We are all Jeffersonians Now?
Napier, Ophuls, and Shvets on The Age of Debt
“If the past is another country, then Rome is another planet. And yet, that planet colonized the one we now inhabit,” Cullen Murphy in Are we Rome?
Recently, I’ve been reflecting on the value of a liberal education. As much as many have been led to believe by the inertia of previous generations, education is not the escalator to the good life it is often made out to be.1 To the extent that education offers those benefits to some, it is largely due to the networks formed when students are pretending to study. There is good reason why students so often fail to hit the books, because for most of us, it is an extraordinarily inefficient mechanism to acquiring insight. In normal times, students will prefer the tried and true way of achieving success by cultivating a network. Unless a student is fortunate enough to receive mentorship to overcome the ignorance trap, the hours spent on the alternative, toiling to understand curved lines on the page and screen, will be wasted because they will fail to make the necessary connections to absorb the material. They will simply read the words without spending a moment’s reflection, breathing their inner life to those words.2
And yet, I’m prepared to share a more limited value of university education. From my interactions with classmates and professors, I recall these fleeting thoughts that left an impression, stopping in the moment to note that this idea is significant in ways my ignorance could not comprehend. They are thoughts which alert the thinker to future wanderings. That which was an imprecise feeling becomes conscious reflection that one lives in a revolutionary world, and brings the underlying significance of those ideas into sharp relief.
Truth is for Walking
Two macro analysts, Russell Napier and Viktor Shvets, similarly composed to blurb their respective books, The Asian Financial Crisis and The Great Rupture, have vivid metaphors for standing at the the precipice which leads into the vortex of a revolutionary world. Napier’s reflections on his first-hand experience arriving in Hong Kong when the bull run began to gain steam appealed to an image set forth by the Duke of Wellington. In “the business of life”, completeness is a useless pursuit. There can only be varieties of ignorance such that the observer endeavors to find out what they don’t know by what they do; called ‘guessing what was the other side of the hill’. Seeking truth from facts.3
Wise men like Napier and Shvets are under no illusions that their empiricism brings them closer to Truth. Truth is a bit like Galeano’s characterization of Utopia; you take one step forward, and the desired object only recedes further into the horizon. While reflecting on his time crisis fighting at the IMF amidst the fallout of the Asian Financial Crisis, Stanley Fischer demonstrated the dominant methodological influence of Karl Popper at LSE in the 1960’s. He channeled another British brain, Michael Oakeshott:
Like Midas, the Rationalist is always in the unfortunate position of not being able to touch anything without transforming it into an abstraction.
Fischer continues by noting that he followed the classic conservative trajectory, from a student who believed in the transformative potential of theories only to see that potential betrayed as soon as he left university. Fischer was part of the 60’s generation of economists (Robert Gordon was another) who were led astray by hydraulic Keynesian assumptions.4 His appreciation of the policy mess only grew as the late 60’s passed into the late 90’s, which he interpreted at the time as the first modern, capital-account driven financial crisis, a fate laid by the new-fangled machines of the ICT revolution.5 Robert Gordon knows this tragic arc of hubris and nemesis well. They were the moments when securitization and finance’s mission to serve as a duty-bound intermediary transformed into something more purely speculative, a phase transition that began precisely in the year productivity started to decline, Mackenzie noted in his book on HFT.
Appreciation of the policy mess is a productive good. As a liberal, there is very little I have to disagree with Michael Oakeshott’s core belief that the aim of adjudicating disputes and seeking balance within any complex society is not “primarily the science of setting up a permanently impenetrable society, it is the art of knowing where to go next in the exploration of an already existing one.” Recall the Duke of Wellington’s image “on the other side of the hill” intended to portray humanity’s frustrating relationship to rationality. So long as there are barriers occluding vision, and to the extent initial barriers are removed only increase awareness of that occluded vision, science will always be elusive. But the art of climbing on the other side of the hill may serve as a useful internal motivator. Truth, like Utopia, is for walking.
Science, the notion that all relevant observable characteristics can be synoptically catalogued, invariably contain surprises Robert Gordon and his young cohort of Keynesian economists discovered with the unravelling of the Phillips Curve. And I think it is fair to claim that both national and global Keynesianism were failed attempts to fortify society with impenetrable stability. For this reason, those entrepreneurs most deeply committed to Oakeshott’s conservative morality, like Milton Friedman, reserved their most acerbic attacks for Soviet Marxism, on the one hand, and hydraulic Keynesianism, on the other. Revealingly, they had much less to say about Keynes in his original form, presumably because the art was still substantially preserved.
The danger of treading down the path of Friedman and his acolytes lies not in monetarism as an opposite art form, as it was sold. With the benefit of hindsight on the hyperatrophy of finance and concentration of market power, we know now the opposite of art is not science, but blind withdrawal. Appreciation of the policy mess, an insight Keynes, the ambiguity loving free spirit of the Bloomsbury set, surely would have acknowledged, has morphed into an utterly rapid reification. The market giveth, the market taketh, blessed be the name of the market.
Crisis has a way of shaking this faith. Viktor Shvets cites an authority, David Hackett Fisher in The Great Wave, which more accurately conveys the precise dimension of epistemology invigorated by crisis. We are but lonely and weary ship passengers, riding aboard a sailing vessel of the national state which cannot be steered, trying to perceive the outlines of the future amidst a violent storm. Crisis sets the lonely traveler away from science and casual nonchalance toward a constructive retrieval of art. Retrieval of the artistic elements which are thought to be hopelessly antiquated and may seem small with respect to the grand but grotesque attempts to remake man, both as they played out in the horrors of the 20th century and may be unfolding in the 21st.
In actuality, they are the blueprint behind the progressive rallying cry, Go Big. That vision isn’t afraid to state the fatal defect of the global financial architecture tried by a series of fires of developing world financial crises. Deriding by everyone ranging from Robert Hockett to Paul Volcker as “a non-system”, the allocations for fire fighting are hopelessly ill-equipped to deal with scale and scope of the challenge. Moreover, there is hardly a second thought devoted to the wisdom that any self-respecting “system” should contain some mechanism dedicated to punishing arsonists as vigorously as other vandals.
A reader recently put it to me more bluntly—we are witnessing a biblical story disguised as an economic one. Economics is not to be discarded, as certain segments and only those segments must be purged of their sin via modern techniques. Economics is the method, but the aim ought to be probe deeply into the soul of neoliberal order to identify sins distorting housing markets or global trade imbalances and remove them.
Bernanke, Hockett, and Napier don’t waste a single breath explaining the two are in fact related. The chronology is a solid match as well; the global financial architecture began to unravel at the moment home prices began to spiral out of control in 1995, ushering in the second Gilded Age and heightening the distance between Keynes’ “utopian” ideal and “pragmatic” perversion, Hockett wrote in his Bretton Woods 1.0 paper.
Perrow on Abandoning Complexity: We are all Jeffersonians Now
I revealed on Twitter that my philosophical influences hail almost exclusively from thinkers residing on a small island of an even tinier SE corner, John Maynard Keynes and Bertrand Russell, who wrote of an ethico-economic unity, melding the method and soul. A related idea is the aspirational fusion between cleverness and wisdom. Economics, both at its best devising instrumental variables to conduct natural experiments, and at its worst is the belief that cleverness rules the world. Their envious colleagues in the philosophy department shout at the economists from across the hall that they are right and the world is worse off for it:
“The real product of genuine analysis is not solutions but wisdom.6 To wit, understanding that excessive complexity is both costly and perilous and that management in the sense of control is not achievable. This would lead us to see that the proper way to “manage” civilization is by not letting it become too complex….To revert to the financial metaphor, to prevent busts, one must stop [immensely popular] booms from happening in the first place….So wisdom consists in consciously renouncing immoderate greatness,” William Ophuls, articulating the ancient Greek principle of sophrosyne (self-restraint, sense of proper limits) in Immoderate Greatness.
This is the management theorist Charles Perrow’s conclusion in Normal Accidents that the only way to manage systems of interactivity complexity and tight coupling (sequences that must proceed toward unifinality) is to abandon them. A progressive Small is Beautiful twist to what I characterized as a Friedmanite withdrawal. In the rivalry that forged a nation between busy merchants who demonstrated faith in the magic of the (credit) market and agrarian slaveholders with sufficient leisure time to learn the lesson of immoderate greatness, we are all Jeffersonians.
On Fleeting Impressions
The Perrow connection brings me to where I started on the value of learning at university, which I characterized as the surprisingly deep impressions left by a single fleeting thought. When my LSE seminar went down the list of well-known management failures, great planning disasters, ending on the validity of Perrow’s abandonment conclusion, I offered an invitation to consider an application which I thought to be obvious, financial weapons of mass destruction. Though something can hardly be said to be “obvious” if it lacks concrete evidence. I needed prompting by the seminar lead to elaborate, and could do little more than blabber on about Dodd-Frank.
Good lawyers know that the absence of substantiating evidence does not mean there is no case. The case is simply a difficult one because the burden of proof rests on the Jeffersonian followers of Perrow hoping to persuade others solely based on risks which have not yet materialized.
Over the long arc of human history, the exponential increase in composites of social development—sometimes applied to foster connection via urbanization and information technology and other times wielded to destroy through enhanced war-making—was still cumulatively progressive. Until 1870, the only problem that mattered for humanity it had developed too little complexity. The benefits of the Hamiltonian strategy of leaning into complexity were clearly seen after 1870 during the long 20th century.
Relatedly, another fleeting moment that left a disproportionately deep impression was the way my first macro lecture at UCSD began with a slide depicting US GDP over time. The professor quizzed the class for two observations: (1) the rise in GDP is remarkably consistent; (2) during brief periods, GDP does not only deviate from trend, but declines absolutely. The macro analyst, Lyn Alden, presented a version of this same pattern this week with a marker many Americans associate just as strongly with progress—home prices.7 Her point of emphasis was that it takes a major banking crisis for home prices to decline by even 10 percent on an annual basis. In each instance, to emphasize that the deleterious effect of a deep, severe financial crisis on economic progress is to ignore the main event—the overall magnitude of compounding progress.
Given this enormous progress, the student who applies Perrow’s critique to financial system has a difficult time keeping their distance from what Krugman bemoaned in a recent NYT column as monetary hawkishness. The trick is to know when hawks can be safely dismissed, and when their advice, which absurdly never changes, should be heeded. Cassandras like Tom Hoenig may be cranks, but they have a record of imparting wisdom at civilizational junctures. That Faustian point was made in a 2016 book, Between Debt and the Devil:
We seem to need credit to grow faster than GDP to keep economies growing at a reasonable pace, but that leads inevitably to crisis, debt overhang, and post-crisis recession [or, hysteresis, Greek for that which comes later]. We seem condemned to instability in an economy incapable of delivering balanced growth.
Restoring balance is the clarifying directive to the abandonment principle. Like its cousin, the precautionary principle, its chief demerit is that it implies a cold turkey binary which leaves little room for the art of knowing where to go next. Some of my classmates intuited this tension in my LSE seminar. The tension will never be entirely resolved, and for this reason, curious onlookers know they can always set their gaze on something on the other side of the hill.
Here is the first shadow I encountered on the other side:
Viktor Shvets has a number of riffs in his book, The Great Rupture, which appear to contradict the reams of literature my economics of education professor at UCSD, a wonderfully nice Canadian Julian Betts, pointed to on persistence of the college wage premium in an era of skill-biased technological change. During the era of spreading mass education, known as The Great Compression, technology pushed up IQ’s, as the broad middle manager class raced to keep up with their gadgets. This was the Flynn effect in action. Coincidentally, around the same time the discourse shifted from Keynesianism to Greed is Good business school ideologies led by Michael C. Jensen, new technologies relieved many of these middle managers of their duties, justifying enormous compensations from a much narrower executive class at the upper tail of the IQ/talent distribution. Returns to IQ, while less consistent, still held in a step-wise manner. Shvets believes the core of The Great Rupture is a technological phase transition when returns to IQ absolutely decline for everyone. What will we [the investor executive class] do with our time, he asks? Presumably write books like The Great Rupture. What about the others who are not similarly inclined? Related:
In his review of Slouching Towards Utopia, the econ blogger, Noah Smith, noted that reading the book is like entering the Delongverse. While at times disorienting, this is the highest compliment to any writer that novices should aspire to. The purpose of words is to disorient, Keynes once implied.
If you follow the link, you will see the phrase is a 40’s Yan’an era Mao quote, not originally Deng. Currently reading a very interesting, but difficult to access, book on that critical period of Chinese history, How the Red Sun Rose. One key claim from the author, Gao Hua, is that Mao would take the Stalinist assault against rivals, by labeling them as “empiricists”, even further than Stalin.
Fischer’s time at LSE overlapped with another towering economist of the Keynesian era, Phillips of the Phillips curve.
See also Napier’s emphasis on new technologies for reason why the Asian Financial Crisis was different from all others that preceded it. They facilitated a modern form of bank run with portfolio investors rather than bank depositors. Similarly, Arthur Toffler admirer, Newt Gingrich, remarked during the Mexican peso crisis that it was “the first crisis of the 21st century”.
Responding to a stray comment I made on Twitter, PolicyTensor suggested a parallel distinction between solutions and wisdom in specific fields of investing and military strategy. The novice seeks to optimize returns and speaks in tactical terms, while the wise investing sage seeks to insulate his portfolio, as best he can, from risk and speaks in logistical terms.