Stanley Fischer and the twilight of technocracy

IN 2004 Stanley Fischer described the wonder he felt as an economics student in the 1960s. “You had a set of equations”, he said, “that meant you could control the economy.” Technocracy—the dream of scientific government by a caste of wise men—arose in the 20th century, as rapid change rendered the world unfathomably complex; in economics, it came of age in the Keynesian revolution of the 1930s. On September 6th, after a remarkably distinguished career in public service, Mr Fischer, an intellectual heir to Keynes, announced his imminent retirement as the vice-chairman of the Federal Reserve. It is tempting to see in his departure the end of the era and the ideal of technocracy.

A century ago, as physicists unlocked the secrets of the atom and biochemists probed the molecular basis of life, economists sought to systematise their own field. But the growing complexity of their work created a problem: laymen could not make head or tail of it. Government consultation with experts, or the delegation of authority to them, became critical to the management of the economy. War-time state planning empowered technocrats further. And in the years after the second world war, when Mr Fischer was a boy in what was then Northern Rhodesia (now Zambia), technocratic principles were enshrined in extragovernmental institutions like the World Bank and the IMF, and in panels of economic advisers whose systems of Keynesian equations produced forecasts and shaped policy.

These systems were flawed. Trouble struck in the 1970s. Slowing growth, wobbling currencies and rising inflation upset the status quo and bolstered sceptics of Keynesian ideas, like Robert Lucas. A dose of stimulus might fool people into thinking the economy was doing better than it was, and so into working harder—but only for a while. People would catch on, and inflation rather than growth would result.

Mr Fischer questioned this fatalism and, in so doing, helped make the intellectual case for revitalising technocratic management. That work was centred on the Massachusetts Institute of Technology (MIT), the home of economic luminaries like Paul Samuelson and Rudiger Dornbusch and the theories that would become New Keynesianism. There, Mr Fischer and others explored when a deft intervention could do some good. In 1977, for instance, he argued that long-term contracts prevented prices and wages from adjusting quickly to changes in economic fortunes. Such frictions could lead to soaring unemployment unless trained economists were on hand to tend the government’s policy levers. New Keynesianism became the orthodoxy in central banks and finance ministries around the world.

A parade of economic talent came to work with and learn from Mr Fischer. They included Ben Bernanke, who would later lead the Federal Reserve through the financial crisis; Mario Draghi, who now pilots the European Central Bank (ECB); Olivier Blanchard, until recently chief economist at the IMF, as well as his successor, Maurice Obstfeld. These men helped build modern macroeconomics, then went out into the world to apply it.

In that, they followed the example of Mr Fischer. In the late 1980s he joined the World Bank as chief economist. He could draw on his research on economic growth—and the policy errors that could waylay it. Later he became the deputy managing director of the IMF, putting him at the centre of battles to contain the financial crises that punctuated the 1990s. After a turn at Citigroup, he went to run the Bank of Israel, navigating the Israeli economy through the Great Recession. Then, in 2014, Barack Obama nominated him for the vice-chairmanship of the Fed.

Mr Fischer and his acolytes often operated under intense pressure. In the 1990s the IMF faced withering criticism for the terms it imposed on struggling borrowers. But it faced hard choices; more generous terms from the fund might have helped the citizens of beleaguered economies, but also given spendthrift governments licence to misbehave—or put support for the IMF itself at risk. Messrs Bernanke and Draghi have their detractors, but were instrumental in saving their respective economies from catastrophe. Recent electoral pratfalls argue for leaving critical decisions in the hands of well-trained, pragmatic technocrats.

Even so, technocracy is in retreat. The sway of the World Bank, the IMF and other international institutions is slowly waning. Their supporters, notably America, seem to be losing interest in their mission; China is building rival institutions as vehicles for its geopolitical ambitions. Central-bank independence is far from assured, not least at the Fed under President Donald Trump. German frustration with the ECB is a dormant threat.

The disenchantment stems in part from a failure of expertise. The mathematisation of economics did not always enhance understanding. The IMF’s forecasters almost invariably fail to see recessions coming; the Fed, during Mr Fischer’s tenure, repeatedly overestimated the risk of rising inflation. The New Keynesian consensus itself has fractured; disagreements flare among Mr Fischer’s acolytes over how much deficits matter, or whether monetary policy can be effective when interest rates are near zero.

The invisible hand

Technocracy’s greatest vulnerability, however, is its fundamental premise, that complex decisions should be taken free of political influence. When officials unexpectedly face problems outside their intended purview—whether a global banking crisis or a period of chronic stagnation—public confidence in them erodes. The rub is that the complex systems technocrats are expected to manage inevitably yield surprises. Amid such uncertainty, the expertise of men like Mr Fischer is as valuable as ever. But the hard choices which must then be taken also demand the legitimacy that democratic processes confer.

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