Former Fed Chairman Alan Greenspan, earlier this week:
Greenspan seems to argue that since the case for capitalism is so overwhelmingly rational, the opposition to it must surely stem from very deep-seated, immutable characteristics. "And that carries me to the general conclusion that if you're going to model an economy, you have to do far better in understanding how the unit of the economy functions--i.e., the human being."
As he compiled the book, Greenspan lifted his eyes from spreadsheets and data sets long enough to notice certain universals in human behavior--beyond profit-seeking. "When you get to be my age you see teenagers who replicate each other generation after generation, and it's all crazy and idealistic in the same ways," he said. Greenspan also recalled his discovery that people in all sorts of isolated societies smile, and that when Lewis and Clark encountered the Indians of the Northwestern United States, they found certain commonalities: "These were societies that truly grew up without contact with the rest of the world."Greenspan also turned to psychology and anthropology for explanations of economic irrationality. The erratic behavior of investors during and after bubbles--excessively exuberant on the upside, unwarrantedly pessimistic and fearful on the downside--continuously confounds economists. In his memoir, Greenspan mounts a spirited defense against critics who charge that he too cavalierly let bubbles inflate on his watch. His response: bubbles, while "extraordinary human behavior, which is not what we could consider ideal," must be innate. They seem to break out everywhere--again and again. "There's a long history of forgetting bubbles," he writes. "But once that memory is gone, there appears to be an aspect of human nature to get cumulative exuberance." When the bubble inevitably breaks, as reality fails to meet expectations, "the result is a dramatic 180-degree switch from exuberance to fear."
So what should we learn from bubbles, aside from the fact that they can be great for the economy? The phenomenon, he said, "is ever increasingly suggestive that these market economies are run by consumers, mainly by the innate characteristics of human nature."
More from Greenspan here.
Now consider current Fed Chairman Ben Bernanke, today:
Losses from sub-prime mortgages have far exceeded "even the most pessimistic estimates", US Federal Reserve chairman Ben Bernanke has said. His comments to a US finance committee come two days after the Fed cut base interest rates to 4.75% from 5.25%.
The rate cut was made "to help forestall some of the adverse effects on the broader economy", he said.That, along with pumping cash into the financial system, aimed to counter "significant market stress" he said.
There is no single thing about studying political science that has frustrated me more than unending respect, and at times even envy, that most political scientists have for economists. I'll be honest: I cannot for the life of me understand why everyone is so impressed with them. Their models and theories are often wonderfully elegant, but they rarely if ever work in the real world. Having failed to demonstrate rationality in humans, many have fallen back on the idea of limited, or bounded, rationality. But even that conception of humans is rarely accurate. Which makes sense, really, because human beings are neither robots nor vulcans. We have emotions. We both feel and think things, and sometimes both! We don't always think with our heads.
Once upon a time, the behaviorists ruled my discipline. But then the economists came along and convinced everyone to ignore psychology and pretend humans are lean, mean, reasoning machines. We are not. This should be obvious to anyone who has ever, oh, I don't know... lived? For god's sake - if Star Trek can get this right, why can't academics?
But hey...if Alan Greenspan of all people can finally admit to economics fatal flaw, maybe there is hope. Maybe, just maybe, we can begin to recognize that there is something far more complicated and, I would argue, far more interesting going on inside of us. If Greenspan recognizes that economists need psychologists, maybe there is hope for us humans after all...
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