We Can’t Say They Didn’t Warn Us
A guide to who's still standing in the post-crash marketplace of ideas.
In a letter to shareholders written just after the dot-com bust, Warren Buffett observed, "You only find out who is swimming naked when the tide goes out." The 2008 financial crisis had a similar effect on our economic and financial gurus: It revealed whose thinking was based on whiggish, End-of-History assumptions about the essential triumph of Western democratic capitalism and whose mental framework admitted the possibility of radical disruption. The thinkers whose intellectual -- and maybe even psychological -- starting point was that Western market democracy is neither perfect nor eternal turned out to be much better at foreshadowing the financial crisis, and it is those thinkers whose ideas are the most relevant today, in the uncertain, post-crisis world.
In a letter to shareholders written just after the dot-com bust, Warren Buffett observed, "You only find out who is swimming naked when the tide goes out." The 2008 financial crisis had a similar effect on our economic and financial gurus: It revealed whose thinking was based on whiggish, End-of-History assumptions about the essential triumph of Western democratic capitalism and whose mental framework admitted the possibility of radical disruption. The thinkers whose intellectual — and maybe even psychological — starting point was that Western market democracy is neither perfect nor eternal turned out to be much better at foreshadowing the financial crisis, and it is those thinkers whose ideas are the most relevant today, in the uncertain, post-crisis world.
These specialists in uncertainty are a broad church: They range from academic economists who saw the crisis coming, like New York University’s Nouriel Roubini and the University of Chicago’s Raghuram Rajan, to philosophers of finance like George Soros and Mohamed El-Erian, who have made huge market bets, as well as intellectual ones, on how bubbles are formed and how they burst. One striking similarity between many of them is that they have seen regime change up close.
The most dramatic example is Soros, whose formative life experience was the Nazi invasion of Budapest when he was 13 years old. That trauma taught him two things: that the world could change overnight, and that those, like his beloved father Tivadar, who responded to that upheaval instantly were the ones who survived. Roubini, who is sometimes caricatured as either Dr. Doom or the Hugh Hefner of the dismal-science set, is likewise best described as a specialist in revolution. He spent his childhood being moved around volatile parts of the world from Istanbul to Tehran to Tel Aviv — and began his career as an economist studying the 1990s emerging-markets crises in Latin America, Asia, and Russia. El-Erian, Rajan, and Daron Acemoglu, a widely cited young Turkish economist, also have both personal and professional experience of rapidly, and sometimes traumatically, changing social and economic orders.
These men were all born or at least partly raised outside the United States. That is surely no accident. In the 20th century, and even in the 19th and 18th, America was the world’s laboratory, the place where many of the best, and most revolutionary, ways of organizing government and the economy were being worked out. The United States is still the world’s most powerful country and most intellectually vibrant — after all, these global thinkers now make their home in America — but partly because the United States is so big and has been so prosperous for so long, American-centric thinkers have been relatively slow to spot the challenges to the Washington Consensus and offer coherent alternatives.
Being a "global nomad," as Roubini calls himself, has another intellectual advantage. Thanks to communism’s collapse, the lowering of trade barriers, and the technology revolution, the world economy is more interdependent than ever. This group takes America’s connection to the global economy as the starting point for its analysis — hence El-Erian’s emphasis on global financial imbalances (also a signature theme of Martin Wolf‘s Financial Times columns) and the relationship Rajan traces between rising income inequality and its U.S. political manifestation in subprime mortgages.
This crew is all about big ideas and the big picture — their frame of reference is global, and their intellectual strength is their ability to understand that entire economic systems can, and do, collapse. Paradoxically, the opposite impulse is simultaneously in fashion: You might call it the economics of small steps, an approach that eschews the big theory altogether in favor of smaller, achievable, and, crucially, measurable proposals.
Enter Esther Duflo and her frequent collaborator Sendhil Mullainathan, guiding lights of the "randomista" strategy pioneered by the Massachusetts Institute of Technology’s Poverty Action Lab, of which they are co-founders. They are bringing medicine’s randomized drug-trials approach to poverty reduction, a marriage of the practical with the idealistic that has tremendous appeal both on Main Street and in the academy (she is a winner of the John Bates Clark medal, the "junior Nobel" for economists, and they are both MacArthur-anointed geniuses).
The broader movement of behavioral economics is in many ways animated by a similar spirit. As the title of Nudge, co-written by Richard Thaler, a father of the field, suggests, one of the most popular uses of the insights of behavioral economics is to propose small public-policy "nudges" that can create better outcomes. A favorite is designing cafeterias in ways that subliminally encourage us to eat healthier foods.
Small-steps economists and big macroeconomic theorists would seem to spring from opposite — and even opposing — ways of thinking about the world. That is partly true: Some of the latter crowd are frustrated by what they see as the timidity of small-bore economics, while randomistas and nudgers are enraged by big ideas backed by nothing more solid than big rhetoric. But the two approaches also draw on a common intellectual foundation — a shared critique of the once dominant, now widely attacked, efficient-market school, which holds that free markets, unfettered by regulation, swiftly find the best collective outcome — and they are sometimes both practiced by a single person, as is the case with Yale University’s Robert Shiller, a leading behavioral economist who is also one of the big-picture guys who saw the financial crisis coming.
The other world that brings together both a talent for responding to revolution and an ability to recommend practical, measurable action is the world of business. That’s true of the financiers on FP‘s Global Thinkers list and even of some of its senior government officials, like Federal Reserve Chairman Ben Bernanke, who is acting on his academic conclusions about the Great Depression with quantitative easing — using central-bank intervention to keep interest rates extremely low — of heroic proportions.
But this combination of the small and practical with the big and theoretical is probably best manifested by the leaders of what is surely the most significant, underlying shift of our age — the technology revolution. Amazon’s Jeff Bezos and Apple’s Steve Jobs are businessmen with very focused briefs: One invents and sells consumer electronic devices; the other sells things, especially books, online. Yet they and a handful of other technology giants, like Google’s Larry Page and Sergey Brin, are also the biggest-picture economic thinkers we have these days, driving revolutionary transformation of the way we do just about everything.
The big challenge of the coming decades is for our public intellectuals, and our public policy, to catch up.
Chrystia Freeland, editor of Thomson Reuters Digital, is working on a biography of George Soros and is author of Plutocrats: The Rise of the New Global Super Rich and the Fall of Everyone Else.
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