a rational actor

A congratulatory note from Chancellor Holden Thorp was amidst the piles of paper on Henry’s desk.

Peter Henry in his office at NYU.

NYU's Stern School is in Greenwich Village, about two miles from Wall Street.

At NYU Stern, Peter Henry ’91 makes the case for classical economics

 March 16, 2012
 by By Eric Johnson

A few years ago, Peter Henry ’91 published “A Tale of Two Islands,” a crisp, eleven-page parable about Jamaica and Barbados.

Both Caribbean countries are former British colonies. They have similar histories and similar governing institutions. But they responded to economic pressures of the 1970s with wildly different policies. Jamaica nationalized industries and imposed trade barriers; Barbados didn’t. The result was modest but respectable growth for Barbados and utter disaster for Jamaica.

“Countries have no control over their geographic location, colonial heritage, or legal origin,” Henry wrote. “But they do have agency over the policies that they implement. “Pedestrian as it may seem to say, changes in policy . . . can have a significant impact on a country’s standard of living within a single generation.”

It’s not exactly a prose poem, but by the standards of economics writing, it was downright elegiac. Decisions matter, Henry’s paper proclaimed. There are correct and incorrect answers to the world’s problems.

It was a full-throated defense of economic theory at a time when the discipline badly needed defending. The paper was published in December of 2008, just as the global economy plunged into the worst downturn since the Great Depression. It struck a chord not just with fellow economists but with a wider audience hungry to make sense of a volatile world.

Henry’s work inspired an in-depth segment on National Public Radio’s This American Life, part of an episode on “The Social Contract.”

“This is a smart man, a man with a big heart, who meant to do well,” Henry said during the broadcast, explaining the disastrous economic interventions of Jamaica’s then-president, Michael Manley. “This is why I think it’s all the more powerful a lesson. Even in places where governments are trying to do the right thing, trying to empower their citizens, if they follow bad policies, there will be substantial long-run consequences.”

What makes a “A Tale of Two Islands” such a compelling story is that Henry didn’t just research Jamaica’s slow-motion economic collapse. He lived it.

“I lived in Jamaica for nine years before we moved to the U.S.,” he recounted last summer, leaning back in his chair on the top floor of New York University’s Stern School of Business. “My parents decided it was going to be easier to raise four kids in the United States, so we emigrated.”

“That was a really formative experience for me,” he continued. “Why is Jamaica poor and the United States rich? Economics gives you metaphors — models — to begin thinking about the answers to those kinds of questions.”

As Henry likes to tell it, he was relishing a low-key, run-of-the-mill career at Stanford when he got a call about the dean’s job at NYU Stern. “I was happily enjoying the quiet life of a professor,” he said.

That’s admirably modest, but it elides some key details. By the time Stern came calling in late 2009, Henry was one of the world’s best-known experts on emerging markets and international trade policy. His papers on debt relief, developing nations, and capital markets were widely cited.

He was also heavily involved with the Barack Obama campaign and the presidential transition, thanks to a friendship with Obama economic advisor Austan Goolsbee. Henry and Goolsbee were classmates at MIT, where Henry earned his doctorate after studying at Oxford on a Rhodes Scholarship.

“I ended up working on a lot of issues in international economics related to the International Monetary Fund, issues that were really critical with emerging markets during the crisis of 2008,” Henry recalled. “The financial crisis hit in the U.S. and in Western Europe. Nobody wanted to lend to emerging markets.”

There was also that whole business of the NPR story, various CNBC appearances, and a prestigious book contract with Oxford University Press. His life was quiet like a jet engine.

Still, the decision to leave Palo Alto and take the helm at Stern was difficult. Henry had given up the chance to work in the White House for the sake of his family—he and his wife Lisa have four young boys—and a dean’s schedule is far less flexible than a professor’s.

“The difference now is that so much of what I do involves me being physically present,” he said. “Meetings, lunches, dinners. The flexibility to pick up the kids from school, to coach baseball . . . it’s not as easy as it used to be. But there are trade-offs in everything. Lisa and I talked about it a long time and decided this was a trade-off worth making.”

Prestige was certainly a factor. Stern has long been one of the top business schools in the world, and Henry isn’t shy about touting its global reach. NYU has a campus in Abu Dhabi and will be opening another in Shanghai next year.

“We’re at a point when emerging markets are more important to the international growth story than ever before,” Henry said. “I’m an immigrant kid, an international economist—there were a number of parts of the story that I felt really fit.”

January of 2010 was, to put it mildly, a challenging time to take the lead at a major business school. Manhattan-based Stern, both geographically and culturally close to Wall Street, was badly hit by the financial crisis. Donations fell, job opportunities for graduates evaporated, and business schools in general began to lose a bit of their swagger.

Stern retained a top spot in the global rankings — number 17 in the 2012 Financial Times MBA survey— but Henry was forced to contend with a tide of public distrust toward business.

“Society at large is really skeptical — and rightly skeptical— about what business schools are doing,” he said. “I think that business schools in general have become . . .” — here he takes an exceedingly diplomatic pause—“a little too transactional, and not as transformational as they should be.”

Transformation is a rather delicate thing to undertake at a world-class business school, and it highlights the fundamental tension between Henry the dean and Henry the economics wonk. For a great many students, especially in executive MBA programs, business school is a combination of resume-enhancer and networking tool. Inspiration is rarely at the top of the list for career-minded students.

Henry wants it to be.

“Education is subversive, in the most positive sense of the word,” he said. “The goal of classical education is to create a mind that will, in some sense, undermine the teacher. We need to get that spirit back into the business school environment.”

Doing that without alienating faculty, business constituents, and students will require more of those diplomatic pauses that Henry has mastered. I ask him if the aim is to toss MBA students off of their pre-determined career paths. He pauses, lowers his voice.

“People will toss themselves off the path!” he says, holding his fingers beneath his chin like a yogi and then bursting into laughter. “Look, we’re not saying, ‘Don’t be an investment banker.’ We’re just inviting people to think about the world differently.”

I ask Henry if the past few years—with the spectacular collapse of the mortgage market, the near-death of Wall Street’s investment banks, and a huge shift in growth toward the developing world—has given him cause to fundamentally rethink his discipline. Is the field of economics in need of some root-and-branch transformation?

“Modern economics is not dead,” he replied, leaning forward in his chair. “Far from it.”

If anything, Henry thinks the crisis of confidence brought on by the Great Recession calls for a more robust defense of economics as a disciplined, rigorous science. His book—out sometime in 2012—will make exactly that case, laying out data from the developing world to show how economists can help separate good policies from bad.

“The economist’s job is to use the tools to figure out what’s going to be good for society,” he said. “It’s society’s job to take that advice and figure out what’s politically feasible.”

Now as he enters his third year in the dean’s chair, Henry is finding the divide between politics and policy not quite as clean.

“I’m a researcher and a teacher who was asked to lead an institution,” he said. “And I’m fool enough to think I can do this because I haven’t tried to do it before.”