Found via Simoleon Sense.
Schwartz: Well, I think this picture is completely false, but I think that even economists have known it was false almost from the start. Arguably the leading economist from the 20th century, Keynes, wrote about animal spirits. So here’s this framework of rational, utility-maximizing choice, and along comes Keynes and there’s this package of stuff that he calls animal spirit, that we just might call psychology, that has an enormous influence, moderates, completely negates all these processes of rational deliberation that economist models are built on. So this has been the dirty secret of economics forever. They build models as if people are rational actors, knowing that that assumption is unjustified. And what they hope, I think, and what Keynes thought was also a mistake, is that our irrational quirks are idiosyncratic, so that they basically just cancel each other out. Since economists are not particularly interested in predicting what you will do, or what I will do, but rather what whole markets will do, quirkiness doesn’t matter if it’s random. What Keynes appreciated is that it’s not random. In fact, bubbles are the opposite of random. Every time one of these bubbles pops, it seems to me, it’s a real thorn in the side of the kind of models of rational choice that economists build.
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