Judge Foreign Policy Decisions by Their Immediate Impacts

Why I'm declaring victory in Venezuela

There’s a story that in 1972, Zhou Enlai told Henry Kissinger that it was too early to judge the impact of the French Revolution. As it turned out, this was a misunderstanding, and Zhou was actually talking about the 1968 student protests in France.

Regardless of what really happened, when the story is mistold, it is held up as a demonstration of Eastern wisdom, reflecting the Chinese propensity to take a very long view of history. Simple Westerners only think about immediate impacts; much wiser Oriental leaders take a wait-and-see approach and then draw more lasting lessons.

Yet the alleged Chinese perspective is really dumb. The further away we get from the French Revolution, the less certain its impacts become. Did the French Revolution cause Bolshevism? Or maybe we can say that the nationalism it fostered in fact brought down the Soviet Union? Do we stop and judge in 1943 or 1991? Things will look very different depending on which year we choose. You can make a good historical argument that the French Revolution caused Napoleon. But to get from that event to World War I, there are too many uncertainties to come up with any kind of reasonable counterfactual.

I’ve been thinking about this fake piece of Chinese wisdom while participating in the discussion about Venezuela. Right now, it looks like things are going well. I remember what the debates were like two months ago, and if anyone told you that soon Delcy Rodriguez would welcome back foreign investors, reform energy laws toward American preferences, amnesty or release large numbers of prisoners, and be kissing up to Trump on social media and yucking it up with Doug Burgum, they would’ve said you were dreaming. Moreover, public opinion polling shows that Venezuelans overwhelmingly support the raid. Any American leader would’ve taken that over the status quo ante. For that reason, I’m ready to declare Venezuela a success. On Iran, I’ll continue to reserve judgment until at least a few more months.

This reminds me of a debate scholars have had over the generations about the role Christianity has played in the history of the world. Sometimes you’ll hear writers argue that the faith is responsible for all good things that have happened in Western civilization over the last few centuries. I’ve always found this odd, since as Christianity took over Europe, living standards and the state of technological development plummeted, as explained by Bryan Ward-Perkins in The Fall of Rome: And the End of Civilization. By his estimate, things did not begin to recover until well into the Middle Ages. Are we to grant Christianity a thousand-year mulligan from the time of Constantine’s conversion? I don’t know how you can skip how bad things got after Rome collapsed, but then give Christianity credit for what came later.

You can write very entertaining books about why Christianity was responsible for modern science and the Industrial Revolution, they can sound convincing to smart people, and I’ve read and enjoyed many of them myself. They might even be true. But I think that a question like “Would the world be better or worse off if Christianity never existed?” is way too complex to be addressed by mere mortals.

It’s funny because if you read Edward Gibbon’s The Decline and Fall of the Roman Empire, he tells a story that takes the opposite view of many moderns (check out my 2020 thread). During the Enlightenment, intellectuals believed that Christian superstition ruined ancient civilization. Like all writers, Gibbon was reflecting the prejudices of his time, and it seems as if the kinds of academics who write books about Christianity now are either believers or have a cultural affinity toward the faith. Today we know that Gibbon made a lot of stuff up, and needless to say modern historians have access to more archives and better methods, and are a lot more careful with their facts. But in the centuries since The Decline and Fall, I don’t think that they’ve figured out how to adequately engage in a two-millennium counterfactual. Scholars now have more confirmation that life did actually get worse for most people after the fall of Rome, and this obviously supports Gibbon’s theory better than those of his modern counterparts.

Judging the Maduro Raid

What will Venezuela be like in five years? I don’t know. But even if it turns out terribly, we will have no counterfactual regarding what would have happened had Maduro remained in power. It seems to me that opponents of intervention are doing the following:

1. When things seem to be going well, assert that it’s too soon to say anything.

2. Wait for bad things to happen, and then declare them the result of the American intervention.

At some point, something bad will happen in Venezuela or elsewhere in the world. Anti-interventionists will then stand up and say “I told you so.” Even if bad things happen outside of Venezuela, they will be able to blame the fracturing of international norms or somehow tie it back to Maduro’s arrest, ignoring the fact that wars and violations of international law have always been regular occurrences.

In the weeks after Maduro was seized, the value of the Venezuelan stock market skyrocketed 260%. Some argue that liquidity was low, but tens of billions of dollars isn’t exactly nothing, and I put a lot of weight on this piece of data. In The Midas Paradox, Scott Sumner judges the wisdom of US policy up to and throughout the Great Depression based on the immediate movements of the stock market, and other indicators like bond and foreign exchange markets. If FDR announced a change in policy and the stock market went down, for example, he doesn’t care if it ended up rising six months down the line. The theory behind this idea is that people with skin in the game take into account all foreseeable circumstances at the time an event occurs, and what happens later can always be better explained by more proximate causes. I prefer this approach because otherwise you can just come up with any story you want about the wisdom of various economic policies.

What happens to the relevant stock exchanges after a foreign policy event is just one data point. We can look at others too. In the case of Venezuela, the country is economically and politically freer than it was a few months ago, and has a more plausible path to good governance. People ask when there will be a free and fair election, and the question isn’t whether this is likely, but whether it is more or less likely than in an alternative timeline where Maduro stayed in power. The signals on Venezuela are not mixed. They’re all pointing in the same direction and the operation is over, and for those reasons it is not too early to say that interventionists have been vindicated.

Judging the War with Iran

I’m willing to accept the other side of this coin, and say that the fact that the stock market went down after the war with Iran started is an indication that Trump made a mistake. On the first day of trading after the bombing began, the S&P 500 was about flat. I’ll make the argument harder for myself and take the state of the S&P 500 two trading days after the war started, down about 2%, since that’s maybe about how much time it took to fully understand the initial scope and aim of the intervention.

Of course, we all knew that the stock market would fall if we started bombing Iran, so that can’t be the full story. But the magnitude matters a lot. And we simply can’t wait an indefinite amount of time to judge the wisdom of the intervention.

Unfortunately, it looks as if the odds that the Iranian regime will fall by the end of 2026 are the same as they were at the start of the war. Yet, right when the war was launched, the chances skyrocketed from 36% to a high of 61%. We had a few weeks of elevated chances of regime change, before the market settled back to the baseline.

So in retrospect, the Trump administration did increase the chances that the regime would fall. It’s looking the same as before now, but that should not have much influence on how we see the original decision to pull the trigger. That is, unless you think that the fact that war was seen as a credible option was why the baseline odds of regime change were so high, and maybe the war was necessary for the threat ever to have been credible, and also to maintain more pressure on the regime going forward. This would argue in favor of a more hawkish approach. At the same time, a similar logic can force us to say that we’re underestimating the economic damage of the war, since markets had already priced in the cost of conflict before the bombing began. Maybe the stock market lost 2%, but it was already 1% lower than it otherwise would have been just because we know Trump was going to attack Iran. I hope that these two ways of taking the previous policy into account balance one another out, since they point in opposite directions regarding whether the war was a good decision.

Anyway, we can begin by saying that on the plus side we have a twenty-five-percentage-point increase in the probability of a regime change and a weakened Iran as a consolation prize, balanced against a 2% loss of the stock market, which means approximately $1.2 trillion in value destroyed. But the stock market does not cover the extent of economic damage. That $1.2 trillion is in corporate profits, and corporate profits make up about 10% of GDP. So we might at first glance consider multiplying the $1.2 trillion by ten, but it’s doubtful that the war will impact all sectors and forms of output equally. I’m going to multiply the effect by six times, and get $7.2 trillion in economic damage in terms of expected present value.

But I’m a global citizen, and will take a global perspective. According to one estimate, as of March 9, about $6 trillion in equities value was lost globally since the start of the war. It’s hard to know whether to attribute this all to the conflict, but let’s do so anyway. We can again multiply this by 6, and end up with a grand total of $36 trillion in global economic damages.

I’m not going to count the direct costs of the war in terms of money spent, since this is negligible compared to the overall economic effect. We have to throw in Iranian and American casualties, but these aren’t particularly high if we convert them into monetary terms. Let’s put the statistical value of life at $10 million, and assume this war has killed 3,000 people. Both of these estimates are way too high, and multiplying them we only get about $30 billion. Once again, this is a rounding error. Iranian infrastructure and real estate are likewise not that valuable in the grand scheme of things. The impacts on the global economy as reflected in equity markets are the costs you should be thinking about in this conflict.

If we stop the tape today, the question boils down to this: Was $36 trillion in lost value worth a twenty-five-percentage point increase in regime change, and a weaker Iran regardless? Another way to look at it is whether it would be worth $144 trillion for a 100% chance of regime change in Iran. Since $144 trillion is greater than the entire yearly GDP of the world, we have to say no, especially since there’s no guarantee regime change would work out well. As mentioned, I also think that Iran’s offensive capabilities being wiped out and many of its leaders killed should be considered pluses and placed on the ledger. But even with that, it’s hard to see how you end up with a benefit that is worth losing that much in economic costs.

We’re still early here, though, and we don’t know which way this will go. With the Maduro raid, I’m comfortable saying that it is “over” – anything that happens from now will be the result of more proximate causes. But when it comes to war with Iran, we’re still in the opening stages of the conflict. The ultimate outcome can be anything from a quick finish that limits the economic damage and sends indicators back to where they were, just with a weakened Iran, to stagflation and a global recession. The bulk of the cost of the war is from economic damage, and most of the economic damage is coming from the closing of the Strait of Hormuz. So if the Trump administration can figure out how to open it through force, which some have argued is doable, global equities will recover and you get the benefits of a weaker Iran at low cost even if the war continues.

All of this is to say that I’m fine with continuing to wait. We can have a rule: in the first few months or so after an action is taken, if all the indicators are either positive or negative, then a move was either clearly justified or a mistake. When the record is mixed, like here, or things are still early, you can reserve judgment. You usually can’t call a war a failure if it’s only been going on for a few weeks and much about its trajectory remains up in the air, but a raid that is carried out and only seems to have positive results within the next few months can be declared a success.

What I won’t do on Iran, however, is simply wait indefinitely until I can say that the war was a good idea. If Iran looks to be in worse shape and not getting better and the world is more unstable in say a year with a weaker economy, I will declare that the war was wrong. But if things look good in one year and bad in two years, I will still say that the war was a good decision. The one-year limit is arbitrary, and one can argue that maybe it should be two months, or six months. In all honesty, circumstances will provide various moments as candidates for when we can judge the outcome of the war.

Regardless, the point is that your time horizon here should be short. Definitely not on the order of several years or decades, and certainly not generations or centuries, as implied in the fake version of the Zhou Enlai quote. I’m inclined to say that the ultimate impact of the Iran War should be judged probably by the point that either the Strait of Hormuz is opened, or it is clear that the closure is going to last at least long enough to justify the initial drop in equities – at which point equities should drop even further and it won’t even be a close call.

Of course, there has to be some allowance for freak events that might occur. If Iran gets hit with a major asteroid in six months and it devolves into anarchy immediately after, and things looked to be going well before that point in time, I will not blame that on the war.

So we have an immediate verdict on Venezuela, which is that it was a good move. On Iran, we got a slight decrease in the stock market, a substantial increase in odds of regime change, the decline of Iran as a threat, and perhaps $36 trillion in global financial losses. Looks bad, but the market might yet recover.

You can imagine scenarios where the Iran war would’ve clearly been a mistake at this point. Let’s say that the stock market dropped 12% in the immediate aftermath of the beginning of the bombing, as what happened in the days after “Liberation Day” tariffs were announced, and the odds of regime change only went up 10%. In that case the war would’ve been a disaster. It’s also possible that casualties could’ve been so high that this would have been a major consideration in the analysis, but it’s looking doubtful that we’ll get to that point.

Speaking of Liberation Day, the fact that the market responded so negatively to Trump’s tariffs should be taken as indisputable evidence that protectionism is stupid. The stock market’s reaction to Liberation Day was more negative than to the 2003 invasion of Iraq, the 2022 Russian invasion of Ukraine, and the current war with Iran. Yes, the market ended up recovering, but this was clearly tied to Trump backing off, and we consistently see how each piece of news on tariffs either sends equities up or down in predictable ways consistent with standard economic theories. Again, if the stock market dropped by a similar amount after Trump and Israel attacked Iran, it would be enough to declare the war a failure. If someone is still defending Trump’s views on trade at this point, you should think much less of them.

You may ask what about blowback? The beauty of trusting markets is that this should be factored into prices. If, due to the war with Iran, we should expect to see more wars and terrorist attacks, then equity markets will consider that. Markets don’t fully take into account the potential human costs of more wars. But if those become more likely, we now have relevant prediction markets, and we should see movement there. In my experience, wars tend not to impact unrelated markets all that much, indicating that most models of the world that believe in second- and third-order effects of foreign policy decisions aren’t very well founded.

Summarizing My Method

In conclusion, my method for judging the wisdom of any foreign policy action is the following:

1. Decide what you care about first.

2. Reserve judgment if the initial decision is still unfolding.

3. Look for short-term market proxies for the things you care about.

4. Try to factor in the best you can things you care about without good market proxies, through, for example, cost-benefit analysis using the statistical value of life.

5. Feel free to disagree with market proxies, but you need to start with them and let them guide you (Out of intellectual humility, I will very rarely disagree with market proxies).

6. Maybe after 5-20 years you can do a more meaningful retrospective, but the judgment window has to close at some point. You can declare Napoleon as the result of the French Revolution but not anything after Napoleon.

There are several weaknesses of this method. Number 2 poses particular problems, since the course of events often doesn’t give you a clean cut-off point. I’m tempted to draw the line here and say that the market reaction, and the fact that the odds of regime change are flat, are enough to declare the Iran War a failure. But again, this is early, and you have to leave open the possibility that it ends soon and markets rally. We should be spending our time looking for proxies and thinking about when is the right time to judge the initial decision to go to war; not sitting around and trying to just guess what the world looks like one or two years from now.

What all this demonstrates is that, even when outsourcing your thinking to markets, contemplating the wisdom of foreign policy decisions is still a complex undertaking. But without using markets as guideposts, we’re completely lost. There are a hundred objections one can make to my methodology, and I’m not saying that you’re going to get a mathematically precise answer to every foreign policy question. But the methodology does impose some limits, and I think it’s the best that we can do. Even if you have a range of a, say, 1-3% drop in equity markets depending on what date you use to judge, that is at least a bounded estimate. Normal foreign policy discourse is fuzzy and provides few lessons, while the market-based approach reliant on immediate impacts is still fuzzy but allows you to glimpse the outlines of causal paths that can be taken and added to a repository of knowledge.

Regarding 5, people can of course say the market is getting things wrong. But whenever analysts doubt market indicators, the burden of proof is always on them to show why they know better than the aggregate estimates that are calculated based on the decisions of all those who have money on the line. Anyone who can consistently beat the market will get very rich, and you should be skeptical of any individual who claims that ability.