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The Psychology of EconomicsThe Psychology of Economics

The Psychology of Economics

But an economy is a society of trust and faith. A recession is a mental event, and every recession has its own unique spirit. This recession was caused by deep imbalances and is propelled by a cascade of fundamental insecurities. You can pump hundreds of billions into the banks, but insecure bankers still won't lend.

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The Psychology of Economics January 16, 2009  |  By Robert Joustra
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David Brooks writes a usual thought provoking piece today in the New York Times about how economic recession has triggered a collapse of classical economic theory, particularly its increasingly badgered anthropology. In classical economics human beings may be a mixture of passions and desires, but ultimately they are governed by reason. Thus the market can be predicted, and supply and demand constellate a relatively stable economic order. Brooks writes,

But an economy is a society of trust and faith. A recession is a mental event, and every recession has its own unique spirit. This recession was caused by deep imbalances and is propelled by a cascade of fundamental insecurities. You can pump hundreds of billions into the banks, but insecure bankers still won't lend. You can run up gigantic deficits, hire road builders and reduce the unemployment rate from 8 percent to 7 percent, but insecure people will still not spend and invest.

The economic spirit of a people cannot be manipulated in as simple-minded a fashion as the Keynesian mechanists imagine. Right now political and economic confidence levels are running in opposite directions. Politically, we're in a season of optimism, but despite a trillion spent and a trillion more about to be, the economic spirit cowers.

Mechanistic thinkers on the right and left pose as rigorous empiricists. But empiricism built on an inaccurate view of human nature is just a prison.

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