By Paul Ormerod
Andrew Mitchell, the Government Chief Whip, remains in some difficulty after his exchange with the police at the gates of Downing Street. At the heart of the incident, there is an objective reality. Either he used the word pleb, or he didn’t. Either the police were officious jobsworths, or they were the epitome of politeness.
But perception matters much more than reality. It is perhaps unfortunate for Mitchell that he went to Rugby, the home of Tom Brown’s Schooldays and the arrogant bully Flashman. This wholly fictional setting and these wholly fictional characters have played an important role in shaping how many people regard the incident.
After allowing for one-offs such as the transfer of pension assets from the Royal Mail, public borrowing is actually 22 per cent higher in the April-August period than it was in the same months last year. So the deficit-reducing Osborn is actually presiding over a sharp increase in government borrowing. Yet the markets continue to believe in him, to have faith that he is committed to deficit reduction.
In terms of economic policy, the objective difference between the policies of George Osborn and Ed Balls is minute. Osborn wants to achieve his target for deficit reduction in six years. Balls has the radical (!) alternative of getting to the same number in seven.
The margins of error involved in forecasts of public spending and receipts even one year ahead are huge. And the potential errors around the projected deficit, the difference between these two numbers, are even larger. The difficulties of making accurate forecasts on the deficit are illustrated by the outcome to date during the current financial year.
Given the size of potential errors around forecasts, to all intents and purposes there is no effective difference between the strategies of Balls and Osborn. Yet Balls struggles to gain credibility in financial markets. Narrative and perception outweigh reality.
This Time is Different, the monumental study of government debt by Carmen Reinhart and Ken Rogoff, ex Chief Economist at the IMF, showed that when public sector debt to GDP ratios rise above the 90 to 100 per cent mark, there is a sharply increased risk of both lower economic growth and of a default taking place on the debt. The data show only too clearly that the Germans are hovering very close to this critical value. Yet they are perceived as being the epitome of financial stability.
A great deal of economic policy in Europe at the moment can be seen as an attempt by various players to get their narrative of events to ‘go viral’ and dominate financial markets, almost regardless of objective reality.
This is the future of macroeconomics. With a real basket case such as Greece, the facts are so glaring that they will be hard to ignore. But in general, as with the Andrew Mitchell incident, they are usually capable of more than one interpretation. Perception trumps reality.
Alfred Korzybski, author of general semantics and the notion of cybernetic epistemology, taught that ‘the word is not the event it described, the map is not the territory’. This aspect of the subjective nature of perception now should become one of the more critical elements of research in applied complexity science.
I think the following post I made on Greg Fishers blog entry also applies to Pauls post above:
From Plebs to Proles:
http://www.synthesisips.net/blog/why-the-new-funding-for-lending-scheme-wont-work-either/#comment-12845