Essays on the Financial Crisis and Globalization

We have certainly been living in interesting times. While avoiding the worst connotations of that concept (no global war or other catastrophe), we have seen the fall of communism, the rise of information technology, and the beginnings of a shift in the global economic balance, back toward the days before the industrial revolution, when Asia carried as much economic and political weight as the West. All three trends – the ostensible triumph of capitalism, the innovations wrought by digital technologies, and the growth of China and (to some extent) India – in some ways came to a head in the current financial crisis. The crisis was sudden, and at one stage seemed that it would engulf the world economy in depression and even chaos. It prompted some fevered writing, by journalists in particular. For my part, writing fortnightly columns for Indian financial dailies (first the Financial Express, then The Mint), I have seen my role as bringing analytical economic thought to bear on understanding current events. A column gives one some freedom to opine, but also imposes disciplines of concision and clarity, beyond the usual requirements of academia. The following dozen pieces were written between September 2007 and April 2009. They comment on the reasons for the crisis, and possible solutions, using economic theory to understand the issues wherever possible, but in relatively non-technical language. What keeps markets working well? What do financial markets accomplish, at a fundamental level? Why do markets fail? Why do scandals arise? What can regulators do to improve matters? I have tried to shed light on these basic questions in the context of current events. Along the way, I have had the temerity to take issue with Alan Greenspan, George Soros and Martin Wolf, all bigger names than I, but less well versed in the core principles of economic analysis. My sympathies lie with other professional economists: George Akerlof, Nouriel Roubini and Larry Summers come out well in these pieces, though I take issue with Summers’ implicit politics with respect to globalization. Several essays look at aspects of globalization, and view with optimism the potential of emerging economies. Another underlying theme is that the crisis was not about the collapse of capitalism, but rather arose from some specific failures of institutional design in so-called advanced economies. Getting this lesson right is critical for economies that want to go beyond being just “emerging.” Readers must judge if I have made my points clearly and convincingly enough.