It is impossible not to contrast Spain's football team with its economy. The difference turns on confidence, and beliefs often become reality. Spanish moxie grew out of past success and the stories spun by the media before the game. This helped them own the field. The Italians hung back, in awe of Spain, tiring themselves in pursuit of Spanish passes. In effect, the balance of confidence tilted the field against Italy, and beliefs became reality. No doubt this victory has further enhanced Spanish self-belief just as England's exit, as if on cue, cements England's self-perception as a middle-ranking power that can beat weak sides but must bow to the sport's Great Powers. This confidence effect, amplified by the media and fans, has been repeatedly demonstrated by sports psychologists. Its counterpart in medicine is the placebo effect, whose clinical reality is uncontested.
Spain's economy has few of its football team's advantages. The media and other players lack faith in it, forcing the Spaniards to run harder, cutting spending to prove they are worthy of a bailout and low borrowing costs. This reduces the amount of money in circulation and lowers consumer and investor confidence, further damaging the Spanish economy. Confidence in team sports, as with trust in marriage, tends to build up with success but can crash spectacularly. Confidence is also contagious, so its effects become amplified in an economy in which everyone assesses everyone. Money, meanwhile, consists of numbers in balance sheets and on computer screens, resting only on the confidence of others. Remove this magic substance and depositors will flock to withdraw their cash. Robert K. Merton, the sociologist who first unpicked the mechanics of self-fulfilling prophecies, explained that people lining up at a bank unnerve others and draw them to the door. Lack of confidence weakens the bank which further unsettles investors and depositors, creating a death spiral. Magnified by the media and social networks, this market psychology can grip an entire nation, or even the world economy, as in 1929 or 2008.
Confidence, according to Robert Shiller and George Akerlof, is central to behavioural economics and finance. But it is also key in politics. Clausewitz placed morale at the centre of his theory of war. If an army loses confidence, it may suffer a string of self-fulfilling defeats. If two countries lose confidence in each other, this creates what political scientists call a security dilemma. One side begins to amass weapons 'just in case'. The other side responds, setting off an arms race that can produce a Cuban Missile Crisis or even a pre-emptive strike. Media talk of inevitable war transforms beliefs into reality. At home, a lack of confidence in politicians, fanned by the media, reduces leaders' scope to think long-term or experiment with innovative policies. In developing countries, mistrust in political elites becomes self-fulfilling as expectations fall and people seek to exploit the system, driving further corruption. In business, as in the classroom, it is well known that lower expectations produce a 'Pygmalion Effect' of lower results.
Scaled up to the level of society, the confidence-performance feedback produces seemingly puzzling phenomena like winning and losing streaks, booms and busts, poverty traps and persistent inequality. This is especially marked over the short term, but also lurks behind long term trends. The relative wealth and poverty of nations has changed little in a century. There are numerous material explanations for this, but confidence, which is woven into the national identity of countries, plays a part. Successful countries gain confidence in their collective economic prowess, drawing in capital and encouraging enlightened economic policy, which locks in success. Poor countries are despondent, which inclines them to downplay values conducive to economic reform. Even the Germans, when confronted with French power in the early nineteenth century, turned their back on modernity. In place of French rationalism came German romanticism, instead of urban sophistication, peasant authenticity. Today's equivalent is the Islamic revival: unable to best the West at its own game, the Muslim world turns inward to laud its spiritual virtues, as did the German Romantics. This compounds the economic woes of the underdeveloped, reinforcing inequality. Asia has chosen to compete, and the general view that power is shifting from west to east helps drive capital to Asia and stimulate enlightened economic policies, accelerating the power shift.
Some countries break out of the poverty trap. The Irish in America, buoyed up by new waves of despised European immigrants entering beneath them, moved up the social ladder. After JFK's election as the first Irish Catholic president, his portrait hung in many an Irish living room, inspiring a new 'can do' generation to demand reform and usher in the Celtic Tiger. Once success breeds confidence, a winning streak is set in motion which produces economic takeoff. Spanish victory will barely register in the markets, but if it can shift the perceptions of Spain's creditors long enough to reverse its confidence spiral, Torres may yet save his country.
Eric Kaufmann is a professor of politics at Birkbeck College, University of London, and author of Shall the Religious Inherit the Earth: Demography and Politics in the 21st Century (Profile Books, 2011) and Political Demography (Oxford, 2012). He has written for Foreign Policy, Prospect, Newsweek and Huffington Post, among others. He is presently working on a book on confidence. He may be found on the web at www.sneps.net.