General Orientation

Making Complex Decisions: General Orientation, with Lawrence Summers, Former Director, White House United States National Economic Council

Every kind of decision is important. I’ve had the opportunity to be very involved in decision making in response to financial crises – during the 1990s in Mexico, in Russia, in Asia, and in this decade, in the United States. Tolstoy famously said that every happy family is the same and every unhappy family is miserable in its own way. And one can say something of the same of financial crises. But while every situation is different, I’ve come to the view that there are certain rules and approaches that are likely to lead to better and wiser responses, and other errors that are likely to lead to less than ideal responses.

Define the Problem

First you have to understand why things went wrong. If you don’t understand why things went wrong, you are very unlikely to be able to put them right. Things go wrong for relatively standard reasons. In my own sphere of economics, I’ve always said that the laws of economics are like the laws of physics. They play out differently in different environments. After all, a ball falling in vacuum operates differently than a leaf falling in the air but they’re both subject to the law of gravitation. In the same way, the basic laws of economics – that people respond to incentives, that too much money chasing too few goods will give rise to inflation. These kinds of principles have a certain universality, and if you want to analyze a situation you should usually start from its universal aspects.

Now with respect to the particular situation that I’ve had some of the most dealing with – financial crises, there is always or almost always a very important element of confidence. If you’re an automobile company that’s on the brink of failure people are going to be very reluctant to buy a kind of car if they think the model’s going to be discontinued. So the restoration of confidence becomes a crucial aspect.