Duct Tape, the Eurozone, Status-Quo Bias, and Neglect of Innovation

In 1995, I visited my Swedish relatives. We argued about the Euro. They thought it was a good idea, I thought it had a serious weakness.

ME It ties together economies that are different.

MY AUNT It reduces the chance of war in Europe.

You could say we were both right. There have been no wars between Eurozone countries (supporting my aunt) and the Eurozone is now on the verge of breaking apart for exactly the reason I and many others pointed out (supporting me).

Last week a friend said to me that Europe was in worse shape than America. I was unconvinced. I said that I opposed Geithner’s “duct-tape solution”. It would have been better to let things fall apart and then put them back together in a safer way.

MY FRIEND Duct-tape works.

ME What Geithner did helped those who benefit from the status quo and hurt those who benefit from change. Just like duct tape.

This struck me as utterly banal until I read a one-sided editorial in The Economist:

The consequences of the euro’s destruction are so catastrophic that no sensible policymaker could stand by and let it happen. . . .  the threat of a disaster . . . can anything be done to avert disaster?

and similar remarks in The New Yorker (James Surowiecki):

The financial crisis in Europe . . . has now entered a potentially disastrous phase.. . . with dire consequences not just for Europe but also for the rest of us. . . . This is that rarest of problems—one that you really can solve just by throwing money at it [= duct tape]

Wait a sec. What if the Eurozone is a bad idea? Like I (and many others) said in 1995? Why perpetuate a bad idea? Why drive further in the wrong direction? Sure, the dissolution will bring temporary trouble (“disaster”, “dire consequences”), but that will be a small price to pay for getting rid of a bad idea. Of course the Euro had/has pluses and minuses. Anyone who claimed to know that the pluses outweighed the minuses (or vice-verse) was a fool or an expert. Now we know more. Given that what the nay-sayers said has come to pass, it is reasonable to think that they (or we) were right: The minuses outweigh the pluses.

You have seen the phrase Japan’s lost decade a thousand times. You have never seen the phrase Greece’s lost decade. But Greeks lost an enormous amount from being able to borrow money for stupid conventional projects at too low a rate. Had loans been less available, they would have been more original (the less debt involved, the easier it is to take risks) and started at a smaller scale. Which I believe would have been a better use of their time and led to more innovation. Both The Economist‘s editorial writer and Surowiecki have a status-quo “duct-tape” bias without realizing it.

What’s important here is not what two writers, however influential their magazines, think or fail to think. It is that they are so sure of themselves. They fail to take seriously an alternative (breakup of the Eurozone would in the long run be a good thing) that has at least as much to recommend it as what they are sure of (the breakup would be a “disaster”). I believe they are so sure of themselves because they have absorbed (and now imitate) the hemineglect of modern economics. The whole field, they haven’t noticed, has an enormous status-quo bias in its failure to study innovation. Innovation — how new goods and services are invented and prosper — should be half the field. Let me repeat: A few years ago I picked up an 800-page introductory economics textbook. It had one page (one worthless page) on innovation. In this staggering neglect, it reflected the entire field. The hemineglect of economics professors is just as bad as the hemineglect of epidemiologists (who ignore immune function, study of what makes us better or worse at fighting off microbes) and statisticians (who pay almost no attention to idea generation).

MORE Even Joe Nocera, whom I like, has trouble grasping that the Euro might be a bad idea. “The only thing that should matter is what works,” he writes. Not managing to see that the Euro isn’t working.