Thursday, March 26, 2009

Theories Blessed By Mammon

Yglesias says what lots of people like Kevin Drum say about tighter banking regulations, and they might not have helped us if we'd had them:
the vast majority of the human agents were in the grips of a neoclassical economic theory that told them that the operations of the private market couldn’t be problematic in this way and that any market failures that might have existed were surely trivial compared to the problems that would be created by government intervention. That theory’s wrong, but it’s hard to see how any ship of state piloted by people holding those beliefs could possibly have steered clear of the shoals.
I'm wondering where the problem originates. If the problem is just the prevalence of bad economic theories, it seems like what we need is some heroic economics professors to do a big study of the housing bubble disasters. Disasters like this can be the events that catalyze scientific revolutions, turning fields upside down and getting written about centuries later by intellectual historians. Are you listening, my colleague in the next building? You can save the world and get tenure while doing it!

Of course, it's highly significant in all of this that billions of dollars in income for highly influential people and firms depend on neoclassical economic theories maintaining their dominance, at least among the sort of people who in charge of financial regulation. How exactly one buys this sort of dominance for theories blessed by Mammon, I don't really understand. (There are straightforward things like buying a new Nobel Prize for a field that never had one before, but I bet it can work in a bunch more subtle ways.) I'd be curious to hear more about how this works. Are there entities doing a more respectable version of crap like this where businessmen give large grants to colleges in exchange for putting Ayn Rand on the curriculum?
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