When Michael Woodford was a young economics professor in the late eighties, he wrote a handful of seminal papers on a topic known as “sunspot” theory. The idea is that economies get stuck in a rut because of a breakdown in coordination. It seems that people will be productive only when those around them are also productive. Suppose, for example, that you live in a country of skilled, educated people where no one is doing much more than subsistence farming because the economy had recently tanked. (Think of an extreme version of the United States at the beginning of the Great Depression.) Even if you knew how to manufacture sophisticated products like computers, you wouldn’t do it. Why? Because no one would buy them. What good is a computer to a bunch of dirt farmers? For the same reason, none of your countrymen would manufacture anything either.
According to the theory, the only way out of this dilemma is to change everyone’s state of mind at once. The impetus could be anything, really—a new president, a change in the fortunes of a beloved sports team, even something as arbitrary as a spot on the sun. The key is that everyone has to believe that everyone else will suddenly start producing again. The expectation that the economy will improve becomes self-fulfilling.
Four years ago, the once-formidable economic department at Columbia University was stuck in a rut. Its stars were aging—Columbia had more tenured faculty members over 70 than under 50—and the few first-rate faculty still in their prime faced a constant pull from rival schools. Even junior faculty would jump ship at the first opportunity. Worse, Columbia was bottoming out at a time when economics was becoming a very hot field.
Columbia’s president, Lee Bollinger, came to the school in 2002 with the goal of putting the university on a par with the likes of Harvard and Yale. He knew that it was nearly impossible to be a top university without a first-rate economics department. Undergraduate majors were surging; American universities awarded almost 40 percent more economics degrees in 2004 than in 1999, while most other majors were either flat or declining. And these relatively well-compensated graduates—the average economics major earns more than $40,000 per year in his first job—were, in turn, helping boost their schools’ position in U.S. News and World Report, which considers alumni giving in its rankings. Meanwhile, economists were becoming more influential in public policy and even popular culture, a trend highlighted this year by the publication of the best seller Freakonomics, in which University of Chicago economist Steven Levitt applies the tools of his field to drug dealing, corruption, and violent crime.
Of course, Bollinger wasn’t the only university president to note the rising importance of economics. Salaries were rising across the field, and there was a run on the top scholars; NYU is rumored to have offered Harvard’s Andrei Schleifer a $500,000 salary in 2003.
Bollinger gave department chairman Donald Davis a mandate to restore the program to its past glory. But Davis faced a chicken-and-egg problem: Columbia couldn’t attract first-rate faculty because it didn’t have much first-rate faculty in the department already. And the university didn’t have first-rate faculty in the department because it couldn’t attract them in the first place. Davis couldn’t break the cycle by hiring one top economist a year for fifteen years, because no one was going to leave Harvard or Princeton for a second-rate department. But sunspot theory held a tantalizing alternative: He just might be able to break the cycle by trying to hire ten or fifteen star economists in a year or two—a game-changing move designed to alter people’s perceptions. If everyone expected everyone else to accept the offer, then the department they’d be joining wouldn’t be second-rate.
Bollinger was sympathetic and eventually agreed to fund an unprecedented thirteen new positions, a commitment of nearly $10 million. The only catch was that, since you can’t hire thirteen people at the same time, someone needed to be persuaded to go first. That’s when Don Davis thought of Michael Woodford.
There is a subtle art to recruiting from a position of weakness. You compile a list of all the people you’d love to hire, even if they might laugh in your face. You call these people up, tell them you’re conducting an exhaustive search in their area of expertise, and ask for recommendations. Then, toward the end of the conversation, you send out the “well, if you were interested” feeler, which of course was the main point of the call. “Because we were so much in a hole, it was almost a little embarrassing,” says Davis. “ ‘Gee, would you like to leave a top-five school for a school that really isn’t that strong?’ ”