Are Old Ideas Better than New Ideas?

November 11, 2008

Today both of the post-graduate classes I teach were focused on an international relations theory called constructivism, which emphasises the role of ideas, communication and persuasion in determining the outcomes of interactions between states.  A constructivist argument could explain, for example, why many Western countries and international financial institutions like the IMF and World Bank suddenly became more interested in relieving the debt of developing countries in the late 1990s.  Constructivists would argue that a new idea arose in the field of development: that forgiving debt would lead to increases in growth and social spending and thus development, and that this idea was actively pushed by a number of actors until leaders of states accepted the idea.  Once it was widely accepted among states, it became a basis for action.  At that point, the idea of debt relief being good for development became a norm.

But the point of this post is not to go into great detail about constructivism.  It is instead to tell you about something that hit me on the tube while I was reading the Financial Times’ reports on two fiscal stimulus plans: one announced by the Chinese and one planned by Obama, while constructivism was on my mind.   The solutions being posited to dig the world economy out of the current financial crisis / recession are all old ideas.   In particular, they are a mix of New Deal like Keynesian stimulus and a monetarist response in the guise of reduced interest rates.  These two approaches form the cores of Keynesian and neo-liberal economic policy prescriptions for downturns, respectively.   During the Depression, politicians had to experiment with previously untested economic policies whose ultimate impact on the economy was not known before hand.  In the case of the current crisis, instead, we draw on history to tell us the most appropriate policies to adopt, despite the fact that the severity of the crisis is in no way similar to the previous situation.

The implication of this is important for the ultimate severity of the crisis: because we perceive the crisis to have the potential to eventually be as bad as the Depression (which I actually believe is an erroneous perception, but that’s a matter to be discussed at a different time), we apply economic policies we know to have been successful in fighting major recessions, thus avoiding such a recession from ever really developing.   It is impossible to know the counter-factual: would the financial crisis of 2008 have been as severe as the 1930s?  Thanks to old ideas, we never need to find out… assuming that the old ideas still work in the new setting – something economics does indeed assume (paraphrasing a favourite quote from gaffe-prone former and potentially future Treasury Secretary Larry Summers “the laws of economics are like the laws of physics: the same across time and space.”).

That’s what makes old ideas “better” than new ones: old ideas are ready today whereas new ideas take some time to become accepted and applied, something which is generally perceived as undesirable in a time in which politicians use the behaviour of the Dow Jones in the moment’s after they announce new policies as a proxy for their likely success.  This is particularly problematic because the theoretical literature suggests that periods of war and economic crisis tend to be very useful periods for coming up with new ideas and therefore systemic change.  In modern economic crises, the market’s in built bias for quick responses means that politicians and policy makers are less likely to do the deep, out of the box thinking crises allow and instead rely on old ideas.   If this line of argument is correct, the future of economic policy making will look like just a little bit of history repeating.

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3 Responses to “Are Old Ideas Better than New Ideas?”

  1. […] heavy around here these days: between my serious excitement about the new President Elect and my late-night reflections on ideas, my purpose to poke fun at globalisation has been put aside recently.  So here to restore my […]

  2. […] better equipped. If you read my post on ideas the other day, you can already guess where this argument is going.  We have economic and political […]

  3. […] depends a lot both on the “trauma” to the financial system and the policy response. My previous post on the importance of old ideas in alieviating financial crises seems to me to be quite salient: the […]

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