OUT FROM UNDER AYN:

Margaret Mead in a Pinstriped Suit: Alan Greenspan discovers that human beings are … irrational! (Daniel Gross, Sept. 17, 2007, Slate)

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."

Looking to human nature also helped Greenspan solve a perplexing economic mystery. Over the last 150 years, it seems that the maximum productivity growth the economy could achieve over a long period of time was 3 percent annually—despite a series of productivity-enhancing innovations, from the steam engine to the Internet. His conclusion? "What ultimately looks to be the case is that's the pace at which human beings operate," he said. People simply can't process new ideas more quickly. "The answer is that the human race, no matter how one defines it, is not smart enough to do better."

The ultimate rationalist seems to have concluded that fear, resistance to change, exuberance, and human limitations play a bigger role than expected in economic development. And he recognized that economists have proven so human—i.e., fallible—in their forecasting because the force actually driving the economy is humans who are prone to act on emotion rather than reason.

A nice illustration of why grown-ups stop believing in libertarianism, which denies human nature just as much Marxism does.

Posted by Orrin Judd at September 17, 2007 7:30 PM