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July 19, 2010
David Warsh, Editor


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The Economist As Political Philosopher

Few positions educate the incumbent more thoroughly to a global point of view than that of chief economist of the International Monetary Fund. The IMF was buttressed in its founding by the authority of John Maynard Keynes, even if his fellow architect Harry Dexter White, representing Franklin Roosevelt, had more to do with its design. IMF economic counselors, if they are successful, are entitled to speak for Keynes, or so we hope – privately, as clinicians, while in office; publicly, once they have left.

It is not surprising, therefore, that each of the three holders of the job in the last ten years has become a household name, at least in households where economic ups and downs are analyzed as well as experienced.. 

Thus Kenneth Rogoff, of Harvard University, is famous  for his collaboration with Carmen Reinhart, of the University of Maryland, on This Time Is Different: Eight Centuries of Financial Folly. Simon Johnson, of the Massachusetts Institute of Technology’s Sloan School of Management, and author, with James Kwak, of 13 Bankers: the Wall Street Takeover and the Next Financial Meltdown, continues to thunder on his highly influential website, Baseline Scenario , against the financial oligarchs.

And Raghuram Rajan, of the University of Chicago Booth School of Business, has produced Fault Lines: How Hidden Fractures Still Threaten the World Economy, superior in many ways to its more flamboyant competition, Crisis Economics: A Crash Course in the Future of Finance, by  Nouriel Roubini.  As Rogoff says, it is “the best book out there on the global imbalances that gave us the last financial crisis and that might well give us the next one.”

(What, incidentally, about the current IMF incumbent? As MIT’s leading macroeconomist for 25 years, Olivier Blanchard trained all three of his immediate predecessors, but only after MIT’s Stanley Fischer trained him. Michael Mussa, of the University of Chicago, who did very well in the job for ten years from 1991, continues to play an active role behind the scenes from Washington’s Peterson Institute for International Economics, but that’s another story. So is Fischer.)

Of the three recent IMF economists, Rajan is in many ways the most interesting because he is, in a certain sense, the most ambitious. Rogoff HAS gone back to work with his longtime collaborator Maurice Obstfeld, of the University of California at Berkeley, to further elucidate the mechanisms that produced such turmoil. Johnson has dropped out of his previous heavy-duty collaboration with Daron Acemoglu, of MIT, and James Robinson, of Harvard, on long-term institutional change. “The Quiet Coup,” the indignant article he published in The Atlantic shortly after leaving office, changed his life, evolving first into his blog and then his book.

Rajan, on the other hand, has signed on as adviser to the prime minister of India.  He is a. frequent traveler to China, and, in common with Dani Rodrik, of Harvard’s Kennedy School of Government, has achieved a global audience. (Rodrik’s The Globalization Paradox: Democracy and the Future of the World Economy will appear in February.) 

For example, in Saving Capitalism from the Capitalists:Unleashing ther Power of Financial Markes to Create Wealth and Spread Opportunity, with Luigi Zingales, also of Chicago’s Booth School, Rajan served up an ambitious history of both capitalism and communism in the twentieth century, complete with a plan for maintaining the political viability of markets.  While still at the IMF, Rajan warned in 2005 at a Federal Reserve Bank conference at Jackson Hole, Wyoming, that financial innovation was making the world riskier, earning a place in the Pantheon of Prescients, along with Roubini, Rogoff, Robert Shiller, of Yale, and William White, of the Bank for International Settlements.  And now he is back with Fault Lines, arguing that “the past three decades have brought immense improvements to countries around the world: even as “insecurity and despair have replaced hope” in many rich countries.

For my money, it’s too soon to sum up the forces that led to the recent crisis and the prospects that lie beyond. Rajan is after something different – a seat at the table. He writes with an authority of someone who has seen barriers fall all around the world and yet who hasn’t lost interest in the safety nets that must be repaired if markets are to continue to flourish.  He is not a stylish elaborator of a point of view like John Kenneth Galbraith – he’s too engagé. But you know the world is changing when an Indian economist becomes a leading Walter Lippmann-like spokesman for the tightrope of reform between too little and too much social control.

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