The Wisdom of Crowds & the Economy

Once you’ve been in the Agile mindset for a while, you begin seeing the world through a different lens. As I apply the “wisdom of crowds” to the projects my teams undertake, I find their estimates more accurate and approaches to complex issues are indeed more accurate than the smartest guy in the room. I’ve recently been considering the impact of this thinking as it may apply to the economy.

I’m not an economist, but I do enjoy reading the various approaches to the same problem — how to keep the world from going broke. I learned how fragile our understanding economics is from reading Alan Greenspan’s book Age of Turbulence: Adventures in a New World. Among other insights, he mentions the science of economics is so new no one really has a handle on how to manage it.

In a very basic sense there are two major approaches. On one side there is John Maynard Keynes. He advocated government monetary and fiscal programs intended to stimulate business activity and increase employment. On the other hand you have Classical economics (also known as liberal economics). This asserts that markets function best with minimal government interference. Milton Friedman, was a strong proponent of this “free market” capitalism. In the United States, Republicans are generally supporters of liberal economics, while Democrats tend to believe government should be involved in setting the rules generally guiding economic activity.

Avoiding the heated debate surrounding these theories, let’s consider how the wisdom of crowds may apply. This discussion presupposes those with the most money drive the economy in one direction or other. In 2013, the top 1% of households received approximately 20% of the pre-tax income versus approximately 10% from 1950 to 1980. This means the top 1% generally decide what is economically important. To this 1% the purchase of goods and services is far less important than getting a high return on investments. On the other hand, to the remaining 99% the purchase of goods and services is very important. If this same 99% are collectively wiser than their 1% counterparts, it stands to reason giving them more monetary power will build a stronger and more balanced economy.

The years 1937-1967 saw such wisdom in action. During this time the predominant theory by which economic activity was guided came from John Maynard Keynes. If the majority of the population knows best how to spend money, it may be wise to embrace economic policies that leverage this knowledge.

Additional Reading:

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