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Global macro & geopolitics from a small economy perspective

On faith-based policy

David Skilling
16 March 2012

After years of observing governments, I have come to the view that one of the most costly features of policy-making is ‘faith-based policy’ in which certain policies become articles of faith and are not subject to serious scrutiny. This can lead to poor outcomes at any time, but particularly in times of disruptive change when new ideas are needed to enable governments to adapt to a changing world. It is the governments that respond flexibly to a changing world that are more likely to sustain strong performance. So this week’s Observer offers some reflections on why faith-based policy remains relatively common, and what sort of response might be required.

Faith, the evidence of things not seen
The global financial crisis revealed that many areas of economic policy were based as much on underlying beliefs about the world as on the economics. I have argued before that the crisis was fundamentally about ideas; many economists (and economic models) were warning of trouble, but they were not taken sufficiently seriously because they were not fully consistent with the prevailing view. A sense of hubris and the underlying intellectual climate led to ideas being pushed beyond their breaking point. But this concern about faith-based policy extends beyond the crisis into many other areas of policy; the beliefs in the effectiveness of stimulus spending, the pernicious effects of welfare, the magical properties of deregulation and privatisation, and so on.

I call it faith-based because the legitimacy of the policy is not fully based on what is seen, the evidence. Sometimes it is dogma, based on strong priors about how the world works and what sort of policies are appropriate (e.g. a view that a minimal state is best for growth). But this is more than simply doctrinaire policy-making. In many other cases, policies become the conventional wisdom because of a reliance on a heuristic or rule of thumb; a plausible story that seems to explain the world satisfactorily well. And sometimes it is legacy or path dependence; policies acquire legitimacy because it is the way that things have always been done. Some combination of these views creates a belief that there are no reasonable alternatives to the preferred policy approach. The nature of policy-making means that an element of faith is inevitable, but it should be recognised as such and subject to regular challenge.

Conspiracy or human nature?
So why is faith-based policy so common? First, many aspects of policy can only be partly based on evidence, because of the imperfect nature of the data and difficulties with understanding causality. This means that policy-making can become an exercise in telling plausible stories, which combines the available evidence with a conceptual story. As opposed to the physical sciences, it is rare that major policies are proven not to work. And there is a common tendency to seek confirming evidence and to discount disconfirming evidence. The paradigm shifts that Thomas Kuhn talked about are relatively unusual, and require a mass of contrary evidence (or a much more plausible story). This process of change is also slowed because of a tendency to construct ever more elaborate and creative stories to explain discrepancies between predicted outcomes and actual results. This generates a strong status quo bias, which becomes a real problem in times of rapid change.

Second, the organisational environment in policy agencies can make the conventional wisdom hard to shift. Many policy agencies in developed countries perform well in terms of efficiency and incremental innovation, but sometimes at the expense of the break-through ideas. Innovation is difficult to contract for, and can involve challenging orthodoxies – which can create the type of noise that is not conducive to rapid progression. To paraphrase Keynes, in such environments “it is better for reputation to fail conventionally than to succeed unconventionally”. And often the senior people in an organisation were responsible for existing policies and may not warm to being challenged on their record. Organisational research also reveals a pronounced tendency towards group-think, adopting the prevailing point of view. An independent review of the IMF’s performance before the crisis identified the existence of group-think, confirmation bias, intellectual capture, and an “institutional culture that discouraged contrarian views”. This is true in many organisations.

Governments need inquiring minds
Responding to these organisational and intellectual problems, and ensuring that the right strategic choices are made to adapt policy to the changing world, is vitally important for national performance. Governments need to build organisational capacity and cultures that encourage constructive challenge and the generation of new policy ideas and approaches. There is a need to be able to confront policy orthodoxy on a systematic basis to ensure that it remains robust and appropriate to the emerging challenges. Contestability of ideas matters, just as competition in the market leads to better outcomes. John Kenneth Galbraith once observed that “a nicely conformist nature, a good tailor, and the ability to articulate the currently fashionable clichés have usually been better for personal success than an excessively inquiring mind”. But particularly now, given the challenges and uncertainties facing governments, governments need more inquiring minds. We need to get better at asking the right questions.

To enable this, governments should ensure that there are parts of the policy-making machinery that are able to ask questions and generate new ideas. This may be through internal think-tanks, strategy units, or new operating models like B teams or skunkworks functions. Another characteristic of innovative organisations, in both the public and private sectors, is that they are well-networked externally. So governments should ensure they are able to engage with knowledge and perspectives that are independent of the permanent civil service. And it will become increasingly important to build international networks, to ensure that governments understand the policy debates and choices that are occurring in other countries. In a world experiencing structural change, and where there is much less of an intellectual policy consensus for governments to rely on, governments will need to invest in developing their own ideas-generating capacity.