With the credit crisis raging and the stock market crashing, it’s not surprising that some people are rethinking their approach to free-market economics. What is surprising is who some of these people are. Perhaps most surprising is former Fed chairman Alan Greenspan, a staunch opponent of regulation and a former member of the Objectivist inner circle (he was even present at Ayn Rand‘s funeral when “A six-foot floral arrangement in the shape of a dollar sign was placed near her casket”). So, this comes as something of a surprise:
Under questioning from Rep. Henry Waxman (D-Calif.), the committee chairman, Greenspan acknowledged that the failure of that expected self-regulation represented “a flaw in the model” he used to analyze economics. “I was going for 40 years or more on the perception that it was working well.”
Of course, this admission was roundly panned by Objectivists and their brethren in market fundamentalism, libertarians. And there’s the classic response that the guvm’nt is really the cause of all the market’s problems.This is how so much discussion of the markets goes, with free-market zealots expressing their faith in the omnipotence of markets, and market-haters making arguments that ignore the success of markets in dealing with many of the problems that face us today.
What bothers me is that there really is a lot of science being done on the kind of decisions real human beings make in economic matters, which is largely ignored in the media’s analysis. Behavioral Economics and Neuroeconomics are becoming well developed fields, and recent books (like Michael Shermer’s The Mind of The Market) provide accessible and fascinating analysis of these experiments (though that book has a baffling ending where Shermer relapses completely).
The author of another such book, Predictably Irrational, explains this in a way I though was really intuitive in this post. The post is short, so rather than explain it I’ll just inline it here:
I always found the appeal to the market gods a bit odd. Why would the market fix mistakes instead of aggravating them? When the Chicago economists sometimes (reluctantly) admit that people make mistakes, they claim that people make different types of mistakes that will eventually cancel each other out in the market. Behavioral economics argues that, instead, people will often make the same mistake, and the individual mistakes can aggregate in the market. Let’s take the subprime mortgage crisis, which I think is a great example (but a very sad reality) of the market working to make the aggregation of mistakes worse. It is not as if some people made one kind of mistake and others made another kind. It was the fact that so many people made the same mistakes, and the market for these mistakes is what got us to where we are now.
A statement like this can enhance your understanding, be falsified, etc. Either way, it isn’t simply an assertion of faith or hatred. It’s a nuanced view, which is what the truth almost always is, especially when dealing with a complex emergent system like the market. Why aren’t we hearing more from the behavioral and neuro- economics people during this downturn?