David Brooks of the New York Times has of late been a big advocate of behavioral economics, as this column from October initially laid out. Last week, Brooks again raised his argument that the economic collapse has irreversibly exposed the flaws in classical economic theory:
Once, classical economics dominated policy thinking. The classical models presumed a certain sort of orderly human makeup. Inside each person, reason rides the passions the way a rider sits atop a horse. Sometimes people do stupid things, but generally the rider makes deliberative decisions, and the market rewards rational behavior.
While the classical model is hardly the quaint ancient history that Brooks' rhetoric suggests, I do agree with Brooks that the current crisis can be traced in part to a fantastical belief about both the nature of persons and of markets. It is also nice to see that others are moving toward acceptance that there may be a significant role for government and law to play in market regulation. It would have been much nicer to see that move occur prior to the complete meltdown of the economy, the destruction people's lives and livelihoods, etc. That's an argument for ex ante versus ex post regulation, I guess.
Even if the King is dead, I am less certain than Brooks seems to be that the natural successor to the throne is behavioral law & economics. Such a move could be seen as simply a mere substitute of a new mode of "mechanistic thinking" (to paraphrase Brooks' criticism) to address the problem. I guess it could be argued that the crisis has exposed the weaknesses not of one economic model for regulation, but of all economic models for regulation. But, if that is the case what are we left with? In any event, we are no doubt in the midst of a major shift in attitudes toward legal intervention into markets, and it will be interesting to see what insights behavioral economics has regarding solutions to the problems.