Laurence Ball, a professor of economics at Johns Hopkins University, has published a paper that looks at the conduct of the U.S Federal Reserve board through the lens of social psychology, in particular the concept of "groupthink".
The professor wants to know why the Fed's chairman, Ben Bernanke, has changed his mind over the years about the need to aggressively stimulate a flat economy using fiscal measures, if interest rates are already near zero. In short, Bernanke used to advocate such a policy, but now he doesn't. Rather than simply accepting that Bernanke changed his mind, Ball argues that he was a party to groupthink, defined by the psychologist who coined it in 1971, Irving Janis, as “the mode of thinking that persons engage in when concurrence-seeking becomes so dominant in a cohesive group that it tends to override realistic appraisal of alternative courses of action.”
When groupthink occurs, individuals go along with what they perceive as the majority view, or the view of a group leader. Each individual silences his or her own dissent: people self-censor any opinions that they sense might differ from the majority view, because they value group harmony too much to risk disturbing it, and because they want to avoid disapproval from their peers. The results can be disastrous; Janis used groupthink to explain the Bay of Pigs invasion, and the escalation of the Vietnam war.
I don't have a view on Ball's overall argument but he does turn up some interesting evidence. One of the factors identified by psychologists as common to groupthink is situations is the presence of a high degree of camaraderie amongst the members of the group. The Fed (FOMC) sounds like a jolly old club:
Laurence Meyer reports that, when he entered his first FOMC meeting, he was “warmly welcomed into the club.” A New York Times article about the FOMC transcripts for 2006 notes the frequency of jokes, “banter,” and “gossip about people who are not present”
Ordinarily we think of camaraderie as a good thing. It's certainly pleasurable for the people who are part of it. But whether it's likely to lead to good decisions - well, that's another question. Here's Tim Geithner - then board member and current Treasury Secretary - addressing Alan Greenspan on the occasion of the latter's last Fed meeting in 2006:
I’d like the record to show that I think you’re pretty terrific, too. And thinking in terms of probabilities, I think the risk that we decide in the future that you’re even better than we think is higher than the alternative.
Well, uh, it didn't exactly turn out that way, did it, Timmy?
The Fed has a foreign counterpart that Ball mentions approvingly as being less likely to suffer from groupthink - the Bank of England's Monetary Policy Committee:
The reasons include the absence of a directive leader or a desire for consensus: 5-4 votes on policy decisions are common, and the Governor is sometimes on the losing side. Each committee member has a legal mandate to vote based on her individual views. The committee includes “external” members who are not part of the Bank’s management... Finally, the Bank of England has long encouraged outside scrutiny through post-meeting news conferences, a practice that started only in 2011 at the Fed.
That's something we can comfort ourselves with, as America's growth curve turns upward again and ours remains resolutely supine.