant. In such times forecasts in popular media become hugely influential because they provide a focal point for all manner of economic choices. And if the commentators are engaged in a beauty contest of their ownlooking to each other, singing the same choruswe have self-fulfilling prophecies.
Some of the popular commentaries on what 2009 holds out for the global economy illustrate how pundits tend to underplay economic changes happening at the moment, as they offer compelling historical perspectives on how the crisis began and evolved. The trajectory of narrative tends to miss any (necessarily slender) positive signals from the ever-changing and adapting economy. Interpretative accounts are influential but biased towards pessimism.
Earlier in January in Britain, the business minister Shriti (Baroness) Vadera came under flak for remarking that she thought she saw a few green shoots of recovery in the British economy. She admitted she was clutching at one instance in the credit market where a large company had just raised hundreds of millions of pounds.
The green shoots phrase is indelibly linked in Britain with the dreadful recession of 1991. In October 1991 the then treasury secretary Norman Lamont said he thought he saw some green shoots of recovery. He was ridiculed (and not merely for this comment). In fact recovery did begin in the second quarter of 1992.
If 2009 turns out to be a dreadful year for the economy, to a large extent it will be because people believe it will be. Proclaim and celebrate green shoots, as soon as there are any to be found!
The author is reader in economics at the Judge Business School, University of Cambridge, and fellow of Corpus Christi College