Skip to 0 minutes and 10 secondsIn the previous two lectures of this activity, we have discussed two features of complexity in history. It was argued first that although all historical events are unique, they can be perceived as emergent properties of interrelated circumstances. And second, that uncertainty influences the course of history through path dependence. Given the multitude of factors involved in these complex historical systems, is it possible at all to draw lessons from history? In this respect, it may be helpful to consider for a moment the difference between history and other social sciences-- in this case, economics. Charles Kindleberger, an American economist, once wrote that for historians each event is unique. Economics, however, maintains that forces in society and nature behaviour repetitive ways. History is particular.
Skip to 1 minute and 7 secondsEconomics is general. In the field of economic history, both approaches meet. By abstracting from the particular, general patterns in history are identifiable from which lessons may be learned. An example of such a pattern concerns financial speculation, which, throughout history has recurrently led to economic bubbles that sooner or later burst. Examples are the tulipomania in the golden age of the Netherlands, the railway mania in Victorian England, and the recent dotcom bubble of the late 1990s. These cases clearly convey a warning against opportunistic behaviour, also called bandwagon effects. Unfortunately, these lessons do not come in the form of predictions. Events cannot be predicted on the basis of history.
Skip to 2 minutes and 2 secondsIn the case of economic bubbles, we cannot predict when they burst, only that they will. But the knowledge and experience obtain in the study of the past may provide guidelines for handling comparable events in the present. A good example is the Great Depression of the early 1930s, which has recently been studied with revised interest for the possible lessons it has to teach about the Great Recession of 2008 and 2009. Looking back on the recent recession, since 2008, we now know that it was the worst international economic downturn since the Great Depression of the 1930s. Only a few had seen it coming, but most policy advisers, officials, and, above all, economists, had not predicted the downturn.
Skip to 2 minutes and 52 secondsThe explanation for this is the extreme complexity of such a major shock to the system, which cannot be incorporated in the stylish models often used in economics. Explaining big swings in economic activity is particularly difficult because they happen infrequently. For this reason, it was not a surprise that since 2008, policymakers, journalists, and economists turn to history for guidance and for shaping the emergency policy response. How to react to these unique and unforeseen events? References to the Great Depression of the 1930s became widespread in the newspapers and on the internet. The Great Depression was the last big economic downturn. Like the present one, it was a full blown financial crisis. Because it is well diagnosed, it acted as an appropriate guide.
Skip to 3 minutes and 49 secondsOr, as the economist Barry Eichengreen observed, it was a powerful intellectual shortcut that provided a ready diagnosis and a set of do's and don'ts. This was necessary because the 2008 crisis was so complicated that policymakers groped in the dark. It was therefore fortunate that some important decision makers, such as Ben Bernanke, then chairman of the Federal Reserve, were serious students of business cycles and financial crises, especially the big one of the 1930s. The crisis of the 1930s was foremost a banking crisis. Back in the 1930s, the Federal Reserve had done nothing to mitigate the banking panics, leading to a collapse of the banking system.
Skip to 4 minutes and 37 secondsThe resulting contraction of the money supply and the impairment of the payment system had set in motion a devastating deflationary spiral that was bad for the economy. The most important emergency measure taken since 2008, although after the fall of the Lehman Brothers bank, was the prevention of the collapse of banks and investment funds and had run into trouble. Furthermore, in 2008, the authorities decided to put money into the economy, cut interest rates to zero, and organise fiscal stimulus, to counter to collapse of private demands. Back in the 1930s, the Federal Reserve had kept interest rates high, tightening the money supply, and the government raised taxes to balance the budget instead, leading to a further decline in demand.
Skip to 5 minutes and 28 secondsSo the analogy pointed to specific steps and away from others, and this might as well have prevented the Great Recession from turning into the Great Depression. Nevertheless, not all lessons can be implemented easily. There seems to be one big lesson that can be learned from the Great Depression. In the 1930s, the global monetary system was based on the gold standard. Countries had fixed their own currency to a particular amount of gold, robbing them of monetary policy instruments to absorb shocks. Those countries that left the gold standards early tended to recover faster than those that did not. The present Eurozone can be seen as a variant of the gold standard because it deprives national governments of monetary policy instruments.
Skip to 6 minutes and 19 secondsYet the high level of financial integration in Europe today may make it much more difficult to leave the Eurozone than it was leaving the gold standard. This last point goes to show that the number of similarities between the crises is as large as the number of differences. Still, although history is not a perfect guide because it never repeats in the exact same manner, it can provide analogies to deepen our insight into present day problems. Or, as quoted before, history does not repeat itself, but it does rhyme.
The recurrence of complex financial crises
This lecture draws comparisons between the emergence of complex crises in the past and in the present. We will explore whether, given complexity, it is still possible to draw lessons from history.
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