Dead Men Walking

Why 2009's truly top thinkers are yesterday's news.

There is nothing like a really big economic crisis to separate the Cassandras from the Panglosses, the horsemen of the apocalypse from the Kool-Aid-swigging optimists. No, the last year has shown that all is not for the best in the best of all possible worlds. On the contrary, we might be doomed.

At such times, we do well to remember that most of today’s public intellectuals are mere dwarves, standing on the shoulders of giants. So, if they had e-mail in the hereafter, which of the great thinkers of the past would be entitled to send us a message with the subject line: "I told you so"? And which would prefer to remain offline?

It has, for example, been a bad year for Adam Smith (1723-1790) and his "invisible hand," which was supposed to steer the global economy onward and upward to new heights of opulence through the action of individual choice in unfettered markets. By contrast, it has been a good year for Karl Marx (1818-1883), who always maintained that the internal contradictions of capitalism, and particularly its tendency to increase the inequality of the distribution of wealth, would lead to crisis and finally collapse. A special mention is also due to early 20th-century Marxist theorist Rudolf Hilferding (1877-1941), whose Das Finanzkapital foresaw the rise of giant "too big to fail" financial institutions.

Joining Smith in embarrassed silence, you might think, is Friedrich von Hayek (1899-1992), who warned back in 1944 that the welfare state would lead the West down the "road to serfdom." With a government-mandated expansion of health insurance likely to be enacted in the United States, Hayek's libertarian fears appear to have receded, at least in the Democratic Party. It has been a bumper year, on the other hand, for Hayek's old enemy, John Maynard Keynes (1883-1946), whose 1936 work The General Theory of Employment, Interest and Money has become the new bible for finance ministers seeking to reduce unemployment by means of fiscal stimuli. His biographer, Robert Skidelsky, has hailed the "return of the master." Keynes's self-appointed representative on Earth, New York Times columnist Paul Krugman, insists that the application of Keynesian theory, in the form of giant government deficits, has saved the world from a second Great Depression.

The marketplace of ideas has not been nearly so kind this year to the late Milton Friedman (1912-2006), the diminutive doyen of free-market economics. "Inflation," wrote Friedman in a famous definition, "is always and everywhere a monetary phenomenon, in the sense that it cannot occur without a more rapid increase in the quantity of money than in output." Well, since September of 2008, Ben Bernanke has been printing dollars like mad at the U.S. Federal Reserve, more than doubling the monetary base. And inflation? As I write, the headline consumer price inflation rate is negative 2 percent. Better throw away that old copy of Friedman's Monetary History of the United States, 1867-1960 (co-authored with Anna J. Schwartz, who is happily still with us).

Invest, instead, in a spanking new edition of The Great Transformation by Karl Polanyi (1886-1964). We surely need Polanyi's more anthropological approach to economics to explain the excesses of the boom and the hysteria of the bust. For what in classical economics could possibly account for the credulity of investors in Bernard Madoff's long-running Ponzi scheme? Or the folly of Richard Fuld, who gambled his personal fortune and reputation on the very slim chance that Lehman Brothers, unlike Bear Stearns and Merrill Lynch, could survive the crisis without being sold to a competitor?

The biggest intellectual losers of all, however, must be the pioneers of the theory of efficient markets -- economists still with us, such as Harry M. Markowitz, the University of Chicago-trained economist who developed the theory of portfolio diversification as the best protection against economic volatility, and William Sharpe, inventor of the capital asset pricing model. In two marvelously lucid books, the late Peter Bernstein extolled their "capital ideas." Now, with so many quantitative hedge funds on the scrap heap, their ideas don't seem quite so capital.

And the biggest winners, among economists at least? Step forward the "Austrians" -- economists like Ludwig von Mises (1881-1973), who always saw credit-propelled asset bubbles as the biggest threat to the stability of capitalism. Not many American economists carried forward their work into the later 20th century, but one heterodox figure has emerged as a posthumous beneficiary of this crisis: Hyman Minsky (1919-1996). At a time when other University of Chicago-trained economists were forging the neoclassical synthesis -- Adam Smith plus applied math -- Minsky developed his own math-free "financial instability hypothesis."

Yet it would surely be wrong to make the Top Dead Thinker of 2009 an economic theorist. The entire discipline of economics has flopped too embarrassingly for that to be appropriate. Instead, we should consider the claims of a historian, because history has served as a far better guide to the current crisis than any economic model. My nominee is the financial historian Charles Kindleberger (1910-2003), who drew on Minsky's work to popularize the idea of financial crisis as a five-stage process, from displacement and euphoric overtrading to full-fledged mania, followed by growing concern and ending up with panic. (If those five steps to financial hell sound familiar, they should. We just went down them, twice in the space of 10 years.)

Of course, history offers more than just the lesson that financial accidents will happen. One of the most important historical truths is that the first draft of history -- the version that gets written on the spot by journalists and other contemporaries -- is nearly always wrong. So though superficially this crisis seems like a defeat for Smith, Hayek, and Friedman, and a victory for Marx, Keynes, and Polanyi, that might well turn out to be wrong. Far from having been caused by unregulated free markets, this crisis may have been caused by distortions of the market from ill-advised government actions: explicit and implicit guarantees to supersize banks, inappropriate empowerment of rating agencies, disastrously loose monetary policy, bad regulation of big insurers, systematic encouragement of reckless mortgage lending -- not to mention distortions of currency markets by central bank intervention.

Consider this: The argument for avoiding mass bank failures was made by Friedman, not Keynes. It was Friedman who argued that the principal reason for the depth of the Depression was the Fed's failure to avoid an epidemic of bank failures. It has been Friedman, more than Keynes, who has been Bernanke's inspiration over the past two years, as the Fed chairman has honored a pledge he made shortly before Friedman's death not to preside over another "great contraction." Nor would Friedman have been in the least worried about inflation at a time like this. The Fed's balance sheet may have expanded rapidly, but broader measures of money are growing slowly and credit is contracting. Deflation, not inflation, remains the monetarist fear.

From a free market perspective, the vital thing is that legitimate emergency measures do not become established practices. For it cannot possibly be a healthy state of affairs for the core institutions of the Western financial system to be effectively guaranteed, if not actually owned, by the government. The thinker who most clearly discerned the problems associated with that kind of state intervention was Joseph Schumpeter (1883-1950), whose "creative destruction" has been one of this year's most commonly cited phrases.

"[T]his evolutionary ... impulse that sets and keeps the capitalist engine in motion," wrote Schumpeter in Capitalism, Socialism and Democracy, "comes from ... the new forms of industrial organization that capitalist enterprise creates.... This process of creative destruction is the essential fact about capitalism." This crisis has certainly unleashed enough economic destruction in the world (though its creativity at this stage is still hard to discern). But in the world of the big banks, there has been far too little destruction, and about the only creative thing happening on Wall Street these days is the accounting.

"This economic system," Schumpeter wrote in his earlier The Theory of Economic Development, "cannot do without the ultima ratio [final argument] of the complete destruction of those existences which are irretrievably associated with the hopelessly unadapted." Indeed, he saw that the economy remained saddled with too many of "those firms that are unfit to live." That could serve as a painfully accurate description of the Western financial system today.

Yet all those allusions to evolution and fitness to live serve as a reminder of the dead thinker we should all have spent at least part of 2009 venerating: Charles Darwin (1809-1882). This year was not only his bicentennial but the 150th birthday of his paradigm-shifting On the Origin of Species. Just reflect on these sentences from Darwin's seminal work:

"All organic beings are exposed to severe competition."

"As more individuals are produced than can possibly survive, there must in every case be a struggle for existence."

"Each organic being ... has to struggle for life and to suffer great destruction.... The vigorous, the healthy, and the happy survive and multiply."

Thanks in no small measure to the efforts of his modern heirs, notably Richard Dawkins, we are all Darwinians now -- except in the strange parallel worlds of fundamentalist Christianity and state-guaranteed finance.

Neither Cassandra nor Pangloss, Darwin surely deserves to top any list of modern thinkers, dead or alive.



The Hajj

It's the greatest yearly pilgrimage on Earth. But these days, the annual trek to Saudi Arabia's holy sites is as much about politics as it is religion.

This month, hundreds of thousands of Muslim pilgrims from around the globe are converging upon the Saudi Arabian holy cities of Mecca and Medina to perform the hajj, the pilgrimage that believers are supposed to make at least once in their lives as long as they have the health and the means to manage it. The hajj takes place this year from Nov. 25 to 29, but many of the faithful are already thronging the airport and docks of Jeddah, the main entry point for pilgrims.

It's an event of huge religious significance. Some three million Muslims from all around the world -- Indians and Pakistanis, Nigerians and Bosnians, Arabs and non-Arabs, rich and poor, Sunni and Shia -- will commune, worship, and celebrate the global unity of Islam. They'll be performing the same set of ritual acts, dressed in exactly the same clothes, all equal in the sight of God. For those who've completed the hajj, it's a lifetime landmark, a transformative religious experience.

In reality, though, there's another reason why the hajj is important -- even if most Muslims would rather it weren't the case. Today's hajj -- given the widening sectarian rifts within Islam -- is also very much about politics. To some extent, of course, it's always been that way. The royals in Riyadh have always taken their guardianship of the Two Holy Places in Mecca and Medina as a key to the spiritual and political guidance of the global community of believers. (It should be said, by the way, that though the Saudis invariably evoke the "nonpolitical" character of the hajj, they've also been known to shower pilgrims with literature espousing the benefits of the sere Wahhabi version of Islam that holds inside the kingdom.)

Given this potentially explosive mix of politics and religion, the recent war of words between the governments of Iran and the hajj's Saudi Arabian hosts deserves to be taken seriously. On Oct. 26, Iran's Supreme Leader, Ali Khamenei, met with officials from the Iranian hajj organizing committee and seized the occasion to rail against alleged past mistreatment of his compatriots during the pilgrimage.

"Such acts are against the unity of Muslims and contribute to the goals and wishes of the U.S. and foreign intelligence services," he said. "The Saudi government should fulfill its duty in confronting these acts." He received immediate support from President Mahmoud Ahmadinejad, who warned on his Web site that the government in Tehran would respond with a "necessary decision" to defend the dignity of Iranian pilgrims.

On Nov. 2 the Saudi cabinet of ministers fired back: "The kingdom does not permit any party to disrupt the security of the pilgrims or to attempt to divide the ranks of Muslims." The text didn't mention Iran by name, but everyone in the region knew whom the Saudis had in mind. The hajj has remained a central battleground for these two rivals at least since the 1979 Iranian Revolution, as Saudi Arabia and Iran have competed for regional influence and worked to spread their competing interpretations of Islam. Those divisions remain alive and well despite some superficial improvements in places like Iraq and Lebanon -- and hopeful rhetoric from President Obama. The rise of a Shia-dominated government in Iraq and Iran's nuclear aspirations certainly haven't helped to assuage Saudi fears.

Throughout the 1980s, Iranian pilgrims tried to use the hajj as an opportunity to propagate Islam à la Khomeini. That conflict culminated in full-scale riots in 1987, when Saudi security forces opened fire on demonstrators. The clashes resulted in 402 deaths, not to mention some 600 wounded. That's a nightmare that the Saudis, presumably, would do anything to avoid. And they probably aren't finding much consolation in a recent statement by an Iranian government spokesman that this year's Iranian pilgrims are planning to stage a "peaceful demonstration" calling for "Death to Israel, Death to America." (Apparently, he didn't notice any irony.)

And yet, as Tariq Alhomayed of the London-based newspaper al-Sharq Al-Awsat points out, the situation has recently deteriorated further. "We've always expected a certain degree of tension, but usually they don't talk about it this openly," he notes. One reason, he says, is that the present Iranian leadership is facing intense domestic pressure in the wake of the controversial elections earlier this year and the mass demonstrations and dissent that followed. Confronted with a crisis of legitimacy at home, he says, stoking the conflict with the traditional enemy -- the hated Sunni Arabs -- is one logical way to rally people around the powers-that-be. He speculates the Iranians might also be angry about the mysterious defection of an Iranian scientist, allegedly connected with Iran's nuclear research program, during his visit to the kingdom earlier this year to perform the umrah, the "lesser pilgrimage" to the holy sites. Even if the Americans were behind the defection, he says, they probably wouldn't have been able to carry it off without the cooperation of Saudi security authorities.

For their part, the Saudis see Iran as vulnerable and are not willing to let any criticism of their patronage of the hajj go unpunished. "In the past Iran has said this stuff and they [the Saudis] chose to let it go," says Anoush Ehteshami, a specialist on Gulf security at Britain's Durham University. "This year they haven't. The Saudis are looking at Iran now as a wounded animal, and they're not going to take this stuff from the Iranians in the usual fashion."

Then there's the regional context. One reason for Tehran's display of attitude might well have to do with the extent to which its international influence has grown over the past decade -- indirectly abetted by the United States, which toppled Tehran's archenemy Saddam Hussein and brought Shiite parties to power in Baghdad. The Sunni-dominated countries in the Middle East and South Asia are reacting with conspicuous skittishness to the new assertiveness of Shiite groups throughout the area. The Saudis are particularly worried about the large Shiite population within Saudi Arabia's own oil-rich Eastern Province, which has sometimes found itself at odds with the harsh Wahabbi version of Sunni Islam that dominates the kingdom.

This war of words over the hajj could very easily take the form of a shooting war in Saudi Arabia's unstable southern neighbor, Yemen. Simmering tensions between the Saudis and Houthi rebels in Yemen's lawless northeast exploded into open conflict last month, prompting subsequent Saudi air strikes along the Yemeni border. The Houthis are Shiites, and even if their own brand of Shiism differs rather starkly from the Iranians', their discontent with the central government in Yemen and the traditional lawlessness of their region potentially make them a perfect instrument for Iranian troublemaking. (Whether the Houthis are actually acting on Iran's behalf is somewhat disputed. The Yemenis claim to have a captured a ship bringing Iranian weapons to the rebels, but so far they've offered little to verify that. One Yemeni newspaper recently claimed to have seen a map projecting the creation of an Iranian-sponsored Houthi state along the border -- and then warned the Saudis to expect Iran-inspired "chaos" during the hajj.)

A Saudi-Iranian proxy war in Yemen could have a destabilizing effect throughout the region, as the other Gulf states would be forced to line up in support of either regional power. There are already signs of this polarization: When the Saudis canvassed their regional allies, the tiny, majority-Shiite state of Bahrain initially refrained from offering a statement of support. The Bahraini parliament ultimately approved support for the Saudis, but only after the largest opposition bloc, representing Shiite voters, opted to abstain.

So what will actually happen when the expected 65,000 Iranian pilgrims descend on the hajj? Perhaps nothing. But you can bet that Saudi security officials will be prepared, carefully vetting the lists of attendees provided by Tehran in order to screen out possible agitators. Sadly, all the talk of political intrigue tends to hide the salient fact that, for the vast majority of hajjis, the pilgrimage is a life-transforming event that emphasizes peace, tolerance, and the equality of all believers despite racial, political, and national differences. That's according to a 2009 statistical survey conducted by three American scholars, including Harvard economist Asim Ijaz Khwaja. According to the study's findings, says Khwaja, efforts by the Saudis to impose their own brand of Islam on pilgrims -- much less any other group's proselytizing effects -- don't seem to have much effect. And that's precisely because the modern hajj experience is a decidedly global one, where the average pilgrims aren't necessarily traditionalist Arabs but pious, tolerant Southeast Asians. "In today's Muslim world the average person you're interacting with is Indonesian," he says. One can only hope that the politics will catch up.