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.

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.

Marcus Bleasdale/VII


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."

Darren McCollester/Getty Images