Uncertainty is a function of three factors: the depth of the shock, the linkage between the idea and the adverse outcome, and the depth of the preexisting consensus among policy elites for the privileged set of ideas. The bigger the shock, the bigger the uncertainty. A market crash or sustained recession clearly suggests that the status quo is not working, which creates a powerful incentive to search for new ideas. As the biggest global downturn since the Great Depression, the 2008 financial crisis definitely met this threshold criterion.
The connection between privileged ideas and bad outcomes also matters, however. If the link between an economic idea and an outcome is clear, simple, and direct, then it is easier for elites and publics to make the cognitive connection. For example, there has been considerable debate about the underlying causes of the 2008 financial crisis. The misplaced faith in the efficient-market hypothesis seems to be directly related to the subprime mortgage crisis: deregulation permitted the creation of an asset bubble that, once popped, triggered the crisis. In finance, the causal logic connecting the privileged idea to negative outcomes was tightly coupled. On the other hand, few analysts blamed the Great Recession on low trade barriers. In trade, therefore, the causal logic was more loosely linked.
The strength of the expert consensus also affects uncertainty. One can argue that confidence in policy ideas mirrors the way Bayesian statisticians predict how people update their beliefs. In Bayesian theory, expectations about the future are based on the strength of prior beliefs and the extent to which new data contradict those beliefs. In the world of economic ideas, the strength of that prior distribution is a function of the historical depth and current breadth of the consensus view among policy elites. The longer an ideational consensus has taken root, the more it takes on a “technical” rather than “ideological” cast—thereby making it harder to challenge. Deeply privileged ideas often possess an array of auxiliary arguments that can explain anomalous effects, making it less likely that these ideas will be usurped. So in areas in which experts have been in agreement for quite some time, even severe shocks might not trigger a substantive reevaluation of beliefs. In public policy areas in which the consensus is shallower, however, such shocks might lead to large changes in policy attitudes.
Even during periods of high uncertainty, it is not enough for the privileged set of ideas to be discredited. There must also be a viable alternative. It is quite easy for discontented elites to criticize the privileged set of ideas; it is quite another for them to agree on another idea. For that to happen, there must be a substitute paradigm that provides a compelling explanation for the current negative outcome, offers a policy that reverses the status quo, and coalesces strong interests around the idea to supplant the existing ideational order. This is a daunting intellectual task, particularly if there is no “off the shelf” idea available that can explain current events. It is also a daunting political task: the proposed alternative needs to be simple and clear, and compelling enough to serve as a focal point for a heterogeneous group of individuals opposed to the status quo.
Given this checklist, the failure to dislodge the Washington Consensus begins to make more sense. To be sure, the Great Recession triggered genuine uncertainty, but that uncertainty varied across different areas of global public policy. Post-crisis surveys of leading economists suggest that a powerful consensus persisted on several key international policy dimensions. For example, the University of Chicago’s business school has run surveys of the world’s leading economists since the crisis started. On the one hand, the surveys show a strong consensus on the virtues of freer trade, as well as a rejection of returning to the gold standard to regulate international exchange rates. On the other hand, there is less consensus on monetary policy and the benefits of continued quantitative easing.
To demonstrate the ways in which the relative strength of economic ideas affected the willingness of states to cooperate with global economic governance, the next two sections look at two areas where the outcomes differed. First, we examine why a Beijing Consensus failed to take root to challenge the Washington Consensus. In this case, the necessary conditions to displace the ordering principles of neoliberalism were never in place. The depth of belief in the privileged set of ideas was strong, and the alternative set of ideas was too inchoate to be a plausible substitute. This explains, in part, why China proved to be a supporter rather than a spoiler after 2008.
Then we examine the more contested debate about macroeconomic policy coordination. In this case, the possibility of ideational change found more fertile ground. The depth of the consensus on macroeconomic policy was newer and weaker. The existence of Keynesian ideas enabled a global policy shift. Nevertheless, the shift turned out to be only a transient deviation from the neoliberal paradigm. The tightly coupled relationship between macroeconomic policy and the sovereign debt crisis enabled advocates of austerity to push back against Keynesian ordering principles.
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As previously noted, many Chinese officials and commentators took great delight in criticizing the United States for some of the neoliberal policies it espoused during and after the Great Recession. Numerous Western commentators began to embrace China’s development model as a genuine challenger to the neoliberal model. There were certainly some policy steps that could be equated with growing Chinese assertiveness in the global political economy. Chinese policymakers embraced the openness of the WTO trading system while simultaneously arguing in the G20 and the IMF that exchange-rate questions were matters of domestic sovereignty and should not be discussed. China created or joined new institutional structures that were outside America’s reach, including the Forum on China-Africa Cooperation, Asian Bond Markets Initiative, and Chiang Mai Initiative. China’s response to the 2008 financial crisis was to double down on its investment-and-export growth model. Massive fiscal and monetary stimulus benefited state-owned sectors far more than it did private firms over the next few years. China’s robust rate of economic growth during the Great Recession seemed to vindicate its development path yet again.
~~The System Worked: How the World Stopped Another Great Depression -by- Daniel W. Drezner
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