David Brooks has noticed the increasing popularity of behavioral economics. He argues that it would be a mistake to allow the recognition that people aren’t perfectly rational to convince us that policy makers should intervene more in the economy, since they aren’t rational either. My reaction is that, of course, the level of sophistication required to play it safe is less than the level of sophistication required to beat the market and so support for prudential regulations does not require the assumption that the regulators are smarter than market participants.
Matthew Yglesias demonstrates (again) that he is a genius and that a degree in philosophy can be an excellent preparation for economic analysis. He considers the ban on interstate banking — clearly not an optimal policy — and argues that concerns about human irrationality might have convinced us to keep it
when we’re looking at a regulatory regime that seems to be working okay, and the regulated parties start saying we need tweaks x and y and z and oh there’s no danger there we should be very suspicious. We shouldn’t count on being to fine-tune our results to perfection,
Oddly he entitles his post “The case for crude measures” and concludes “we should either lean in with a heavy hand or else stay away.” His reasoning has nothing to do with this conclusion. He is arguing in favor of conservatism. If something has existed for a long time and seems to be working okay, we shouldn’t change it — even if it is a regulation.
This argument makes sense (and was made by Edmund Burke some time ago I might add). It may have seemed to some people, including economists (one of the groups detested by Burke) that economic theory gave us a simple guide to optimal regulation. It may have seemed to some of them that optimal regulation was no regulation. These people are radicals who trust their own reasoning more than the wisdom of the ages.
Behavioral economics teaches us two things. First it is much more difficult to understand the economy than it would be if we could count on it to be in Nash equilibrium, so we should be cautious about our theories including our theories based on a particular hypothesis about irrationality. Second, we’re not rational either, so we should be humble. Both support conservatism.
The strange thing is that Brooks doesn’t seem to remember what conservatism originally was. He suggests that it tells us we should regulate — that is odd since economies have traditionally been regulated and respect for tradition and things the have been found to serve and work okay would suggest we continue to regulate it. This is particularly odd, because Brooks is unusual among contemporary American conservatives, because he leaves no doubt that he has actually read Burke and, in large part, agrees with him.
Odd that he uses the old old conservative argument in the defense of radical free market experimentation.
Given the polls, it is not odd that Yglesias doesn’t want to admit that a strong case can be made for actual conservatism as I’m sure he believes that it will in the near future become again the ally of right wingness after having spent 8 to 28 years as its nearly effective adversary (that is the least weak of the pathetically weak hindrances to right wing lunacy).