Is The Ship Of Fools On Autopilot?

At the Jackson Hole Economic Symposium in 2018 the chairman of the Federal Reserve, Jerome Powell, used ‘navigating by the stars’ as a metaphor to describe Fed policymaking. He observed that it was challenging because of the uncertainty of the location of those ‘stars’: r*, u* and pi*. 

But I think this observation also illustrated a more profound classical allusion than anybody then realised. Whether knowingly or not, Powell was actually delving into another concept that somebody else stated 2,500 years ago.

And it just so happens that ‘somebody’ was the doyen of philosophers, Plato.

Plato addresses governance in the old-fashioned, pre-ESG sense. And his observations consider one of the developing themes of our modern political and economic zeitgeist. 

That is, what happens when the ‘wrong’ people get hold of the controls of a ship on high seas? Who is the right person to steer the vessel?

These and many related thoughts appear in Plato’s classic The Republic, specifically in Book 6. And the allegory now seems extraordinarily apposite.

In Plato’s example, the crew were drunken mariners on a sailing ship, an allegory for the ship of state, and you can apply it today to whichever recalcitrant modern politico or policymaker fits your bill.

This ancient allegory is known as ‘The Ship of Fools’.

Spoiler alert: Plato concludes that the most appropriate person to steer the ship safely to harbour is the ‘Stargazer’. 

It is not the owner of the ship, and it is certainly not the drunken sailors who inexpertly grab at the controls to try to dodge every buffeting wave and perpetually change their minds about their desired destination with every swig of booze.

No. The only appropriate master of the vessel is the Stargazer. Only he clearly knows their final destination. But more so, he also perceives the best route. The Stargazer isn’t a micromanager. Thankfully, Plato didn’t have the dubious pleasure of reading any books about management or ‘how to be a leader’. 

Plato observes that if the mariners steer the Ship of Fools, then disaster is likely. After a few drinks inside them, neither sea conditions nor rocks seem so perilous. They will squabble and fight among themselves and pay no attention to the perils of the sea.

The Stargazer is only concentrated on the route to the final destination. Not for him are endless unnecessary adjustments of the wheel, just a safe, steady and seamless translocation from the port of origin to the arrival in safe harbour. 

That leads me to the recent changes in Fed policymaking.

My contention is that the Stargazer has taken his hands off the wheel and is letting the crew and blind fate grab at the controls.

In seeking to reassure us about steps to ensure a recovery, I believe the Fed may have exposed us all to a degree of irrational certainty that is actually likely to require dramatic grabbing at the wheel to change course.

What will happen if sea conditions change? When and how will they take action to trim the sails or avoid the rocks? In nautical terms, we are now between Scylla and Charybdis. Surely the best idea is the Stargazer with his hands firmly on the wheel, with the sailors locked below deck.

The ‘drunken sailors’ are the market commentators and participants who are in thrall to the path dependency of economic data and financial markets. The Stargazer has handed over his responsibilities for steering the vessel between the desired safe harbours. 

What is the likelihood that any ship will complete a safe passage through dangerous waters by simply allowing the vagaries of sea conditions to govern its route?

The problem is that the market now is not only priced for perfection in terms of assets, it’s actually priced for perfection in terms of policy. What are the chances that those decisions may have to be adjusted? We really don’t know what is going to happen during or following COVID-19. We don’t really know at all. So I would suggest that now is the least appropriate time to put the ship on ‘autopilot’ as we potentially pass through dangerous waters.

The aggregate inflation policy targeting approach is a form of autopilot. It is illustrative of something we’ve seen all over the economy, which is an infantilisation of logic and a deemphasis of judgement. You know the argument: if we have a good enough model and we have built in enough bells and whistles to anticipate all anticipated outcomes, then we can let the algos take control and take no responsibility for anything that happens between the beginning and the end of any process.

I understand what the Fed is trying to achieve by implying that the ship will sail in aggregate smooth waters. And even if it’s not stating that explicitly, it is very definitely implying it, and clearly the market is pricing that conclusion too. It is fully priced in both fixed income and to a large extent in the recent positive repricing of credit and other risky assets.

How certain should we be that calm waters are ahead? Or that all the turbulent optionality and all the uncertainty of path dependence of policy responses are priced? As any sailor knows, sea conditions are notoriously fickle. 

For the journey ahead we need the Stargazer, not the autopilot. 

Otherwise it’s very likely to be a rough passage. And the rascally crew has already finished the ship’s grog.