By Carmen M. Reinhart and Kenneth S. Rogoff
Princeton University Press, 2009, 496 pp., $35
One of the fallouts of the global financial crisis, especially after the collapse of Lehman Brothers in September 2008, has been the questioning of the credibility of much of what passes for economic science, whether delivered by the mathematical adepts of sophisticated financial modeling in the business world or by academia. This kind of economics promised a rational world of ever-increasing prosperity and stability. It was rather dismissive of economic history, which was cast off as an obsolete discipline based on old-fashioned, low-technology techniques. The only value economists saw in history was as a mine for microeconomic data that could be fed into complex mathematical models. By contrast, economic history (which is often rather gloomy) now looks rather more interesting and important. Carmen Reinhart and Kenneth Rogoff have delivered a powerful and eloquent statement explaining why.
Reinhart and Rogoff’s story is about the dismal cycle of recurring economic and financial crises. That cycle depends on historical ignorance. Financial innovators, as well as academics and politicians, want to tell stories about why the old boom-and-bust cycle is dead. They invariably think that “this time”, their own time, is different, because the present is completely different compared to every past experience. The most memorable political exponent of this thesis is the currently rather vulnerable British Prime Minister Gordon Brown, who as Chancellor of the Exchequer repeatedly claimed to have created a new economic framework that would end “the violence of the repeated boom-and-bust cycles of the past.”
The most important lesson of the book is already revealed in the title, “This time is different.” As Reinhart and Rogoff put it, the damaging syndrome of blindness to history holds thatfinancial crises are things that happen to other people in other countries in other times; crises do not happen to us, here and now. . . . The old rules of valuation no longer apply. The current boom, unlike the many booms that preceded catastrophic collapses in the past (even in our country) is built on sound fundamentals, structural reforms, technological innovation, and good policy. Or so the story goes.
Examples of the myopia that leads to an inability to learn from past patterns of behavior include the boom of the 1920s that preceded the Great Depression, the pumping of debt into Latin America before August 1982, the “Asian miracle” of the 1990s, the dot-com boom, but also, obviously (though it wasn’t obvious in 2005 or 2006), the miracle of rapid and widely dispersed global growth in the 2000s.
In some measure, responsibility for...