For anyone out there looking for a dissertation topic, I (TP) have got one for you. During the Asian Financial Crisis, there was naturally a lot of fussing about the correct way to cope with the problems. All of the big policy makers and economists were involved from all around the world, and there was no shortage of reasonable people having reasonable disagreements about very fundamental issues in economic policy making. So, why did countries adopt the policies that they did? If economic theory was too confusing for economists and sundry policy makers, how did countries get to where they did? It’s part of my dissertation to explain why. But, what about the way that people framed the discussion in foreign countries and in multilateral lending institutions like the IMF? Why were they so married to one particular ideology? My theory is that many of these people advocated particular policies–free capital markets and floating exchange rates–for no other reason than the words "free" and "floating" sound good, and they invoke images of freedom, liberalism, and capitalism.
In a sense, I feel like Edward Sapir, a linguistic anthropologist who has whole school of thought partially named after him–the Sapir-Whorf Hypothesis. Before he went to graduate school, he was working as an insurance adjuster in Peoria, Illinois. This was in the 20s and 30s, when people were first driving. He noticed that a lot of his claims involved folks who were driving around with empty gasoline cans in their car who were shocked–Shocked!–when these cans exploded during accidents. The reason that they always gave for this was that the can was "empty." You know, empty, with connotations of inert, void, whatever…doesn’t sound like something that would be likely to explode, except if that something is gas vapors. This led him to the thought that maybe the way we speak (language) constrains what we do (culture).
So when the Asian Financial Crisis hit, Western governments and international lending bodies were clambering for the affected governments to get rid of their crony economic systems and impose real liberal capitalist systems. Get rid of monopolies, deregulate state-controlled industries, things like that. All good things, no doubt about it. So long as we’re doing that, we might as well make sure that we have free capital markets and floating exchange rates. You know, free, floating, liberal, open, etc.
To borrow the phrase of a famous economist, the problem is that "trade in widgets is not like trade in dollars." That is, there is no economic theory that says that free capital flows and floating exchange rates are better than capital controls and pegged currencies. For trade in widgets and gadgets, we have the theory of comparative advantage and the general equilibrium theory of the market. It helps to prove, both in terms of common sense and through rigorous mathematics, that free trade in goods among countries is superior to trade barriers. It makes everyone better off. If you have a monopoly and your economy is tanking, get rid of that monopoly. There is no corresponding theory for trade in dollars, rupiah, ringgit, euros, whatever. The closest thing we have is the axiom that some exchange rate regimes are good for some countries at some times, others good for other countries at other times. For that reason, a tanking economy with fixed exchange rates does not necessarily get better by floating. The irony is that Mahathir Mohamad in Malaysia bucked the international discourse for open capital accounts and floating exchange rates by fixing the exchange rate and closing the capital account. Despite outrage from the West, Malaysia got better. Indonesia followed the discourse, and got hammered so bad that Soeharto eventually had to step down.
The point is that these particular economic policy decisions are not necessarily good or bad, but that they have trade-offs. Why were so many in the international community so adamant about one rather than the other, regardless of those tradeoffs? (This includes in particular Deputy Treasury Secretary Lawrence Summers, lately of Harvard University fame.) Of course, other economists, notably folks like Nobel Laureate James Tobin and wacko liberal Paul Krugman, called for the capital controls and fixed exchange rates before even Malaysia thought of it, but few listened until after the dust had settled. I certainly have no way of proving my theory, or even of forming a reasonable hypothesis through which to test it. If you know how, you’ve got yourself a dissertation.
James March 10, 2005
You need to stop thinking like a scientist and start thinking like a humanities grad student. First off, the only theories worth believing in are ones than cannot be proven or disproven. You could call this a “preconceived notion,” but “theory” sounds so much better. You should pick one and base your whole career on that. Then when someone disagrees with you, you insist that they do scholarly due-dilligence and read every book ever written about that theory, all of which are terribly boring, obtuse, and use really big words that are completely unnecessary. So the disagreer wisely decides to change course and, like a good electron, follows the path of least resistance. Suddenly this person agrees with you and doesn’t have to read all those bad books. And so your preconcieved notion survives “peer review” and you become famous, until some hard-up graduate student wades through your footnotes and realizes that everything you’ve ever said is lies sandbagged by bullshit. But by then you have tenure and you’re on the hiring committee, and you can make sure the little pecker gets what’s coming.
Sandy March 11, 2005
James, James, James….So young and yet so jaded…Tsk, Tsk
Tom March 11, 2005
Awesome. Here’s something that you should tell your graduate students whenever you have them: No one ever got a job because s/he’s a good critic.
In fake sciences like Political Science, what usually happens is some graduate student comes along who knows more statistics than his advisor, and realizes that the advisor is doing his analyses wrong. (Mom, I hope you’re reading this.) There is a story at Yale from just four years ago, right when I started. There is a famous professor with a huge endowed professorship in our department who has a pet theory that he protects with his life (the theory that democracies are less likely to fight each other than democracies vs. dictatorships). Well, he had a graduate student collect his data, and that graduate student, being smarter at statistics, realized that the professor was doing the analyses incorrectly. He even said, “Professor, you’re doing these wrong.” The professor didn’t want to hear it. So, after some soul-searching about academic integrity and search for the truth, the graduate student teamed up with a younger professor who just received tenure, reran the analyses correctly, and found that the theory is wrong. So they published it. It made a HUGE splash.
But what of this graduate student? He finished his dissertation, but somehow, no job was available. Remember, this is a brilliant student. So now he works at McKinsey, and made six figures his first year on the job.
James March 11, 2005
Wait, I’m confused. Didn’t Kant have that pet theory 200 years ago. Didn’t he already publish it? Wasn’t it called “Perpetual Peace”? Isn’t this professor a hack?
Tom March 11, 2005
Yeah, this guy has updated Kant and called it “Democratic Peace Theory.” It’s all about Kantian liberalism. Democracy, trade, and international organizations. This Professor’s contribution was to prove it using statistics…not just saying “it makes sense” like Kant did, but actually to show it. Then his graduate student comes along and shows that the statistics don’t work. Whoops.
James March 15, 2005
I liked the Economist’s Kosovo-War-disproven McDonald’s theory of world peace better. More common man.