They Did Their Homework (800 Years of It)

THE advertisement warns of speculative financial bubbles. It mocks a group of gullible Frenchmen seduced into a silly, 18th-century investment scheme, noting that the modern shareholder, armed with superior information, can avoid the pitfalls of the past. “How different the position of the investor today!” the ad enthuses.

It ran in The Saturday Evening Post on Sept. 14, 1929. A month later, the stock market crashed.

“Everyone wants to think they’re smarter than the poor souls in developing countries, and smarter than their predecessors,” says Carmen M. Reinhart, an economist at the University of Maryland. “They’re wrong. And we can prove it.”

Like a pair of financial sleuths, Ms. Reinhart and her collaborator from Harvard, Kenneth S. Rogoff, have spent years investigating wreckage scattered across documents from nearly a millennium of economic crises and collapses. They have wandered the basements of rare-book libraries, riffled through monks’ yellowed journals and begged central banks worldwide for centuries-old debt records. And they have manually entered their findings, digit by digit, into one of the biggest spreadsheets you’ve ever seen.

Their handiwork is contained in their recent best seller, “This Time Is Different,” a quantitative reconstruction of hundreds of historical episodes in which perfectly smart people made perfectly disastrous decisions. It is a panoramic opus, both geographically and temporally, covering crises from 66 countries over the last 800 years.

The book, and Ms. Reinhart’s and Mr. Rogoff’s own professional journeys as economists, zero in on some of the broader shortcomings of their trade — thrown into harsh relief by economists’ widespread failure to anticipate or address the financial crisis that began in 2007.

“The mainstream of academic research in macroeconomics puts theoretical coherence and elegance first, and investigating the data second,” says Mr. Rogoff. For that reason, he says, much of the profession’s celebrated work “was not terribly useful in either predicting the financial crisis, or in assessing how it would it play out once it happened.”

“People almost pride themselves on not paying attention to current events,” he says.

In the past, other economists often took the same empirical approach as the Reinhart-Rogoff team. But this approach fell into disfavor over the last few decades as economists glorified financial papers that were theory-rich and data-poor.

Much of that theory-driven work, critics say, is built on the same disassembled and reassembled sets of data points — generally from just the last 25 years or so and from the same handful of rich countries — that quants have whisked into ever more dazzling and complicated mathematical formations.

But in the wake of the recent crisis, a few economists — like Professors Reinhart and Rogoff, and other like-minded colleagues like Barry Eichengreen and Alan Taylor — have been encouraging others in their field to look beyond hermetically sealed theoretical models and into the historical record.

“There is so much inbredness in this profession,” says Ms. Reinhart. “They all read the same sources. They all use the same data sets. They all talk to the same people. There is endless extrapolation on extrapolation on extrapolation, and for years that is what has been rewarded.”

ONE of Ken Rogoff’s favorite economics jokes — yes, there are economics jokes — is “the one about the lamppost”: A drunk on his way home from a bar one night realizes that he has dropped his keys. He gets down on his hands and knees and starts groping around beneath a lamppost. A policeman asks what he’s doing.

“I lost my keys in the park,” says the drunk.

“Then why are you looking for them under the lamppost?” asks the puzzled cop.

“Because,” says the drunk, “that’s where the light is.”

Mr. Rogoff, 57, has spent a lifetime exploring places and ideas off the beaten track. Tall, thin and bespectacled, he grew up in Rochester. There, he attended a “tough inner-city school,” where his “true liberal parents” — a radiologist and a librarian — sent him so he would be exposed to students from a variety of social and economic classes.

He received a chess set for his 13th birthday, and he quickly discovered that he was something of a prodigy, a fact he decided to hide so he wouldn’t get beaten up in the lunchroom.

“I think chess may be a relatively cool thing for kids to do now, on par with soccer or other sports,” he says. “It really wasn’t then.”