How do “Great Crises” lead to “Great Transformations” of ideas, interests and institutions? From the Great Depression of the 1930s, through the Great Stagflation of the 1970s, to the Global Financial Crisis, crises have wreaked economic havoc and reshaped ideas. In this effort, I challenge views of crises as “exogenous shocks” that prompt efficient adjustments by great powers, coalitional agents, or norm entrepreneurs. Instead, I offer a social psychological theory of crisis and change, one premised on assumptions that shared unconscious biases drive cycles of intellectual overconfidence, crisis and populist backlash. Drawing insight from the study of neuroeconomics, I highlight the effects of unconscious tendencies to “ambiguity aversion,” marked by preferences for measurable risks over situations of Knightian uncertainty. Where ambiguity aversion impedes the efficient use of information, and leads agents to overlook the emotional influences on markets, I argue that the resulting technocratic overconfidence spurs increased risk taking in ways that cause crises. In turn, as this gives rise to popular struggles over constructions of crises, I argue that it legitimates often-prolonged efforts to reassert popular influence in paradigmatic debates. Taken as a whole, this analysis suggests that where technocratic overconfidence which to “Great Crashes,” populist backlash makes possible “Great Transformations.”
Tracing these dynamics over the past century, I first argue that a 1920s overconfidence in monetary fine tuning fed the Great Crash of 1929, which in turn led to Keynesian backlash. Secondly, I argue that a 1960s fiscal overconfidence obscured the self-reinforcing nature of the 1970s Great Stagflation, which legitimated an era of wage restraint and financial liberalization. Thirdly, I argue that the 1990s-2000s overconfidence in monetary fine tuning and deregulation obscured the speculative bases of the Global Financial Crisis, which has since spurred expanded debate.
