Steinbeck on the Crisis
“It has always seemed strange to me,” said Doc. “The things we admire in men — kindness and generosity, openness, honesty, understanding, and feeling — are the concomitants of failure in our system. And those traits we detest — sharpness, greed, acquisitiveness, meanness, egotism, and self-interest — are the traits of success. And while men admire the quality of the first, they love the produce of the second.”
The usual cheap shot after citing a literary figure would be to argue that modern economics can’t possibly grapple with such issues. But it can. The incentives that Steinbeck describes are the incentives described in standard economic models. Agency theory is almost entirely devoted to developing mechanisms to deal with the fact that private and social interests often diverge; information economics tells us a lot about when these incentives are active; and behavioral economics tells us how people balance the opposing forces Steinbeck identifies.
One interpretation, understandably popular given our current plight, is that the basic economic theory informing the actions of central bankers and regulators was fatally flawed. … But another view, considerably closer to the truth, is that the problem lay not so much with the poverty of the underlying theory as with selective reading of it — a selective reading shaped by the social milieu …
Those same traits of self-interest that Steinbeck describes shape not only the economy, but also how economists choose to represent economic theory. Here’s Eichengreen again:
consumers of economic theory, not surprisingly, tended to pick and choose those elements of that rich literature that best supported their self-serving actions. Equally reprehensibly, the producers of that theory, benefiting in ways both pecuniary and psychic, showed disturbingly little tendency to object. It is in this light that we must understand how it was that the vast majority of the economics profession remained so blissfully silent and indeed unaware of the risk of financial disaster.