The past few years have been tough on economics and economists. In a searing indictment written one year after the collapse of Lehman Brothers, Paul Krugmanconcluded that
the central cause of the profession’s failure was the desire for an all-encompassing, intellectually elegant approach that also gave economists a chance to show off their mathematical prowess. Unfortunately, this romanticized and sanitized vision of the economy led most economists to ignore all the things that can go wrong. They turned a blind eye to the limitations of human rationality…to the problems of institutions that run amok; to the imperfections of markets…and to the dangers created when regulators don’t believe in regulation.
Last August, Graeme Maxton published a book arguing that “modern economics has failed us,” and this April, theNew York Timeshosted a roundtable “about how the teaching of economics should change in light of the financial crisis.”
This soul-searching has led to the establishment of organizations such as theInstitute for New Economic Thinking and invigorated discussions about alternative metrics for gauging countries’ welfare (last July, in fact, the UN General Assembly adopted a resolution asserting that “the gross domestic product indicator by nature was not designed to and does not adequately reflect the happiness and well-being of people in a country”).
To get the pulse of a field in flux, I asked eight of the world’s top young economists to identify the biggest unanswered questions in economics and predict what breakthroughs will define it a decade or two hence.
Why are developing countries poor? In terms of impact on mankind globally, this strikes me as probably the biggest and most important current economic question. I think the answer is complex and linked to a combination of factors around history, geography, luck, etc. I am personally working on management practices: people in developing countries are poor because wages are low, and wages are low because firms are very unproductive, and firms seem to be unproductive in large part because of bad management. An Indian worker makes in one week what an average U.S. worker makes in a half a day. One big factor seems to be that factories in India are frankly very badly managed: equipment is not looked after, materials are wasted, theft is common because inventory is not monitored, defects keep occurring, etc. In a recent project with the World Bank, we found in randomized experiments that giving simple management advice to Indian factories increased productivity by 20%, and I suspect that a number like 200% would be possible in the longer run.
Developed countries’ biggest question now is probably: how do we restart growth? There are a lot of issues here around innovation, curbing entitlement spending, etc. The area I know best is the short-run side of this, controlling policy uncertainty. A big factor that politicians and the media are pushing heavily right now is that growth is getting crushed by how policy has induced uncertainty. Basically, firms and consumers in the U.S. and Europe are holding back from spending until they know what is going to happen with taxes, spending, and (to a lesser extent) regulations over the next year or so. In the U.S., we have the November 2012 election generating a massive cloud of policy uncertainty, and in Europe, a rolling wave of elections and collapsing governments.
I do not think that any one single breakthrough will happen. The progress is likely to be heavily empirical—simply because more and more data is becoming available, and it is easy to analyze with fast computers (so empirics is now advancing faster than theory)—and spread across many hundreds of topics. So economics has gone from Victorian science, where one genius in his shed could invent the steam engine over the weekend, to industrial science, where innovation comes in thousands of tiny steps made by dozens of research teams.
Many economists are concerned with two broad questions: how can we increase the rate of economic growth and overall well-being, and how can we reduce the rate of poverty? Countless policies—taxation, education, healthcare, etc.—have been implemented in an effort to achieve those objectives. One of our biggest challenges is to distill each policy’s unique impact so that we can understand which ones actually work and which ones do not.
The traditional state of economics is captured by the joke about ten economists, each of whom has a different theory of how the world works, none of which is directly tested or verified. Looking ahead, I am most excited about the prospect of having clear, evidence-based answers on which policies have the most beneficial economic impacts. I am especially optimistic that the expansion of access to large administrative datasets, such as earnings data from social-security records or student-achievement data from school districts, will yield sharp, quasi-experimental evidence that allows us to test theories and estimate key parameters of economic models. While theory will play an important role in guiding this research, its assumptions and conclusions will increasingly be empirically founded.
Within this broad area, I plan to pursue research on two sets of projects over the next few years. The first will try to identify the determinants of intergenerational mobility, with an eye towards finding policies that increase equality of opportunity. Should we be focusing on increasing access to higher education? Changing the structure of elementary schooling? Revamping the tax code? A second set of projects will explore the implications of behavioral economics for policymaking. Although we have accumulated considerable evidence showing that people do not always behave rationally, we do not have as good a sense of how they actually do behave and what this means for policy. I hope to make progress on this front, focusing on how we can design cost-effective policies that encourage people to save adequately for their retirement—to give just one example.
I think the recent world economic crisis has firmly put back on the map basic macroeconomics: that is, the study of traditional questions, such as how to use monetary and fiscal policy to eliminate unemployment and control inflation. It was actually becoming quite unfashionable within economics to study these types of questions, even though they remain unanswered to a large extent. People even graduated with PhDs in economics with little idea about what role, if any, the government plays in stabilizing business cycles, the role of regulations, and so on. Instead, it was becoming increasingly fashionable to tackle smaller but more manageable questions for which data is rich and answers clear.
My guess, therefore, is that if one looks back 20 years from now, one will notice that a shift occurred towards studying the basic, big-picture, policy-relevant questions of macroeconomics—e.g., optimal currency areas, bank runs, fads and herding in financial markets, and automatic stabilizers—that have the power to change the course of history. I think there have been two comparable events that shaped the field in this way. As a discipline, macroeconomics was born in response to the Great Depression, giving rise to Keynesianism; the rational-expectations revolution in macroeconomics was born in response to the great inflation on the 1970s.
Perhaps somewhat under the radar, the past two decades have witnessed the integration of the macroeconomics that came out of the 1970s and 1980s with basic Keynesian models developed in the wake of the Great Depression. I suspect that the current crisis will accelerate that development, with models integrating financial frictions that were clearly central to its emergence.
The most central open question in economic theory, as I see it, is how to model realistic economic agents. Traditionally, economists have relied on the rational-actor model, but it is clear that it is just a rough caricature. It has been greatly enriched by behavioral economics in the past 30 years. Still, we are far from a unified, versatile, believable alternative to the rational-actor model. I am hopeful, though, that this might be overcome—in part because of progress in the sister disciplines (psychology and neuroscience) and basic modeling, and also because empirical anomalies are forcing the economic profession to be more open-minded. Contributions by computer scientists and physicists will help inject new perspectives into economics.
The largest concrete questions in economics are, arguably, how to increase growth—particularly in developing countries—and how to avoid economic disasters and financial crises.
Progress in understanding limited rationality will lead to progress on answering the concrete questions. Low levels of growth are in part due to misapplied cognitive heuristics that lead people to be timid, inert, and gullible. Regarding disasters, during the unfolding of the crisis, traditional macro-financial factors (bank runs, deleveraging, etc.) have arguably been more important than behavioral factors. However, behavioral elements seem to have been paramount in the buildup of the current crisis (in particular, the neglect of tail events by financial actors and by the architects of the euro), as perhaps they are in most crises. The modeling of agents with bounded rationality will help us build economic models (in particular, macroeconomic and financial models) and institutions that better take into account the limitations of human reason.
All countries wish to pursue sustainable growth without large boom-bust episodes. How exactly one accomplishes this remains a challenge that has been made starker by the current crisis. In an increasingly globalized world, the search for answers will necessarily require a much deeper understanding of three areas that interest me. One, we need a better understanding of the interlinkages across countries in trade, finance, and macroeconomic policy. The crisis in the Euro area brings this to the forefront. The complex ties across the member countries via trade, via banks, and through a shared monetary policy are central factors behind the ongoing sovereign debt, banking, and growth crises in the region. While trade interactions are better understood, financial flows remain a challenge.
Two, understanding the global economy requires a greater appreciation of the differences across economies. In the past, research mainly focused on analyzing interactions across economies that were similar in terms of their stages of development and their economic institutions. The most interesting questions today, however, concern interactions between developed economies and fast-growing developing economies, and between countries with diverse economic institutions. Questions on so-called global imbalances, currency wars, and capital controls have to do with interactions across diverse countries.
Three, understanding asymmetries in the international monetary system—with the prominence of the dollar in trade and financial transactions—will be crucial to understanding the propagation of shocks across economies. In my research, I find that international prices, regardless of what currency they are set in, respond very little to exchange rates. Since the dollar is the predominant trade currency, this implies that exchange-rate movements have a much smaller impact on U.S. import price inflation than they do on inflation in other countries.
Addressing these areas will require breakthroughs in theory and empirical work, with more micro-level datasets on prices, trade, and capital flows being brought to bear.
My candidate for the biggest unanswered question in economics is the status of the rationality postulate: the decision to analyze actors as utility maximizers with consistent preferences. If we view economics as an “engine” for understanding the world, the rationality postulate was that engine in nearly all of economics until quite recently. The rise of behavioral economics has challenged the usefulness and, in a more subtle but radical way, the legitimacy of the rationality engine. While only a minority of economists would describe themselves as “behavioralists,” behavioralism has affected many more by influencing the kinds of questions economists consider important to ask and influencing the kinds of answers to those questions they consider illuminating. These influences have the potential to profoundly affect the way economics is done, and thus what economics is able offer our understanding of the world.
At the moment, most behavioralism avers merely to “fine tune” the rationality engine rather than replace it. But even such tuning can have and, as I intimated a moment ago, I think has already had, a noticeable impact on how a growing number of economists and those following them interpret society. To the extent that economists’ view of, say, markets as reflecting rational vs. irrational systems—or, more specifically, their interpretation of economic crises as the product of markets responding rationally to poor policy vs. the product of endemic irrational decision-making—either directly or indirectly influences public policy, the way in which the status of the rationality postulate is resolved will not merely shape what economists are doing. It will shape the kind of society we inhabit.
In his famous 1945 article, “The Use of Knowledge in Society,” F. A. Hayek argued that despite their inequity and inefficiency, free markets were necessary in order to allow the incorporation of information held by dispersed individuals into social decisions. No central planner could hope to collect and process all the information necessary for social decisions; only markets allowed and provided the incentives for disaggregated information processing. Yet, increasingly, information technology is leading individuals to delegate their most “private” decisions to automated processing systems. Choices of movies, one of the last realms of taste one would have guessed could be delegated to centralized expertise, are increasingly shaped by services like Netflix’s recommender system. While these information systems are mostly nongovernmental, they are sufficiently centralized that it is increasingly hard to see how dispersed information poses the challenge it once did to centralized planning.
Information technology thus fundamentally challenges the standard foundations of the market economy. For many years to come, economists will increasingly have to struggle with this challenge. Some will harness the power of the data and computational power provided by information technology to provide increasingly precise and accurate prescriptions for economic planning. Others, who value the libertarian tradition that has often been associated with economics, will be forced to articulate other arguments, perhaps based on privacy, that are not susceptible to erosion by the increasing power of centralized computation.
Economics is in the midst of a massive and radical change. It used to be that we had little data, and no computing power, so the role of economic theory was to “fill in” for where facts were missing. Today, every interaction we have in our lives leaves behind a trail of data. Whatever question you are interested in answering, the data to analyze it exists on someone’s hard drive, somewhere. This background informs how I think about the future of economics.
Specifically, the tools of economics will continue to evolve and become more empirical. Economic theory will become a tool we use to structure our investigation of the data. Equally, economics is not the only social science engaged in this race: our friends in political science and sociology use similar tools; computer scientists are grappling with “big data” and machine learning; and statisticians are developing new tools. Whichever field adapts best will win. I think it will be economics. And so economists will continue to broaden the substantive areas we study. Since Gary Becker, we have been comfortable looking beyond the purely pecuniary domain, and I expect this trend towards cross-disciplinary work to continue.
START WITH THE EVIDENCE: Addressing weaker demand and the wage gap is key to recovery
A worker protesting against unemployment benefit cuts in California. In countries like the US, routine jobs done by the unskilled or the moderately educated have been automated or outsourced. AFP pic
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TO understand how to achieve a sustained recovery from the Great Recession, we need to understand its causes.
First, overall demand for goods and services is much weaker, both in Europe and the United States, than it was in the go-go years before the recession.
Second, most of the economic gains in the US in recent years have gone to the rich, while the middle class has fallen behind in relative terms. In Europe, concerns about domestic income inequality are compounded by angst about inequality between countries, as Germany roars ahead while the southern periphery stalls.
Progressive economists argue that the weakening of unions in the US, together with tax policies favouring the rich, slowed middle-class income growth, while traditional transfer programmes were cut back. With incomes stagnant, households were encouraged to borrow, especially against home equity, to maintain consumption.
Rising house prices gave people the illusion that increasing wealth backed their borrowing. But, now that house prices have collapsed and credit is unavailable to underwater households, demand has plummeted.
The key to recovery is to tax the rich, increase transfers and restore worker incomes by enhancing union bargaining power and raising minimum wages.
But countries like Germany that reformed labour laws to create more flexibility for employers, and did not raise wages rapidly, seem to be in better economic shape than countries like France and Spain, where labour was better protected.
So consider an alternative explanation: starting in the early 1970s, advanced economies found it increasingly difficult to grow. Countries like the US and the United Kingdom eventually responded by deregulating their economies.
Greater competition and the adoption of new technologies increased the demand for, and incomes of, highly skilled, talented, and educated workers doing non-routine jobs like consulting. More routine, once well-paying, jobs done by the unskilled or the moderately educated were automated or outsourced.
The short-sighted political response to the anxieties of those falling behind was to ease their access to credit. Faced with little regulatory restraint, banks overdosed on risky loans.
While differing on the root causes of inequality (at least in the US), the progressive and alternative narratives agree about its consequences.
The alternative narrative has more to say. Continental Europe did not deregulate as much, and preferred to seek growth in greater economic integration. But the price for protecting workers and firms was slower growth and higher unemployment.
While inequality did not increase as much as in the US, job prospects were terrible for the young and unemployed, who were left out of the protected system.
The advent of the euro was a seeming boon, because it reduced borrowing costs and allowed countries to create jobs through debt-financed spending. The crisis ended that spending, leaving the heavy spenders indebted and uncompetitive.
The important exception is Germany, accustomed to low borrowing costs even before it entered the eurozone. Germany had to contend with historically high unemployment, stemming from reunification with a sick East Germany.
In the euro's initial years, Germany had no option but to reduce worker protections, limit wage increases and reduce pensions as it tried to increase employment. Germany's labour costs fell relative to the rest of the eurozone, and its exports and gross domestic product growth exploded.
The alternative view suggests different remedies. The US should focus on helping to tailor the education and skills of the people being left behind to the available jobs.
Rather than paying for any necessary spending by raising tax rates on the rich, which would hurt entrepreneurship, more thoughtful across-the-board tax reform is needed.
For the uncompetitive parts of the eurozone, structural reforms can no longer be postponed. But it is not politically feasible to do everything, including painful fiscal tightening, immediately.
In a nutshell, the fundamental eurozone dilemma is: the periphery needs financing as it adjusts, while Germany, pointing to the post-euro experience, says that it cannot trust countries to reform once they get the money.
The Germans have been insisting on institutional change, more centralised eurozone control over periphery banks and government budgets in exchange for expanded access to financing for the periphery. Yet, institutional change will take time, for it requires careful structuring and broader public support.
Europe may be better off with stop-gap measures. If confidence in Italy or Spain deteriorates again, the eurozone may have to resort to the traditional bridge between weak credibility and low-cost financing: a temporary International Monetary Fund-style monitored reform programme.
Such programmes cannot dispense with the need for government resolve, as Greece's travails demonstrate. And governments hate the implied loss of sovereignty and face.
As a reformed Europe starts growing, parts of it may experience US-style inequality. But growth can provide the resources to address that.
Far worse for Europe would be to avoid serious reform and lapse into egalitarian and genteel decline. Japan, not the US, is the example to avoid. Project Syndicate
Raghuram Rajan is a former chief economist of the international Monetary Fund and is professor of finance at the University Of Chicago
Elinor Ostrom, the only woman to win the Nobel Memorial Prize in Economic Science — an achievement all the more remarkable because she was not actually an economist — died on Tuesday in Bloomington, Ind. She was 78.
Elinor Ostrom at a press event in 2009 for her Nobel award.
The cause was cancer, according toIndiana University, where she taught for many years.
Professor Ostrom’s work rebutted fundamental economic beliefs. But to say she was a dark horse for the 2009 economics Nobel is an understatement. Not because she was a woman — although women in the field are still rare — but because she was trained in political science.
Professor Ostrom’s prizewinning work examined how people collaborate and organize themselves to manage common resources like forests or fisheries, even when governments are not involved. The research overturned the conventional wisdom about the need for government regulation of public resources.
At least it did for the economists who knew who she was and had read her work.
“The announcement of her prize caused amazement to several economists, including some prominent colleagues, who had never even heard of her,” Avinash Dixit, a Princeton economics professor, said when introducing Professor Ostrom’s work at a luncheon in 2011. Usually, he noted, Nobel laureates need no introduction.
In fact, when the Nobel recipients were announced, some economists mistakenly thought the prize had gone to Bengt Holmstrom, an economist with a similar-sounding (and, to economists, much more recognizable) name. One prominent scholar acknowledged visiting Wikipedia to figure out who exactly she was.
Surprise at Professor Ostrom’s honor, which she shared with Oliver E. Williamson, in some cases gave way to disdain and name-calling on economics blogs.
“Some things said about her in blogs and other media were so ignorant and in such bad taste that I felt ashamed on behalf of the economics profession,” Mr. Dixit said.
Professor Ostrom was not the first laureate to hail from outside the field. Previous recipients include Daniel Kahneman (psychologist), John Nash (a mathematician who was the subject of the book and movie “A Beautiful Mind”) and Leonid Hurwicz (trained in law).
As with these other winners, the outsider perspective Professor Ostrom brought to the field contributed to what made her work so groundbreaking. But the unconventional nature of her studies also made it difficult for her to find a foothold in academia earlier in her career.
“A lot of important questions are on the narrow borders between disciplines, but it is difficult to find a home for that kind of work,” said Marco Janssen, a mathematician at Arizona State University who collaborated with Professor Ostrom. “She had experienced many of these challenges over the years. Eventually she and her husband just created their own center for it.”
In 1973, Professor Ostrom and her husband, Vincent, who survives her, founded the Workshop in Political Theory and Policy Analysis at Indiana University. It would become the first of several interdisciplinary institutions she helped shape, and a locus for her collaboration with scholars across academia, including ecologists, computer scientists and psychologists.
Just as her academic habits emphasized collaboration and cooperation, so did the content of her study.
Traditionally, economics taught that common ownership of resources results in excessive exploitation, as when fishermen overfish a common pond. This is the so-called tragedy of the commons, and it suggests that common resources must be managed either through privatization or government regulation, in the form of taxes, say, or limits on use.
Professor Ostrom studied cases around the world in which communities successfully regulated resource use through cooperation. Her work has important applications forclimate change policy today.
Professor Ostrom’s research and Mr. Williamson’s related work on corporate oversight are part of a field known as institutional economics. Some economists still debate whether the field deserves a rightful place within the economics discipline.
Elinor Awan was born on Aug. 7, 1933, in Los Angeles, an only child. She often spoke about how growing up in the Depression had influenced her interest in cooperative institutions. She recalled helping her family grow food in a large garden and knitting scarves for soldiers. She received her bachelor’s, master’s and doctoral degrees — all in political science — at the University of California, Los Angeles.
As a researcher she was notable for conducting fieldwork, an unusual method that is admired by some economists but scorned by others. In 1964, when she was working on her dissertation, fieldwork was considered the province of anthropologists, not academics trying to answer economic questions.
“She would go and actually talk to Indonesian fisherman, or Maine lobstermen, and ask, ‘How did you come to establish this limit on the fish catch? How did you deal with the fact that people might try to get around it?’ ” said Nancy Folbre, an economics professor at the University of Massachusetts, Amherst, and a contributor to The New York Times’s Economix blog.
“In economics, every successive cohort of economists is trained to put greater emphasis on the arsenal of mathematical and econometric expertise,” Professor Folbre said. “That was just not what her work was about.”
A version of this article appeared in print on June 13, 2012, on page B20 of the New York edition with the headline: Elinor Ostrom, Winner of Nobel in Economics, Dies at 78.
Anna J. Schwartz, a research economist who wrote monumental works on American financial history in collaboration with the Nobel laureate Milton Friedman while remaining largely in his shadow, died on Thursday at her home in Manhattan. She was 96.
Anna J. Schwartz in 1982. Her book with Milton Friedman, “A Monetary History of the United States,” is considered a classic.
Her death was confirmed by her daughter Naomi Pasachoff.
Mrs. Schwartz, who earned her Ph.D. in economics at the age of 48 and dispensed policy appraisals well into her 90s, was often called the “high priestess of monetarism,” upholding a school of thought that maintains that the size and turnover of the money supply largely determines the pace of inflation and economic activity.
The Friedman-Schwartz collaboration “A Monetary History of the United States, 1867-1960,” a book of nearly 900 pages published in 1963, is considered a classic. Ben S. Bernanke, the Federal Reserve chairman, called it “the leading and most persuasive explanation of the worst economic disaster in American history.”
The authors concluded that policy failures by the Fed, which largely controls the money supply, were one of the root causes of the Depression.
Mr. Bernanke acknowledged as much when he spoke at a 90th birthday celebration for Mr. Friedman in 2002. “I would like to say to Milton and Anna: Regarding the Great Depression, you’re right, we did it,” he said. “We’re very sorry, but thanks to you we won’t do it again.”
Mrs. Schwartz was widely known in the profession as the co-author of much of the work that led to Mr. Friedman’s Nobel in economic science in 1976. Her supporters thought the prize might have justly been awarded jointly.
“Anna did all of the work, and I got most of the recognition,” Mr. Friedman said on one occasion.
After Mr. Friedman’s death in 2006, Mrs. Schwartz “became the standard-bearer” of Friedman monetarism, said Michael D. Bordo, a professor of economics at Rutgers University and for decades a Schwartz collaborator himself.
Though “not a deep theorist,” he said, Mrs. Schwartz was “probably the best woman economist of the 20th century.”
During the financial collapse that began in 2008, she was one of the few economists with a firsthand recollection of the Depression. After praising early moves by Mr. Bernanke, she wrote, at age 93, a bitingly critical Op-Ed article for The New York Times in July 2009 opposing the reappointment of the Fed chairman who had been so influenced by her work.
She contended that Mr. Bernanke had erred in producing “extreme ease” in monetary policy and in failing to warn investors that new financial instruments were difficult to price.
Mrs. Schwartz also held that the government had been a bigger contributor to the crisis than had been widely realized. By her measure, the government had oversold the benefits of homeownership, pushing Fannie Mae and Freddie Mac, the government-backed mortgage finance giants, to lend increasingly to lower-income borrowers and fostering exceptionally low mortgage rates.
A leading financial historian, Mrs. Schwartz was also an expert on the monetary and banking statistics of Britain and the United States. Besides her collaborations, she had a large body of work in her own name.
Her most visible public role was in 1981, when she agreed to be executive director of the 17-member United States Gold Commission, a Washington panel that was charged with recommending the future role of gold in the nation’s monetary system.
With little interest in a return to any form of gold standard, she and most other members of the panel, consisting mostly of political appointees, limited their recommendations to urging the government to mint gold coins.
Mrs. Schwartz was born Anna Jacobson on Nov. 11, 1915, in the Bronx, the third of five children of Hillel Jacobson and the former Pauline Shainmark, Jewish immigrants from Eastern Europe.
She was drawn to economics while still at Walton High School in the Bronx — “I found it more exciting than literature or foreign languages,” she said — and graduated from Barnard College at 18.
She worked for the Agriculture Department in 1936, the year she married Isaac Schwartz, whom she had met at a Hebrew summer camp. The couple raised four children. Mr. Schwartz, who was the financial officer for a Manhattan import company and had earned a master’s degree in classics from Columbia, died in 1999.
Besides Ms. Pasachoff, Mrs. Schwartz is survived by another daughter, Paula Berggren; her sons, Jonathan and Joel; seven grandchildren; and six great-grandchildren.
After five years at Columbia University’s Social Science Research Council, Mrs. Schwartz joined the National Bureau of Economic Research in New York in 1941 and continued to work there for more than 70 years. But she maintained her ties to Columbia, earning a Ph.D. there in her middle years.
It was at the National Bureau, a private, nonpartisan research organization that has been the nation’s semiofficial arbiter of business cycles, that Mrs. Schwartz met Mr. Friedman and his wife, Rose Director Friedman, who was also an economist. Rose Friedman had heard from mutual friends that the Schwartzes might have a baby carriage to lend.
Arthur F. Burns, the president of the National Bureau and a future chairman of the Federal Reserve, suggested that Mrs. Schwartz and Mr. Friedman work together.
The two of them — she in New York and he at the University of Chicago — formed a close relationship based on exchanges of drafts and ideas by mail. “I’ll write something and send it to him, and he’ll criticize it, and he’ll do the reverse,” she told a reporter for The Times in 1970 on the publication of their second major work, “Monetary Statistics of the United States: Estimates, Sources, Methods.” “The wonderful thing about this relationship is that neither of us takes offense if the other says it’s no good.”
Mrs. Schwartz did take offense, however, when Paul Krugman, an economist and an Op-Ed columnist for The Times, attacked the Friedman legacy in an article in The New York Review of Books in 2007.
She responded angrily that Mr. Krugman had mischaracterized the work and made “inaccurate forays into economic history” by attributing the Depression to a liquidity trap, a situation in which monetary policy fails to stimulate the economy by either lowering interest rates or expanding the money supply.
“She went ballistic,” Mr. Bordo said.
Even after breaking a hip in 2009 and having a stroke, Mrs. Schwartz, by then using a wheelchair, collaborated with Mr. Bordo and Owen Humpage, an economist at the Cleveland Fed, on a project tracing the history of governmental intervention in currency markets. “Anna never stopped,” Mr. Bordo said.
She often spoke about her successful collaboration with Mr. Friedman on their “Monetary History of the United States,” expressing elation that they had taken on an economic establishment with little regard for theories based on the importance of money.
Decades afterward, writing in The Cato Journal, a publication of the Cato Institute, the conservative public policy research organization, she quoted Wordsworth:
“Bliss was it in that dawn to be alive,/But to be young was very heaven!”
A version of this article appeared in print on June 22, 2012, on page A23 of the New York edition with the headline: Anna Schwartz, Economist Peer of Friedman, Dies at 96.
Dani Rodrik is a professor at Harvard University’s Kennedy School of Government and a leading scholar of globalization and economic development. His writings are a compelling combination of interna Full profile
The Nation-State Reborn
CommentsCAMBRIDGE – One of our era’s foundational myths is that globalization has condemned the nation-state to irrelevance. The revolution in transport and communications, we hear, has vaporized borders and shrunk the world. New modes of governance, ranging from transnational networks of regulators to international civil-society organizations to multilateral institutions, are transcending and supplanting national lawmakers. Domestic policymakers, it is said, are largely powerless in the face of global markets.
Illustration by Pedro Molina
CommentsThe global financial crisis has shattered this myth. Who bailed out the banks, pumped in the liquidity, engaged in fiscal stimulus, and provided the safety nets for the unemployed to thwart an escalating catastrophe? Who is re-writing the rules on financial-market supervision and regulation to prevent another occurrence? Who gets the lion’s share of the blame for everything that goes wrong? The answer is always the same: national governments. The G-20, the International Monetary Fund, and the Basel Committee on Banking Supervision have been largely sideshows.
CommentsEven in Europe, where regional institutions are comparatively strong, it is national interest and national policymakers, largely in the person of German Chancellor Angela Merkel, who have dominated policymaking. Had Merkel been less enamored of austerity for Europe’s debt-distressed countries, and had she managed to convince her domestic electorate of the need for a different approach, the eurozone crisis would have played out quite differently.
CommentsYet even as the nation-state survives, its reputation lies in tatters. The intellectual assault on it takes two forms. First, there is the critique by economists who view governments as an impediment to the freer flow of goods, capital, and people around the world. Prevent domestic policymakers from intervening with their regulations and barriers, they say, and global markets will take care of themselves, in the process creating a more integrated and efficient world economy.
CommentsBut who will provide the market’s rules and regulations, if not nation-states? Laissez-faire is a recipe for more financial crises and greater political backlash. Moreover, it would require entrusting economic policy to international technocrats, insulated as they are from the push and pull of politics – a stance that severely circumscribes democracy and political accountability.
CommentsIn short, laissez-faire and international technocracy does not provide a plausible alternative to the nation-state. Indeed, the erosion of the nation-state ultimately does little good for global markets as long as we lack viable mechanisms of global governance.
CommentsSecond, there are cosmopolitan ethicists who decry the artificiality of national borders. As the philosopher Peter Singer has put it, the communications revolution has spawned a “global audience” that creates the basis for a “global ethics.” If we identify ourselves with the nation, our morality remains national. But, if we increasingly associate ourselves with the world at large, our loyalties will expand, too. Similarly, the Nobel laureate economist Amartya Sen speaks of our “multiple identities” – ethnic, religious, national, local, professional, and political – many of which cross national boundaries.
CommentsIt is unclear how much of this is wishful thinking and how much is based on real shifts in identities and attachments. Survey evidence shows that attachment to the nation-state remains quite strong.
CommentsA few years ago, the World Values Survey questioned respondents in scores of countries about their attachments to their local communities, their nations, and to the world at large. Not surprisingly, those who viewed themselves as national citizens greatly outnumbered those who regarded themselves as world citizens. But, strikingly, national identity overshadowed even local identity in the United States, Europe, India, China, and most other regions.
CommentsThe same surveys indicate that younger people, the highly educated, and those who identify themselves as upper class, are more likely to associate themselves with the world. Nevertheless, it is difficult to identify any demographic segment in which attachment to the global community outweighs attachment to the country.
CommentsAs large as the decline in transport and communications costs has been, it has not obliterated geography. Economic, social, and political activity remains clustered on the basis of preferences, needs, and historical trajectories that vary around the globe.
CommentsGeographical distance is as strong a determinant of economic exchange as it was a half-century ago. Even the Internet, it turns out, is not as borderless as it seems: one study found that Americans are much more likely to visit Web sites from countries that are physically close than from countries that are far away, even after controlling for language, income, and many other factors.
CommentsThe trouble is that we are still in the grasp of the myth of the nation-state’s decline. Political leaders plead impotence, intellectuals dream up implausible global-governance schemes, and the losers increasingly blame immigrants or imports. Talk about re-empowering the nation-state and respectable people run for cover, as if one has proposed reviving the plague.
CommentsTo be sure, the geography of attachments and identities is not fixed; indeed, it has changed over the course of history. That means that we should not entirely dismiss the likelihood that a true global consciousness will develop in the future, along with transnational political communities.
CommentsBut today’s challenges cannot be met by institutions that do not (yet) exist. For now, people still must turn for solutions to their national governments, which remain the best hope for collective action. The nation-state may be a relic bequeathed to us by the French Revolution, but it is all that we have .
There is a growing gap between social need and the public resources available to spend on it. Photograph: Oli Scarff/Getty Images
In the midst of great wealth, we are creating a forgotten Britain. Our society's tectonic plates are shifting, and the consequences for the most disadvantaged will be profound.
Firstly, we face a growing gap between social need in this country and the public resources available to spend on it. We should not kid ourselves that the era of austerity will be limited to the current parliament. In the short term, the cuts are likely to get worse not better. In the long term, our ageing population means the demand on a range of social services is set to outstrip supply.
Secondly, the cuts are being implemented in the context of a growing democratic deficit. The government is devolving power to a local level, but greater power is not being accompanied by greater accountability. Local media is weak, only a third of us vote in local elections, and quangos such as the Audit Commission that once interrogated local decisions have been pared back or abolished.
Thirdly, our society is one in which the "haves" live increasingly parallel lives to those of the "have nots". The cabinet stands accused of being divorced from normal people, but the truth is that the fractures run deeper. Too many businesses are cut off from the hard reality in their own backyards. And across the board, charity leaders talk of public attitudes hardening, with greater suspicion of anyone who relies on public-funded support, be they disabled, mentally ill or unlucky enough to be raised as a child in a "feckless" family. As one charity CEO put it, we are becoming a less civilised society.
The result is that the worsening plight of swaths of our society flies under the national radar. The homeless, victims of domestic violence, those with mental health problems, the elderly and alone, children in broken homes – the support for these people looks likely to be eroded over the next decade, without the nation they are part of appearing to notice or care.
How do we avoid the spectre of a forgotten Britain becoming reality? The political class must rediscover its urgency on public service reform. A brutal logic is at play: if you remove billions from public services but leave them unreformed, the people who rely on them suffer. The government has simply not lived up to its rhetoric here. For all the criticism of its rush to reform the NHS, in too many places what we see is glacial-paced gradualism (see reform of the probation service or social care). The people who depend on our public services will pay the price if we combine reduction in resource with a timid adherence to the same old way of doing things.
We must also plug the scrutiny deficit. The government's promised army of "armchair auditors" has not come to pass. Charities could fulfil the role given the right support – for instance, if we had better access to public-sector information. There is a role for businesses in all this, too. All the major parties are now asking how the private sector can be encouraged and supported to play a bigger role in tackling social problems. Over the next decade we need to turn those questions into a step-change in the way businesses engage with communities.
Great fiscal, constitutional and attitudinal changes are unfolding around us. This is not about individual ministers or policies – these shifts are bigger and longer-term than that. As a society we need to respond, with a reformed state, a civil society able to hold the government to account and remind us all that we do not travel alone in this life, and a private sector engaged in the communities around it. Otherwise we are at risk of creating a forgotten Britain whose existence we would come deeply to regret.
