Book Review: 'The Leadership Economy: Why The World Economic System Fell Apart And How To Fix It'

by: John M. Mason

The basic premise of this book is that the world is currently leaderless and if things are going to get better, someone credible must step up to the plate and exert some leadership. The problem is that no one seems to be in a position to take that step!

Peter Temin is an economics professor emeritus at the Massachusetts Institute of Technology and David Vines is a professor of economics and fellow of Balliol College, University of Oxford, England. Both are lifetime academics and both are obvious Keynesians.

The book contains a good deal of historical writings and, at times, one really wonders why, for much of the history is very loosely put together and is full of opinions and judgments that are just inserted with little or no actual support.

Perhaps the best historical read in the book is Chapter Five, "Restoring International Balance in Europe," written, I presume, primarily by Mr. Vines. The rest of the historical work I found to be frustrating. The authors just tried to do too much in very little space. The book is 255 pages long; the authors cover from the late 18th century to the present in just 222 pages, from page 20 to page 242. The rest of the book consists of an introduction and conclusions. Geographically, the history covers the United States, Europe, and China ... and a little more.

The interesting issue the authors present in the book, however, has to do with the following question: How do many nations with differing positions and viewpoints get together and resolve major questions?

The historical case the authors draw upon is that of The Marshall Plan, begun in April 1948 and named after United States Secretary of State George C. Marshall during the presidential administration of President Harry S. Truman.

This case was particularly interesting to me since I was had just finished a review of a book that focused on the Bretton Woods Conference held in 1944 about the founding of the post-World War II global financial structure. The Marshall Plan is considered to be a part of the efforts to build a more economically viable post war environment after the Second World War than the one that followed the First World War.

The difficulty in building an international financial regime like the global financial structure and a foreign aid program like the Marshall Plan is the need to get all the various nations to agree on a structure where there are few common interests and a multitude of needs relating to the self-interests of the people involved.

How does one pull all of this together?

One pulls this all together, according to the authors, through the leadership of one nation, a hegemon, if you will. The Merriam-Webster Dictionary defines this in terms of preponderant influence or authority over others; the social, cultural, ideological, or economic influence exerted by a dominant group.

In the case of the Marshall Plan, the United States decided unilaterally that it was going to give aid to the countries of Western Europe. "It became apparent by 1947 that (the United Nations, the IMF, and the World Bank) were not going to be sufficient to guarantee economic-and therefore political-stability in Europe. President Harry Truman, in one of the great actions of an international hegemon in the past century, extended aid to Europe in the form of the Marshall Plan." (Page 108)

How could this have happened? "The United States was able to impose this world order because it clearly dominated the world after the war." (Page 113)

The world needed a savior at this time, and the United States stepped up to fill this role. There had been an absence of this kind of leadership in the world since the First World War. Previous to that time, from early in the 18th century until then, England had been the hegemon of the world. And, it had been quite a ride with peace and prosperity permeating much of the globe.

The world became leaderless after World War I as Great Britain emerged significantly in debt and with its industrial base losing its predominance. Without a leader, as the subtitle of the book implies, the world fell apart. Toward the end of the Second World War, the United States began to assume the role of the new hegemon. This was very much in evidence at the Bretton Woods Conference mentioned above. The Marshall Plan, however, was the real success story.

And, why? Well, our authors contend that the evolution of the Marshall Plan played out like the famous "Prisoner's Dilemma" problem of game theory. A simple summary of this "game" is that the players of the game are in the position where all can benefit and succeed if all co-operate with one another. However, if the players opt not to co-operate, then everyone defaults to the worst outcomes possible. If the players are left alone, they will default to the worst decision.

The United States stepped out and provided the means for all to co-operate! The Marshall Plan was an offer made by the United States to help Europe recover. "If the Europeans reciprocate, maintain democratic societies, and co-operate with one another, everyone wins." (Page 109)

Our authors see the current world situation is a similar way. Only, in our current situation they see two places that are facing "Prisoner's Dilemma" type conundrums. First, there is the world as a whole. Second, there is Europe. In both cases, leadership they believe, leadership is absent.

In the case of Europe, Temin and Vines argue that Germany needs to step up and take the hegemon role within the eurozone community. They have been slow to do so for two reasons. A large portion of the European community does not love Germany; to be too aggressive would present major problems. Furthermore, "There were many in Germany who were strongly against the creation of a monetary union believing that the credibility of monetary policymaking in both Germany and Europe as a whole would be greatly damaged if the authority of the Bundesbank was surrendered." (Page 167) The eurozone continues to default to the worst outcomes.

In the case of the World, the battle seems to be between the United States and China. Temin and Vines don't see either one moving into the hegemon position going forward. The United States appears to be past its peak and China is nowhere near ready to be the hegemon of the future. Until someone is in place to take on the leading role of hegemon, the world will suffer. The battle for the future will be dependent upon who is able to exert themselves in this role.

The book itself? I just don't think that the book is as well written as it could be. The discussions about the book began in 2010 but an outline was not forthcoming until the fall of 2011. Although they had been "giving talks and writing papers on these themes over the past few years" the book was prepared very hurriedly…and, I think, it shows.

There are some other issues that made me uncomfortable. One in particular was the populist/progressive argument in Chapter Four that the wealthy in the United States controlled Congress for most of the latter part of the 20th century and saw to it that economic policies were designed primarily to favor them…hence the skewing of the income/wealth distribution. This analysis is hard to believe given the government's emphasis put on reducing unemployment, on creating more and more programs to put people in their own homes, and on entitlements, such as those for health care. Did I mention that the authors are Keynesians.

Given the fact, however, that the World ... and Europe ... cannot seem to resolve the problems they are dealing with, this little exercise in applied game theory gives us something interesting to think about.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.