Klaus W. Wellershoff is a highly esteemed economist; he is Chairman of the Board at Wellershoff & Partners, which he founded in 2009. Previously, he was Chief Economist at the Swiss Bank Corporation and then at UBS, where he worked for over 12 years. When not working in Zürich, Wellershoff teaches economics at the University of St. Gallen and works pro bono with several foundations and organizations that support science, culture and sports. Furthermore, Dr. Wellershoff is a passionate supporter of the Lorange Network.
Q: Klaus, in your view, what factors are critical for success as an economist?
It seems to me that, as an economist, it is most important to be honest with yourself, to be self-critical and to be fast. Be honest because you should never oversell yourself or the services of your company. Be self-critical because that is the only way to improve yourself and your products. And be fast because time waits for no one, and speed can be a great competitive advantage in a world of complacent large businesses.
In the business of economics, honesty means understanding which forecasts are feasible and which are not when you analyze the world economy and financial markets or when you give advice on investing strategically or tactically. For example, nobody knows where an exchange rate will be at the end of this year, but most banks and economists still produce such forecasts knowing that this implies knowledge they don’t possess. Obviously, this cannot be a basis for good advice.
We have to be honest about our abilities and limitations to successfully advise our clients. Fascinatingly, even though we do not know many things, we economists do possess very powerful knowledge about the future. At our company, we focus on these little things we know, which prepare us for the future of the world economy and of financial markets.
Q: Could you give an example of being self-critical?
To be self-critical implies analyzing forecast errors and being empirical at every step. Take the theoretical relationship between an exchange rate and the interest rate differential as an example. What good is this theory if it does not explain the future and has never worked consistently in the past? No good at all! All our hypotheses and all the advice we give have to pass an empirical test. Otherwise, wishful thinking could taint our recommendations. Unfortunately, this happens quite often in my industry. One instance is the Eurozone discussions. Most economists, including myself, would say that the Euro is not an optimal currency area. I would even venture that it is ill-constructed. But does that mean the Euro will fall apart and should thus be avoided? Of course not, as a look at other ill-constructed currencies will tell you. To separate ideology or political preconceptions from analysis and advice is critical to success in my field.
Q: And what about speed?
Yes, speed: I once looked at the research process in a bank where it took, on average, fifteen days before the bank’s investment committee decisions were communicated to clients via their flagship publication. In fifteen days, financial markets can turn upside down. Once you reach a conclusion, you need to act immediately. Otherwise, you might as well not do research or money management.
Q: Why is it oftentimes difficult to make economic policy work effectively, especially regarding implementation?
By definition, an economic policy is implemented by government institutions. All large institutions exhibit inertia. In many ways, this is good if these institutions provide stability. If they are supposed to cause change, however, things start getting difficult. They get even more difficult if long-standing population habits, such as smoking, are affected. Breaking a social norm, in particular, can take a long time.
In my field of macroeconomics, we are often confronted with beliefs that change at a glacial pace. Sometimes this is beneficial, such as when inflation expectations are low and well-anchored. Changing such beliefs, however, can be very difficult. In the US in the early eighties, Fed president Paul Volker resorted to double digit rates for Fed funds to bring incredibly high inflation expectations to more tolerable levels. In the process, he triggered a major recession.
Q: What do you see as key top-level leadership factors in organizations today?
As I see it, a clear vision is key. This vision needs to be succinct and clearly communicated. In the past, a clear vision was maybe not as important as it is today, given the hierarchal organizational structures we typically had. In today’s organizations with flatter hierarchies, a clear vision is central to the business’ success. In addition, you must be able to communicate the “why” of your organization well. Otherwise, you might not be able to motivate your younger talents to give their best.
In today’s world, you need strong, inspired teams bound together by a vision. Without this vision, you might never see a “go for it” attitude in your employees. Endless debates on why and how are the death of the agility of an organization.
Q: What do you see as key challenges to economics as a profession?
Academia and business economics face their individual challenges. Much of today’s business economics has degenerated into sensationalism, almost to the point of entertainment. Just look at the economics section of an airport bookstore. It is a disgrace.
In universities (and perhaps in corporations), we waste our energy on educating too many students. Only the few top talents matter when it comes to advancing our academic understanding of economics. Do not get me wrong—it is still important to teach students basic economic insights in business school, but the scientific part of economics produces too much absolutely useless information. We do not need tens of thousands of PhD economics students who must publish three articles in scientific journals before receiving their degrees. We need a broader education of our top talents. Nobody should get a higher degree in economics without strong knowledge in a wide range of subjects, such as the history of economic thought, advanced programming skills or a thorough understanding of financial markets and political processes.
As you can tell, I am skeptical of ivory towers, and I support linking academics to the real world and vice versa—much as you are, Peter, here in the Lorange Network.
The Lorange Network would like to thank Klaus Wellershoff for sharing his perspectives with us today.
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