Happiness deserves to play a part in determining monetary policy

London Briefing: The most recent release of the minutes of the meeting of the Monetary Policy Committee (MPC) of the Bank of England contained a surprise. There are three possible ways to vote at such meeting - that interest rates should go up, go down or remain unchanged, writes Chris Johns

It's not unprecedented - but highly unusual - to find all three types of vote at the same meeting. At the beginning of this month, the majority of the MPC voted for no change.

However, one member, Prof Stephen Nickel, argued for a cut while another, David Walton, suggested a rise.

The governor of the bank, Mervyn King, is famous for expressing the fervent desire that monetary policy should be as predictable as it is boring. With his economists swinging both ways, interest-rate setting has suddenly become interesting again.

Anyone who has ever met Nickel cannot fail to be impressed by his charm. But his formidable intellect is also very evident and I, for one, am always very keen to agree with him on the odd occasion that we meet.

I don't know David Walton - we overlapped at the treasury very briefly many years ago. He went on to become very wealthy at Goldman Sachs, while I didn't. Walton also has a strong reputation: not as intellectually robust as Nickel perhaps, but a bright chap.

A cynic might suggest that to have two economists, both with brains the size of a planet, disagreeing with each other merely confirms everything that we suspect about the dismal science.

As a matter of fact, most economists are at pains to point out that the profession agrees about much more than it used to. Indeed, you often hear that many of the great macro debates have now been settled.

That's news to me and it is clearly news to the Bank of England. When you disagree about the direction of interest rates, that is pretty fundamental.

Just why these two distinguished men disagree so much is unclear. According to the MPC minutes, Walton felt that "the balance of risks to inflation had shifted too much to the upside for comfort and that warranted an immediate increase in rates".

Nickel, on the other hand, "felt that a small reduction in interest rates was warranted to stimulate demand. . ."

To be honest, this is just bank speak for saying that the two men have diametrically opposed views. We don't really learn much about the underlying logic.

It is not easy to understand why very bright people can disagree about such fundamentally important matters. Most economists will snort with derision at this point and state that it is very easy to explain. That, I suppose, is why they are economists. And most normal people are not.

To be fair, Nickel has gone out of his way to explain his decision.

In an interview published this week, for example, he points to rising unemployment as evidence of growing spare capacity in the UK economy. And, going forward, the more spare capacity there is, the more likely it is that inflation will come down.

He appears to think that externally generated inflation - things like oil prices - are, by definition, outside the control of the MPC.

All very sensible stuff; all very hard to take issue with. Except, clearly, the rest of the MPC does disagree.

Nickel has often gone out of his way to explain his thinking and he has done so in a series of clear and well-presented speeches. It is a shame that his term of office is coming to en end.

Fans of clear English will miss him. One of the new boys due to show up at the bank over the summer also promises to add a bit of colour to these dry debates.

Prof David Blanchflower has acquired the reputation of being something of a happiness guru, having apparently discovered that money doesn't necessarily buy us contentment, but lots of sex does.

Most people think that he is American as he is a naturalised citizen of that great country.

When I shared an office with him while at graduate school in London, he was most definitely British and glorified in the very unoriginal nickname Danny. As with Walton, Blanchflower went on to greater glories.

I have no idea whether he will prove to be a hawk or a dove, but his work on the economics of happiness deserves to have a very high weight in setting Britain's mortgage rates.

Chris Johns is an investment strategist with Collins Stewart. All opinions are personal.