Feature

The Four Horsemen of the Teapocalypse

Meet the dead thinkers who defined 2010.

John Maynard Keynes once famously observed, "Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist." During the crisis years of 2007, 2008, and 2009, it was the great British economist himself, along with three other dead men, who dictated the world's response from beyond the grave: Hyman Minsky, Walter Bagehot, and Milton Friedman.

Minsky, an economist at Washington University in St. Louis, for warning that times of financial calm and economic growth led banks to step further and further out onto the ice of leverage -- until finally they would step too far and fall through. Bagehot, the 19th-century Economist editor, for advising that when the bankers fell into the ice-cold lake it was essential that the government spare no expense to make sure that the network of banking survived, but needed to do so in a way that took the bankers' fortunes away. Friedman, the consummate monetarist, for seconding Bagehot's call for bank rescues in depressions -- and calling for central banks to keep the money flowing. And Keynes, for his gloomy fears that central banks would not prove powerful enough to do the job -- coupled with his overoptimistic hope that clever technocrats could then boost government spending to take up the slack.

But we are now into the "recovery," and 2010 has been a very different year. Its horsemen are of a different breed entirely. Where Keynes and his ilk were optimistic believers in the power of technocratic governments to do good, this year's horsemen are practitioners of more dismal sciences: believers that the market metes out judgments that we must suffer -- and that it is our own flawed nature that makes us believe so. In short, it has been a year for Austrian economists Friedrich von Hayek and Joseph Schumpeter, for plutocrat and Great Depression-era Treasury Secretary Andrew Mellon -- and, above all, for Friedrich Nietzsche.


There was silence in the seminar room.
Richard Kahn broke it. "Do you mean to say," he asked, "that if I were to go out tomorrow and buy a new overcoat, that it would increase unemployment?"

"Yes," said the man in the front of the room, Friedrich von Hayek, "but it would take a long and complicated mathematical argument to explain why."

That is how historian Robert Skidelsky describes Hayek's visit to the proto-Keynesian economists of Cambridge University. It was the 1930s, and Hayek had met them in London to convince them that depressions were not to be avoided or cured, but rather endured. In his thinking, they were righteous karmic payback for past sins against the gods of monetary orthodoxy. Any attempts to cut them short or make them shallower would produce only temporary palliation, at the cost of a fiercer, deeper, and nastier further depression in the future.

Hayek's fellow countryman, Joseph Schumpeter, went further: "Gentlemen!" he announced to his students at Harvard University (there were no ladies). "A depression is healthy! Like a good ice-cold douche!" If depressions did not exist, Schumpeter thought, we would have to invent them. They were "the respiration of the economic mechanism."

Agreeing with Schumpeter was Herbert Hoover's Treasury secretary, Andrew Mellon. In his memoirs Hoover was bitter toward many, but bitterest of all toward Mellon, whom he called the head of the "leave it alone liquidationists." Hoover quotes Mellon: "It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people." Hoover opposed Mellon's policies, he said, and worked to undermine them. But what could he do? He was, after all, only the president. And Mellon was Treasury secretary.

Think Mellon is just an anachronism? Then consider current British chancellor of the Exchequer, George Osborne, and his claim that today's record-low interest rates in Britain are a sign of financial strength and not of anticipated prolonged depression: "The emergency budget in June was the moment when fiscal credibility was restored. Our market interest rates fell to near-record lows." That is pure Mellon. It is definitely not Keynes. It is definitely not even Milton Friedman.

Friedman himself condemned Hayek, Schumpeter, and Mellon as devotees of an "atrophied and rigid caricature" of his own doctrines. "[T]his dismal picture," said Friedman, led "young, vigorous, and generous mind[s]" to recoil. And both Keynes's and Friedman's flavors of postwar American macroeconomics, with its focus on government action to maintain stable growth, were the happy result.

Nothing has changed in the past few years to make Hayek's, Schumpeter's, and Mellon's arguments stronger intellectually against the critiques of Keynes and Friedman than they were 60 years ago. On substance, their current victory is inexplicable. But their triumph, epitomized by the Tea Party movement and its hostility to government action, can be explained by our fourth horseman: Friedrich Nietzsche in his role as psychologist of human ressentiment.

Nietzsche talked about the losers -- or rather, about those who thought they were the losers. He looked at those who saw themselves as weak and poor -- rather than strong and rich -- and saw trouble. "[N]othing on earth consumes a man more quickly than the passion of resentment," he wrote. It drives us to madness.

Think of that when you consider this: The U.S. unemployment rate is stubbornly high, yet aid from a federal government that can borrow at unbelievably good terms could allow states to maintain their levels of public employment, and those public workers would then spend their incomes and so boost the number of private-sector jobs as well. But the voters are against that. No, they say. We have lost our jobs. It is only fair that those who work for the government lose their jobs as well -- never mind that each public-sector job lost triggers the destruction of yet another private-sector job. It's the underlying logic that has led to a wave of austerity across Europe that is now headed for America's shores. And it's the same logic that says, "It is only fair that homeowners lose their money" -- never mind that everyone's home prices will suffer. What does not kill me makes me stronger.

Because some are unemployed, unemployment is good -- we need more of it. Because some have lost their wealth, wealth destruction is good -- we need more of it. That is a psychology that Friedrich Nietzsche would have understood all too well. For, as he put it, "If you gaze long into an abyss, the abyss will also gaze into you."

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Feature

The Fourth Wave

Can the world avoid a fresh crisis?

The global economy looks to be headed toward what Mohamed El-Erian has called a "new normal" after the market meltdown and financial upheaval of the last two years. But along the way, we're in for a bumpy ride.

So far, the crisis has come in the form of waves repeatedly testing the ability and willingness of the world's established powers and rising stars to build a cooperative approach to our largest transnational problems. The bad news is that the men and women who gathered to save the world in Washington in late 2008 and London in 2009 have turned their attention to pressing problems at home. The worse news is that some of those problems have now given rise to a third wave, one which will ensure a new round of conflict in the international arena.

The first wave began with Lehman Brothers' collapse in September 2008 and continued through the meetings of the G-20 in London in April 2009, when political leaders in both the developed and developing worlds, persuaded that the global financial system was in mortal danger, came together to take action. They proved that something like international consensus is possible, at least on those rare occasions when everyone seems to face the same threat at the same time. World leaders and their governments moved into high gear with stimulus spending, austerity plans, and assorted other drastic remedies, while heads of state gathered to work toward global agreements. For once, the need for some form of collective action was clear, and the major powers sang from the same choir book as they seemed to open up to the rising powers clamoring for an enhanced role in the new G-20 era.

The second wave arguably began with the December 2009 declaration from White House economic advisor Larry Summers that America's recession was over. Technically, he was right: The U.S. economy had resumed growing, albeit slowly. But politically, he created something like a "Mission Accomplished" moment for President Barack Obama's administration, a problem exacerbated by his comment that "most professional forecasters are now looking for a return to job growth by spring" of 2010. His announcement soothed the fears of those who were listening to the dire predictions from my friend, economist Nouriel Roubini, and others who warned -- and are still warning -- that the recession might not yet have hit bottom. The easing of fears, however, reduced the need for unity on the international stage.

This year, when it became clear that developed economies were not going to bounce back quickly, voters began turning on their leaders. The Japanese electorate, which dismissed the Liberal Democratic Party in 2009 after more than a half-century of nearly uninterrupted rule, began punishing the party that took its place. Emergency steps by the European Union and International Monetary Fund pulled Greece, Spain, and other shaky European economies back from the brink of insolvency, but at a high political cost: In May, the British electorate dispensed with Prime Minister Gordon Brown, and voters in Germany's most populous state defeated Chancellor Angela Merkel's Christian Democrats. In the United States, Democrats, who control the White House and held large majorities in both houses of Congress, faced a tsunami of public anger in this year's midterm elections.

At the same time, emerging markets rebounded, further scrambling the world's political order. China is leading the way, but a relatively sunny economic outlook in India, Indonesia, Brazil, Turkey, and other new heavyweights has contributed to the sense that the balance of power in international politics has shifted away from the old G-7 countries. That doesn't mean the G-20 will emerge as an uncontested new center of global governance; if anything, it has become clearer this year that consensus might now be even more elusive.

Differences within the expanded group over the proper role for government in an economy have come to the fore with American pundits like New York Times columnist Paul Krugman pushing for new stimulus as Europeans commit themselves to weather the political storms following their austerity measures and China, Russia, and the Persian Gulf's Arab monarchies forge ahead with a state-directed form of capitalism. World leaders have seen their interests diverge as different countries emerge from the crisis at different speeds and with different tools. One big result is that proposals to address transnational problems like climate change and the need to create a new international financial architecture are now as dead as the Doha global trade round, stuck in limbo since 2001.

The third wave of the crisis hit this fall when IMF Managing Director Dominique Strauss-Kahn used the fund's annual meeting to sound the alarm that governments are beginning to deploy their currencies as weapons, while World Bank President Robert Zoellick warned that a self-defeating round of tit-for-tat protectionism could return the world to the misery of the 1930s. U.S. and European leaders have begun pressing the Chinese leadership on the value of China's currency, and Beijing has responded with the diplomatic equivalent of "mind your own (failing) business." Although the risk might be overstated, economists like Raghuram Rajan are right to caution of the dangers of a currency war, as exporters compete to undercut overseas competition with lower currency values. And El-Erian is surely correct that we're headed for a "new normal" in the United States, not a return to the heady days of the 1990s. Whether we're in for the "lost decade" that he and others have warned about remains to be seen.

What does the latest wave herald? To start, it's a sign of how far we've come from the initial emergency, when political leaders in both the developed and the developing worlds shared an interest in crafting a coherent emergency response. The last year has shown how temporary a moment that was. Now the international arena is becoming a conflict zone as competing interests pit one state against another, complicating efforts to build the sort of international consensus called for by Oxford University economist Paul Collier and others as a safeguard against precisely the sort of international strife we're already starting to see.

It's hard to overstate the importance of this latest shift. For better and for worse, globalization -- all the various processes by which ideas, information, people, money, goods, and services now cross international borders at unprecedented speed -- has been the primary geopolitical and economic trend of the past several decades. But the financial crisis and its aftermath have proven that no one has forgotten how walls are built, and this moment is in many ways more dangerous for the global economy's future than anything we experienced during the Cold War, threats of nuclear war notwithstanding. That's because of globalization's very success up until now; this level of global economic interdependence did not exist when the planet was divided into opposing ideological camps. A bad day over there is still a bad day over there. But now it's a bad day over here, too.

A return to the economic crisis, political polarization, and resulting violence of the 1930s is mercifully unlikely. Too many emerging players have too much to lose. These governments hope to profit from the global economy, not destroy it. But we are seeing the beginnings of increasingly nationalist, state-driven capital and trade policies from the world's largest economies. Along with them, expect a sharp spike in national security tensions, state-driven industrial espionage, and a more confrontational approach on all sorts of issues from climate change to currency policy to weapons proliferation.

So it's time for the big powers to step up. If they can't succeed in solving some of these conflicts, expect a fourth wave even worse than the ones we've already ridden.

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