The evidence is in….
by Jeanne aka JStor on June 4, 2009
Read this article this morning: How Testosterone Poisoning Wrecked the Economy.
Fell over laughing. Not quite sure what to make of it. But near the end, Andrew Leonard writes:
Neoclassical economics tells us that markets know best and individuals, en masse, will make rational decisions based on the information presented to them. The theory has taken some severe blows lately (and is utterly demolished in Justin Fox’s soon-to-be-published “The Myth of the Rational Market”),
There are a number of books coming out this year on the history of finance (more to come on that next week) but this one might be a good read….
Tags: Financial Crisis
Jeanne, thanks for this post.
After the economists’ physics envy and after copying some models from evolutionary biology, it seems that it’s time for economists to turn to psychology and neuroscience. I think that interdisciplinary work between economists and neuroscientists can be pretty fruitful.
In fact, a unification of economics and psychology have been proposed by Colin Camerer in 1999 (http://www.pnas.org/content/96/19/10575.full) and more recently by Herbert Gintis (http://www.umass.edu/preferen/gintis/NewUnity.pdf) but I’m sceptical as to whether such a unification will take place.
The question I’m asking myself is the following: Will there be two different models of economic agents coexisting, i.e. rational economic agent and a model of man derived from psychology/neuroscience? Or will there be a unified model of the economic agent? Can the two approaches be unified, or should they coexist in a symbiotic way?
It is important for all of us to understand that today’s markets are not free and therefor certainly not rational. The basic ability of the Fed to manipulate the cost of money by increasing or decreasing interest rates as well as printing money as they see fit precludes us from experiencing anything close to a free economy and the rational economic behavior that would result. All this talk from the ivory tower about “markets know best” is a complete fallacy because we don’t have real “markets” that can be studied in order to come to such conclusions.
Then start a school of thought for us economic nihilists ;)
Kidding. You have a good point; theory almost never walks on the same planet as the rest of us.
But theory is a way to promote general understanding. So skeptical as even I am with the concept of “free markets” and “economic agents”, let’s try to think together on some of this econ crap that we somehow manage to love.
Ftr, cool site. Can’t wait to apply here this fall.
So although we don’t currently experience free markets, many of us still do strongly believe in The Invisible Hand. In other words, that the free markets (powers of nature) are bigger and more powerful than the controllers (i.e. The Fed) in the long run; and rational human behavior will prevail if given the opportunity to be truly free.
So what will the powers of nature do with the so-called “free market” system which relies on the preciousness of its currency; yet unconsciously prints it and deals it out at its sole discretion?
The printing of our most precious currency has just begun. As just one example, the Fed/government will soon be forced to cover AIG’s interest rate swap bets against rising interest rates. Yes, AIG insured against rising interest rates.
For better or for worse, I do believe in the Invisible Hand, which will soon provide Interest rates that will rise perpetually as a self-fulfilling prophecy.