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Crashes, Crises, Coaching?

Harold James—

Economics is not homogenous, especially at the moment. Orthodoxy is challenged, heterodoxy is in, there are calls for new textbooks and New Economic Thinking. Each different style of thinking appears as a response to radically changing circumstances. Economic thought is strongly contingent. Who coaches the would-be new thinkers?

When big economic shakeups occurfinancial crashes, stock market panics, rising unemployment, surging pricesit is very easy to let the imagination rip, to fear the worst. There is a ready script for prophets of doom, Cassandras: we suddenly think we can’t go on as before. The modern version of this script was provided by Karl Marx (with his co-author Friedrich Engels in 1848), in the aftermath of a hunger crisis that drove a business depression and fiscal and monetary crisis, and then political and social revolution as well.

Marx was terrific at producing resounding phrases for Wagnerian doom (Marx and Wagner were near contemporaries, with both participating in the 1848 revolutions). Marx’s prose is incandescently mobilizing: “The knell of capitalist private property sounds. The expropriators are expropriated.”1 And crises are inevitable as well as apocalyptic. “A new revolution is only a consequence of a new crisis. The one, however, is as sure to come as the other.”2 But as crises cameand (most significantly) also wentMarx became more worried about how to understand them, and by the 1860s was observing that there were “oscillations,” in which “the scale of production which marked the highest point of prosperity in one period of the commercial cycle, becomes the starting point of the subsequent period.”3 He was discovering the business cycle.

The yearning for radical collapse constantly accompanies moments at which capitalism appears to be in crisis. I remember a chance meeting in the fall of 1987, just after a large stock market crash, with almost exactly the same short-term decline as the celebrated Wall Street crash of 1929, but which had almost no serious longer-term economic effects. I was in the courtyard outside the Princeton History Department in Dickinson Hall, and saw my distinguished older colleague, the Marxist historian Arno Mayer, in conversation with the then recently retired chairman of the Federal Reserve Board, Paul Volcker, an intellectual as well as a physical giant at six feet and seven inches. Mayer said, “Now at last capitalism has ended.” Volcker smiled back and muttered, “Hmmm.”

There is also an alternative script for crises, that something massive needs to be done to correct a major imbalance in the macro-economy. And that version is the comforting opposite of Marx, at least to those who do not want an apocalypse. That vision too has tremendous resonance: and it follows a firm pattern brilliantly laid out by the British economist John Maynard Keynes. The Great Depression was above all a demand shock, induced in large by contagious financial crises. It made sense that governments had a responsibility to stabilize aggregate demand, by fiscal spending; and, in a complementary vision laid out in the 1960s by Milton Friedman, that the money supply needs to be stabilized.

Business cycle theorists thought in terms of waves, but Keynes had a vision in which the waves got stuck, and the individual dynamos, the entrepreneurs with the “animal spirits,” were paralyzed. It wasn’t the entrepreneurs’ fault. They were, he wrote in the 1930s, “suffering what the ignorant might mistake for the fate of the common gambler, but in truth crushed between the ice-bergs of a frozen world which no individual man could thaw and restore to the warmth of normal life. The spectacle of capitalists, striving to become liquid as it is politely called, that is to say pushing their friends and colleagues into the chilly stream, to be pushed in their turn by some yet more cautious fellow from behind, is not an edifying sight.”4

Both the Keynesian and the Friedmanite recommendations were highly apposite in tackling the 2008 financial crisis. Keynes was rebornit was the return of the Master, as Robert Skidelsky, Keynes’s greatest biographer put itand at the Fed, Ben Bernanke had promised to apply the lessons from Friedman’s study of the Great Depression. But both mechanismsstabilizing fiscal demand and forestalling a collapse of the money supplylooked too easy, too obviously available as solutions. They were largely misplaced as responses to the negative supply shock that followed the Covid pandemic. The monetary boost in particular fueled an asset price boom, that accentuated inequality.

Now we are in a quite different world. Shortages and the problems they inducewhat economists think of as negative supply shocksinduce a different kind of analysis, and consequently an alternative policy conclusion. Those type of shocks lead to a focus on the microeconomics of adjustment, including prices. Friedrich Hayek, who is often seen too simply as Milton Friedman’s comrade-in-arms, attacked both Keynesians and monetarists. His later, more philosophical, writing provided a warning against the presumption of any individual—or authority—of knowing too much. That includes following any particular script when it comes to dealing with economic crises. “The Socratic wisdom that the recognition of our ignorance is the beginning of wisdom has profound significance for our understanding of society.”5 Hayek disliked thinking in aggregates—including monetary aggregates. He complained about the way a scientistic approach to social phenomena had led to what he called the engineering approach (he added that in Stalin’s Russia artists were described as “engineers of the soul”): the engineer was “not taking part in a social process in which others may take independent decisions but lives in a separate world of his own.”6 He was taking up an old Austrian tradition—which in British and French thought came out as marginalism—in which the fundamental insight is that prices coordinate action in a world which is as a totality unknowable.

The outcome of big negative supply shocks, such as the 1840s (around Europe’s desperate food situation) or the 1970s (with energy and commodity shocks), was rather surprising. In terms of the overall story of globalization, it pushed more, rather than less globalization: there was an opening up of trade. What economic historians now call the first era of globalization followed the desperation and scarcities of the 1840s; our modern era (or a second globalization) came as a response to the oil shocks and the political turmoil of the 1970s. Maybe a new wave of focusing on scarcity and supply constraints—for computer chips, medicines, rare earths as well as energy and food (where old crisis scenarios are played out again)—will produce a new realization that opening is needed. But if that comes, it will also come as a result of an intellectual revolution in which analysts grope towards a new way of seeing problems.

How much now is knowable? The answer is much, much more than it was at the time of Marx or Keynes. In the modern formulation, the key is micro data, not the macro approach. The exemplar that might serve as a model is Raj Chetty, whose massive statistical work focuses on big data that allows finely tuned policy responses, responses intended to alter particular and individual reactions that would increase general welfare. Chetty’s work cast a harsh light on the fading of the American dream of mobility. Children growing up in low-income families have very different social mobility outcomes depending on where they grow up. The result was expressed in stunning visualizations: above all in maps that could be expanded and honed in on the computer screen. The most famous product was a series of maps published in 2013. There were international comparisons of locational advantage and disadvantage: “Your chances of achieving the American Dream are almost two times higher . . . if you are growing up in Canada than in the United States.”7 But above all the comparisons were between different areas, even different parts, of the same city. And the possible outcome is then a realizable goal—not an apocalypse. As Chetty put it: “The big-picture goal is to revive the American dream. We are not trying to do something that is unimaginable or has never happened. It happens just down the road.”8

If inequality is the great problem coming out of the aftermath of both the Global Financial Crisis and the pandemic, turn to the particular circumstances that engender vast disparities. The macro responses that were originally appropriate back in 2008, when demand collapsed, by contrast look too undifferentiated.

The older scripts for dealing with crisis insist that when something big goes wrong, something really big needs to change. The now available—and now much more attractive – alternative is to think that when something big goes wrong, we really don’t know too much, and many many small things need to change. Keynes saw something of this side of crises as generating the possibility of creative response. In 1919, at the height of geopolitical uncertainty in the aftermath of the First World War, he feared that “All this makes it increasingly probable that things will have to get worse before they can get better.”9 But we learn most when the present is most dismal. That’s when we really do the rethinking: crises and crashes deliver the coaching that we need.

  1. Karl Marx (ed. Friedrich Engels), Capital: A Critical Analysis of Capitalist Production (London: Lawrence and Wishart, 1973 [1887]), vol. 1, p. 715.
  2. Karl Marx, “Manufactures and commerce,” New York Daily Tribune, September 23, 1859.
  3. Ibid.
  4. John Maynard Keynes, Collected Writings, Cambridge University Press, 1978, Vol. XXI, pp. 89-90.
  5. Friedrich A. von Hayek, The Counter-Revolution of Science: Studies on the Abuse of Reason (Glencoe, Ill.: Free Press, 1952), pp. 94-5.
  6. Ibid.
  7. Gareth Cook, “The Economist Who Would Fix the American Dream,” The Atlantic, August 2019,
  8. Ibid.
  9. John Maynard Keynes to Gerard Vissering, January 31, 1920 in Keynes, Collected Writings, Cambridge University Press, 1978, XVII:150.

Harold James is the Claude and Lore Kelly Professor in European Studies and professor of history and international affairs at Princeton University. He is the author of numerous books, including The War of Words: A Glossary of Globalization. He lives in Princeton, NJ.

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