The Recession, Human Greed and Economic Models

My own, amateur, view of the current recession is that human greed was all important as a primary cause, but greed was much aided by a lack of regulatory oversight and accounting rules were missing, or finessed (ignored), for reporting the actions of hedge funds. There was also an unwise and unquestioning knee-bending to the ideological ideal (vastly unworkable) of the free-market. It was inevitable these factors would bring everything crashing down.

Consequently, I find it remarkable how remarkable and shocking many observers, not all amateur like me, find this recession to be. Why the surprise, I ask, when it seems so clear that the free market capitalism model (aka "the big dream") neglects, or better, can't handle greed and other mysteries of the human psyche. These human "qualities" are so controlling of economic models because of their uncontrollable and unquantifiable nature, so it should seem to any one with common sense.

But there were historical warnings about greed. During the Big Depression of the '30's, John Keynes' wrote about the "dark animal spirits" that served to spoil the nice, clean economic (capitalist) model of Adam Smith (Wealth of Nations, 1776). Keynes posited "animal spirits" as the model-blitzing human factors that put the kibosh on Adam Smith and kin, (Keynes, The General Theory of Employment, Interest and Money, 1936). Keynes' notions about economies falling prey to human weakness/spirits are most recently expanded in another book, Animal Spirits (Akerlof and Okun, 2009). Prof. Okun gives a current overview of the Keynes-Okun-Akerlof evolution in the new Financial Times series on the future of capitalism.

Although Professors Akerlof and Okun are owed gratitude for their new book, it is curious that from 1936 (Keynes) through 2009 (Okun and Akerlof) there haven't been more of major investigations into the human-contributed weaknesses of free-market modeling. Maybe there have been, but there has certainly not been major insights that could have prevented idealist, free-market capitalism from becoming the destructive false-god leading to the binge and bust market cycles (junk bonds, savings and loan, dot-com, hedge funds through subprimes) over the past decade and more.

Prof. Okun aptly summarizes about the current recession:

"The idea that unfettered, unregulated capitalism would invariably produce the good outcomes was a wrong economic theory regarding how capitalist societies behave and what causes their crises. That wrong economic theory fails to take account of how the animal spirits affect economic behaviour. It fails to take into account the roles of confidence, stories and snake oil in economic fluctuation".

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Personally, I would add: "Good luck, Drs. Okun and Akerlof, because luck is the only chance you will have trying to model human nature. And no matter how hard you try, I betcha the human psyche has many more twists, tweaks, and tricks that will rise from the dark and outwit you. Ahh, the genius of the mind." (Attributed to me!)

Solution? Obvious - hard regulatory boundaries then let the bulls run.