My sermon for today is taken from Animal Spirits, the title of a new book about the rising science of behavioral economics. A review of the book appears in the New York Times Book Review.
What attracts me to the book — and why I will read it– is its argument with the conventional wisdom of economics that human beings can be expected to make rational decisions. Not so, said J. M. Keynes. What market bubbles demonstrate — the Great Depression in Keynes’ era — is that people make decisions based on what he called “animal spirits” — over-confidence, greed an the naive belief that what goes up will never come down, and even an irrational belief in fairness.
The economics I was taught at The Wharton School of Economics was based on the concept of — but really the belief in and ideology of — human rationality. Had I been smarter and quicker back then, I might have realized that all the reading I had been doing on my own in high school — Freud, Nietzsche, Doestoevsky, Henry Miller — was either utterly absurd, aberrant and shallow, or that it flew in the face of the rational-choice foundation of conventional economic theory.
What I believe today isn’t that human beings are essentially irrational and thus prone to irrational exhuberance, in the phrase made popular by Alan Greenspan, that fallen idol of economics. What I believe today is what Jonathan Swift said about human beings, which is that we are capax rationis, or capable of reason. Which is what I learned in a graduate literature seminar taught by J. W. Johnson, a brilliant scholar of Eighteenth Century literature. That lesson was reinforced in a class with Norman O. Brown, whose Life Against Death made instructive use of Dean Swift and Dr. Freud. Man, Freud believed, is the neurotic animal. Human history, which Brown (no relation) puts on the couch, shows a clear tendency to do what neurotics do: repeat unsuccessful behaviors. For example, war.
It seems inconceivably dense that economics has for so long denied, ridiculed or marginalized such insights into human nature which drives marketplace decision-making. When I interviewed Milton Friedman in l978, he told me that psychoanalysis isn’t a science like economics. For rational-choice-based economics, Freud is mumbo-jumbo and Swift is for Eng Lit departments.
Nobel Prize-winning economist Friedman, I wrote 30 years ago in The Best of Business (Esquire), is smarter than you are. And he was. But history — modern history, included — has shown us that the smartest guys in the room can and do get it wrong. The geniuses who advised JFK about a war in Vietnam War were tragically off the mark. So were the best and brightest economists and Wall Streeters, econ professors and government types who wrote the computer models for credit default swaps and other animal-spirit investment innovations.
A bit of modesty would be in order — would it not? — for the smartest guys in the room.
For we are what Swift says we are — merely capable of reason. The final book of Gullivers Travels gives us the vulgar, shite-throwing animals of our nature, the Yahoos — as well as the depressingly, chillingly overly rationalized animals of our nature, the houyhnhnms.
And we are what Shakespeare’s Lear says we are, “poor, bare, fork’d” animals.
And thus we would be well advised to follow Aristotle’s urging to behave with moderation and regard the golden mean.
Such wisdom goes down well in the humanities — but it needs to go up on the walls of the S.E.C. and in the nation’s economics departments and in the Blackberries of the best and brightest across the fruited plain.