The financial crisis, social policy, methodology and spurious precision

One of the most important aspects of the financial crisis, but one that is often at risk over getting over-looked, is its consequences in relation to research and knowledge.

To try and explain what I mean by this, we need to start by thinking about economics. Economics has presented itself as the ‘hardest’ of the social sciences, favouring quantification above qualitative data, and prizing its version of scientific rigour that is organised around statistical modelling in various forms. It claims to follow a hypothetico-deductive model in that it tries to test theories through the use of empirical data. It follows the positivistic mantra of variables not being real unless they can be measured.

Economics, as a discipline, receives very large amounts of funding from research councils, and even now is marked as a priority area for further research. This seems to me to be a huge mistake.

This isn’t because we don’t need to understand economics better, its because the discipline of economic has failed on a colossal level to meet its own demands for methodological rigour and relevance, and the wider societal need to contribute to our understanding of the economy.

Economics is still largely based on Newtonian, normal distribution-driven models of mathematical modelling. Writers such as Ormerod, Mandelbrot and most recently Taleb have shown the mess this results in. Economists confidently predict outcomes based on models that bear little or no resemblance to anything anyone experiences in the world, are shown to be wrong again and again, but continue as if their methodology remains sound and sensible. Every time there is a financial crisis, you might have noticed how economists label it as a one in a hundred year event. But these events keep coming. Economic models assume away the reflexivity of humans (which Soros damns them for in his work), presents financial outcomes in a Gaussian, normal distribution (which Mandelbrot has shown is entirely inappropriate) and gives predictions that are wrong over and over again.

In a time when the economy is booming, it doesn’t tend to matter that the predictions of economists aren’t entirely accurate, as basing what you think will happen tomorrow on what happened yesterday won’t result in a problem. The problem occurs when the economy goes through a turning point – the most important time to be able to predict – and economists fail to predict it, or to be able to provide any sense of why it happened or how long the particular downturn will last. And yet we keep going back to them, asking for more spurious predictions of when things will get better, as if they are able to get it right this time.

This has huge implications for the way we carry out social policy research. There are strong movements within social policy to utilise economic approaches because of the supposed rigour they will generate. I think this is absolutely bonkers. Economic approaches don’t work in economics, so why on earth should they work anywhere else? I have no problem with quantitative modelling provided it is based on sensible assumptions and it is careful in its recommendations. Economics has not done any of these things. It has failed us, and its about time that we started addressing that problem rather than trying to copy its methods in academic contexts where it is even less suited than its home area.

Social policy does need theoretical roots. But there is no reason why these can’t be pluralistic, so long as we can understand each other’s languages, and we make explicit our assumptions about the world when carrying out research. Social policy based on economics often fails to do any of these things – it presumes that, because it is based on economic principles, that it should be accepted on those terms. It’s about time we challenged that. The city economist Roger Bootle has just published a book showing the failure of academic economics to address real world problems. Economics (the discipline) doesn’t work when addressing the problems of economics. Advocates of its methods in other disciplines need to be challenged far more often than has so far been the case.

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UK postal problems

This week is looks like the UK is going to have a postal strike. I think this raises a range of interesting questions about public management, and of the role of public services.

The management in the dispute are claiming that the strike is down to an unwillingess of workers to adopt ‘modern’ working practices. They say that postal volumes are down by 10%, and that this will inevitably lead to reductions in workforce and changes in working practices.

Unions say that they have already agreed to reductions in workforce, and that managers are trying to push through changes that are not in interest of the service as a whole.

Victoria Coren wrote a rather scathing piece about the strike at the weekend (http://www.guardian.co.uk/commentisfree/2009/oct/18/victoria-coren-royal-mail). She makes some rather excellent points. Central to her argument is the question of who exactly the post office now works for. She points out that the post office made a pretty remarkable surplus last year, and that it can afford to pay its workers a little better as a result. This is debatable, but clearly starting from a pretty good premise. More interestingly she asks in whose name modernisation is taking place in the post office. Consumers, she suggests, probably want all the things that have disappeared in the name of modernisation in the last few years – second deliveries, post offices close to where we live, and postal delivery people who we actually know. So modernisation doesn’t appear to be taking place in their name.

Equally, modernisation doesn’t seem to be taking place in the name of post office workers. They are going on strike to try and oppose the modernisation process. Something we need to be careful of is that ‘modernisation’ sounds like something that it is perverse to oppose, but hides a variety of sins. If ‘modernisation’ means silly targets, poorer service for consumers and workers doing a worse job because they resent the introduction of new working practices, then it is harder to argue in its favour. It is also worth mentioning that workers don’t generally go on strike lightly – they won’t get paid for the time they spend striking, and so it is a tough decision to come to.

So if modernisation isn’t being done in the name of customers (who probably got a better service 5 years ago), or staff (who are prepared to go on strike to oppose it), then who is it for? One answer would be shareholders, but the post office’s majority shareholding is the government, who are meant to be acting on behalf the citizens of the UK, who are also the customers of the post office. And we’ve already said that they aren’t benefitting from it a great deal.

Perhaps modernisation has become some kind of managerial holy grail that now has no resemblance to whether it makes things better for anyone, anymore. We know what we want from our postal service. We know that we won’t be getting it this week, and we know that we probably got a better service 5 years ago. If modernisation is supposed to represent cutting edge public management, which appears to be the government’s position in relation to this mess, then perhaps we need to think again what we want from our public managers.