Wednesday, January 28, 2009

Economists confounded by the social fact of 'confidence'

Here is Robert Schiller writing in yesterday's WSJ:

President Obama is urging Congress to pass an $825 billion stimulus package as soon as possible. But even that may not be enough to stabilize the economy, since it fails to take into account the downward spiral of animal spirits that is underway and may continue to worsen.

The term "animal spirits," popularized by John Maynard Keynes in his 1936 book "The General Theory of Employment, Interest and Money," is related to consumer or business confidence, but it means more than that. It refers also to the sense of trust we have in each other, our sense of fairness in economic dealings, and our sense of the extent of corruption and bad faith. When animal spirits are on ebb, consumers do not want to spend and businesses do not want to make capital expenditures or hire people.

Here is John Cochrane, dismissing 'confidence' as a tenet of economics knowledge:

[Some] say that we should have a fiscal stimulus to “give people confidence,” even if we have neither theory nor evidence that it will work. This astonishingly paternalistic argument was tried once with the TARP. Nobody could say how it would work in any way that made sense, but it was supposed to be important do to something grand to give people “confidence.” You see how that worked out. Public prayer would work better and cost a lot less. Seriously, as social scientists, economists don’t have any special expertise to prescribe what intrinsically meaningless gestures will and will not give “confidence,” so there is no reason for anyone to listen to our opinions on that score.

Truth is, both Schiller and Cochran are right: 'confidence' -- or whatever you want to call the social-psychological category -- is both central to being able to understand or explain economic processes, as Mr. Schiller argues, AND peripheral to present-day economics theory, models, and concepts, as Mr. Cochran argues.

Indeed, to gain insight into 'confidence' -- and I agree with Mr. Schiller, via Keynes, that economics should try to gain such insight -- economists would have to be willing to turn to sociologists, whose well-established categories like legitimacy, power, authority, habit, the lifeworld, social structure, and interaction could help the economist learn a thing or two about the variabilities of human behavior and thought.

I read economists as much or more than I read sociologists. I value their knowledge. But I have a working hypothesis that their theories are not up to the task of understanding present problems. The chief culprit is their disinterest in the human mind and its social context. I also sense that economics practice suffers from a certain level of arrogance. This arrogance will not suit them well in a period like the one we are all of sudden in -- in which economics needs help from the very fields of knowledge they define themselves against.

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