What Could Possibly Go Wrong?
The risks of giving power to crackpots, cranks and contrarians
"Day 149 - Crackpot..." by Menage a Moi is licensed under CC BY-SA 2.0.
Experts can sometimes make catastrophic mistakes. Some of the clearest examples come from nutrition, where sound science-backed advice has a tendency to get watered down by corporate lobbyists long before it reaches the general public. Our biology is conservative; and keeping our stomachs full of ultra-processed pseudo-foods can lead to bad results for individuals and for society.
If experts and institutions given mistaken advice, contrarianism can make a lot of sense, at least in theory, as many entrepreneurs and investors have come to realise in Silicon Valley. Contrarianism can give people a wider range of options to explore; and once in a while a contrarian option will turn out to be on the money. We saw this clearly with the lab-leak theory of the origins of COVID-19. Once thought to be a conspiracy theory, it turned out to be very credible indeed.
There are, however, clear risks in taking contrarianism too far: every crackpot started out as a contrarian. In fact, I would like to propose the following definition: a crackpot is a contrarian who skipped the literature review, is resistant to feedback, and uses conspiracy theories as bodyguards to protect his or her ideas when they begin to fail. Intellectual virtues are notable by their absence.
Although experts have their faults, they often tend to be extremely risk averse. “First, do no harm” has been a central principle of medical practitioners for centuries. Sensible contrarians are aware of the potential risks of getting fundamental issues wrong and test everything carefully. Crackpots, however, couldn’t give a damn about being careful, as we saw in a recent essay on switching costs.
In his second term, United States (US) President Donald Trump has surrounded himself with advisors and officials with contrarian views that often veer into crackpot territory. He has Peter Navarro telling him to start a massive and unnecessary trade war; and Robert F. Kennedy (RFK) Jr misunderstanding the literature on vaccines and autism; while Elon Musk had to walk back his nihilistic line on public-sector jobs in order to keep his private-sector shareholders happy before finally leaving the administration. There are also many, many election denialists in Trump’s circles; and his team often show outright hostility to knowledge workers. What could possibly go wrong with this approach?
We got a glimpse of the dangers when Trump took Navarro’s advice to start a trade war. Tariffs are inflationary by definition - import taxes make goods more expensive, sometimes in surprising ways. To take one small example, even locally grown food might become more expensive if the price of fertilisers soars.
A sudden increase in prices like this is known as a “supply shock” to economists. It works a little differently from “demand-side shocks.” What you need to know is that rising prices in a supply shock hurts purchasing power all around; and this creates planning problems for long-term investments. Independent central banks might respond by ramping up interest rates, which makes debt more expensive. People and companies with variable-rate loans will suddenly have less to spend, reducing demand in the economy. As a result, economic growth will tend to slow down.
At the risk of oversimplifying slightly, in finance, prices are normally based on projecting likely growth rates into the future. If Example Corp suddenly has to grapple with more expensive basic materials; employees demanding large salary hikes; uncertainty over its investment decisions; more expensive debt; and maybe a recession too, it would be worth less than it would in a more benign scenario. Its share price will tend to go down in these circumstances.
We saw this on a massive scale in April. After Trump announced a wild and wacky tariff plan designed by Navarro, stock markets plunged. Some $6.6tn was wiped out in two days - the largest fall on record. Markets were down more than $11tn in a matter of weeks. Such large numbers are almost unimaginable to us, as we have discussed in previous essays on exponential growth. To put it in context, the eurozone’s whole economy was worth just over $14tn in 2022. Although normally resistant to feedback, Trump decided to freeze his plan; and stock markets slowly recovered, although of course he has since threatened further tariffs; and a court has undercut the whole project by questioning his power to levy import taxes at all.
It is not clear what will happen next. Pessimists will focus on the wackiness. Optimists will focus on the fact that Trump blinked (Wall Street traders have invented the TACO trade - it stands for “Trump always chickens out”). Realists should probably bet on the continued combination of wackiness and blinking over the years to come, with pushback from the courts making it even harder to make any predictions, other than volatile asset prices.
If you rarely read the financial press, you will have missed one of the biggest news stories of these volatile times. “Haven” assets like the US dollar, the Japanese yen and the Swiss currency usually soar in times of uncertainty, along with gold. However, the dollar remained weak throughout Trump’s self-imposed crisis.
The potential implications are shocking. “The market is reassessing the structural attractiveness of the dollar as the world’s global reserve currency and is undergoing a process of rapid de-dollarisation,” according to a research note from George Saravelos, global head of foreign exchange research at Deutsche Bank, which was quoted in the Financial Times (FT) (paywalled).
Trump also lobbied for Jerome Powell, the independent chair of the US Federal Reserve, to give the American economy a bump by cutting interest rates. Powell, who will be Fed chair until May 2026 and remain on the Board of Governors to January 2028, has been holding the line by refusing to cut rates. Trump threatened to fire him - a move that many observers believe would be illegal. The US President later downplayed any talk of firing the central banker.
There are interesting parallels with Turkey and the United Kingdom (UK). Turkey’s populist President Recep Tayyip Erdoğan adopted “contrarian” central bank policies early in 2021. He leaned on former central bank governor Şahap Kavcıoğlu to keep interest rates extremely low no matter what happened in the economy. As a result, the economy started overheating, with inflation going above 85% as the Turkish lira plunged in value. Erdoğan began to reverse course in 2023 by appointing first Hafize Gaye Erkan and later Fatih Karahan as governors with a mandate to control inflation around the time he won a surprisingly close general election. Inflation has been declining since then, although it is still shockingly high.
Meanwhile, in the UK, Liz Truss became Prime Minister in September and October 2022. She decided to bet hard on economic growth. This is actually a pretty good bet nine times out of ten. Unfortunately, she chose to implement tax cuts and borrowing at a time that the Bank of England was trying to dampen the economy to get inflation under control. This was an appalling mistake, based largely on impatience. Financial markets moved against the UK; and her standing with the public fell so hard that she became the most unpopular PM in UK history. She was forced to resign.
There are further parallels with both the push for Catalan independence from Spain and Brexit in the UK. Both populist movements were characterised by extreme feedbackphobia. The Catalan independence movement hit a brick wall when local businesses moved their headquarters outside Barcelona during the coup attempt. The UK also experienced capital outflows as the country left the European Union (EU); and its economy has taken a serious hit. Former PM Boris Johnson spoke for populists everywhere in June 2018 when he responded to an Ambassador who raised concerns about capital flight with two words: “Fuck business.”
The US has historically been resilient to forex shocks because global investors need to hold a certain amount of their portfolios in dollars and Treasury bills, which are seen as safe assets. However, as mentioned earlier, if the dollar falls in circumstances when it would normally rise, bright people sit up and take notice. If investors were to start treating the US as an emerging market, the consequences could be far reaching, as the FT has warned (paywalled).
There are other risks too, beyong the economy and finance. RFK is clearly listening to fringe voices instead of experts, as he showed the world rather dramatically by taking his grandkids for a swim in a sewage-infected creek. He is also thinking of starting a poorly conceived war on pesticides.
We have a clear example of what can go wrong with this worldview in Sri Lanka in 2022. Gotabaya Rajapaksa won the 2019 election with a promise to transition the island to organic agriculture. When he banned fertilisers and pesticides, rice production fell 20% as prices surged. Tea production was also devastated. Inflation soared and the currency collapsed. Half a million people sank back into poverty. Rajapaksa was forced to call off the badly designed experiment.
We began this essay by mentioning how nutritionists get things wrong, often by inventing new edible materials that are less nutritious than old-fashioned foods. The argument against switching to organic food might seem incongruous in that context to some readers. However, it is worth noting that humans have been genetically modifying our food for many thousands of years. Using modern fertilisers and cross-breeding plants to develop disease-resistant varieties is one of the great achievements of the expert class, as Charles Man shows in The Wizard and the Prophet.
Although many of RFK’s views are conspiratorial and cranky, in a spirit of fairness, it is worth mentioning that his approach to obesity and chronic disease is on the money. He quite rightly blames the food industry and the typical American diet for a range of health issues. It will be very interesting to keep an eye on his anti-corporate narratives in this area in the months and years ahead.
Finally, there are also risks in election denialism, as we have discussed before. Being able to remove incompetent incumbents is the killer app of liberal democracy. Over-riding it because of conspiracy theories is like removing the brakes on a fast-moving vehicle. It is unlikely to end well. The comments are closed. If you subscribe, though, you can hit reply to the email. I might not get to it immediately, but I will reply when I get a chance. See you next week!
Previously on Sharpen Your Axe
Conspiracy theories as bodyguards to failing ideas
Nihilism (part one and part two)
Exponential growth (part one and part two)
Capital flight in Catalonia (part one and part two)
Coups and democratic backsliding
Further Reading
The Wizard and the Prophet: Two Remarkable Scientists and Their Dueling Visions to Shape Tomorrow’s World by Charles C. Mann
Death by Food Pyramid: How Shoddy Science, Sketchy Politics and Shady Special Interests Have Ruined Our Health by Denise Minger
How Democracy Ends by David Runciman
Virtues of the Mind: An Inquiry into the Nature of Virtue and the Ethical Foundations of Knowledge by Linda Trinkaus Zagzebski
Ultra-Processed People: Why Do We All Eat Stuff That Isn’t Food… and Why Can’t We Stop? by Chris Van Tulleken
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