The beauty of history is that, with the passing of time, it’s easy to see the flaws of conventional wisdom. In science, medicine, economics, finance, and public policy, the years eventually reveal the errors of what people then thought were incontrovertible facts. Society would have been better off being skeptical of conventional wisdom. You would be better off being skeptical of conventional wisdom. Here’s why.
I read a study by two Italian academics (Biondi and Pluchino) that said investing blind is a better strategy than hiring a financial adviser. They examined 15 years of data from four of the largest stock exchanges and compared the four top trading algorithms against a randomized investment program. Guess what? The random algorithm did just as well as the pros, with less volatility. In other words, throwing darts was just as effective as the experts. Recently Wall Street Journal reporters matched their dart throws against some well-known elite investment advisers and the darts won, again.
That’s not what we hear from Wall Street where the conventional wisdom is that the experts make superior investment choices.
It got me thinking about Conventional Wisdom. It’s usually wrong.
It’s not just the investment world. Science and medicine have been notoriously wrong. Pope John finally apologized to Galileo 350 years later for persecuting him for his claim that the earth revolved around the sun. Yet, before Galileo, everyone knew the sun revolved around the earth. Darwin’s theory of natural selection proved wrong the conventional wisdom that God made Man. Before then everyone knew God made Adam and Eve.
Up until a few score years ago, doctors believed they cured mental illness by a radical brain surgery called a lobotomy. It left most patients dull, listless, and often incapacitated. Yet the originator of the procedure, Egas Moniz, was awarded a Nobel prize.
There is a long list of bad conventional wisdom: fats are bad, carbos are good; smoking was good for you and doesn’t cause cancer; margarine is better than butter; aging can be “cured” (see “entropy”); etcetera.
Conventional wisdom in the sphere of economics has been spectacularly wrong, and since public policy is often based on economics, it has a direct, often disastrous, impact on our lives.
For example, before, during, and after the 2008 Crash and depression, Federal Reserve Chairman Ben Bernanke displayed a complete lack of understanding of what was happening to the economy. Just Google the YouTube clip “Bernanke was wrong” and you’ll see what I mean. Bernanke was the world’s most important economist at that time and the remedies he and the other mainstream economists proposed resulted in the worst depression in modern history, the Great Depressions of the 1930s excepted. The conventional wisdom is that Bernanke saved the economy from another Great Depression. Not.
Speaking of the depressions of the 1930s, the conventional wisdom was that Franklin D. Roosevelt saved the economy. Actually, the interventionist policies of FDR and his predecessor Herbert Hoover caused the worst economic depressions of the past 100 years. The results of those policies were that the economy stagnated and unemployment remained stubbornly high (between 10% and 25%) from 1929 until the military draft and WWII war production took over economy. The conventional wisdom says that WWII pulled us out of the Depression, but it didn’t—there were 5 depressions after WWII (1945, 1949, 1953, 1957, 1960). Not until FDR’s heavy economic shackles were lifted did the economy start to grow again. The stock market didn’t reach the pre-1929 Crash high until 1959—30 years later.
How do you cure a depression? The conventional wisdom says you cut interest rates, print money, bail out failing institutions, and increase government spending. Those policies not only did not cure the depression resulting from the Crash of 2008; they caused 6 years of sluggish growth and high unemployment.
It doesn’t have to be that way. They should have done what cured the depression of 1920-1921. You haven’t heard of it? It was a severe depression, one that could be compared to the Great Depression of 1929-1933: GNP declined by 24%, unemployment was as high as 19%, producer prices declined by more than 40% (deflation), and stocks declined 44%. Yet the economy recovered in 18 months. The Great Depression, with similar fallouts, lasted 43 months.
What did the government and the Fed do to achieve this amazing 18-month recovery? Compared to today: almost nothing. They did the opposite of the Bernanke-Bush-Obama Administrations: they kept interest rates high; they didn’t bail out failing banks, the Harding Administration balanced the budget (no massive spending); they understood that price deflation was an indication of recovery, and the dollar was solidly backed by gold. Today this would be heresy, yet today’s conventional wisdom dismisses the policies that caused 1921’s speedy recovery. This is wonderfully documented in James Grant’s The Forgotten Depression: 1921: The Crash That Cured Itself.
It doesn’t stop there. Another conventional wisdom that is wrong is the chattering class’s belief that the middle-class is going backwards. It is not. The middle-class is shrinking because more middle-class folks are wealthier than before—the upper middle-class has grown by roughly the same percentage that the middle-class has shrunk. Also, wages have not stagnated—if you add in fringe benefits which today make up 31% of compensation, they have increased. And lastly, middle-class purchasing power has dramatically increased: the basics that used to cost 53% of disposable income now cost 32% today. The middle-class is better off today than it ever was.
And here is my current favorite conventional wisdom—the far left’s belief that Scandinavian “democratic socialist” countries are not only doing better than we are, they can afford generous welfare systems and everyone is happy. Let me correct this error. These countries are not socialist economies (democratic or otherwise): they are solidly capitalist countries. They have swerved from their socialist experiments and have adopted free market policies. Their economic freedom rankings are: Netherlands no. 13, Denmark no. 14, Sweden no. 19, Finland no. 20, Norway no. 26. The USA is no. 12.
Their socialist policies drove them into economic stagnation and they were going broke. Now, by embracing capitalism and economic freedoms, they are doing much better. Their reforms, depending on the country, include reduced welfare benefits, privatized social security, increased retirement ages, and the elimination of minimum wages. Their taxes are higher to support health care programs and retirement benefits. But, take note Bernie, Liz W, AOC, and others: unlike your “Medicare for all” programs, Scandinavian health care programs are highly decentralized, are administered at a local level, and have competition from private insurers and private health care providers. They are not democratic socialists.
Be wary of all conventional thinking: it clouds our minds and short-circuits rational thought. It leads to policies that do more harm than good. There are laws of economics that cannot be ignored and whenever they are ignored, the result is usually the opposite of what is wished for. Be skeptical.