In a compelling September 3 New York Times Magazine piece, economist Paul Krugman asks, “How Did Economists Get It So Wrong?” Among the many indictments:
As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth. Until the Great Depression, most economists clung to a vision of capitalism as a perfect or nearly perfect system. That vision wasn’t sustainable in the face of mass unemployment, but as memories of the Depression faded, economists fell back in love with the old, idealized vision of an economy in which rational individuals interact in perfect markets, this time gussied up with fancy equations….
Unfortunately, this romanticized and sanitized vision of the economy led most economists to ignore all the things that can go wrong. They turned a blind eye to the limitations of human rationality that often lead to bubbles and busts; to the problems of institutions that run amok; to the imperfections of markets — especially financial markets — that can cause the economy’s operating system to undergo sudden, unpredictable crashes; and to the dangers created when regulators don’t believe in regulation.
I selected these two passages because both reference human rationality. When I took economics as part of my MBA coursework, we were taught that despite its extensive and daunting mathematics, economics is a behavioral science, as are psychology, sociology, and anthropology. And yet, we were also taught that behavior was predictable and rational.
This should have set off alarm bells even then, when I was in my 20s and didn’t understand much of anything.
Dan Ariely, author of Predictably Irrational, and others are working in the relatively new field of behavioral economics – studying what Krugman’s economic rationalists all seem to have overlooked: that the beautiful mathematical models make assumptions about behavior that render them incorrect. To simplify quite a bit, we do not always behave rationally, or even in our own best interests. Decision-making is much more complex, and much more based on an individual’s own influences (education, history, decision-making methodology, emotions, impulses, etc., etc.).
The connection to the world of creativity is this: creative connections and advances often come about from an expert in one domain crossing into another. The trouble with expertise is that a person becomes isolated in a narrow field of endeavor, never venturing out into other areas that could enlighten the work. If the economists who have been so concerned with finding the perfect formulas had just reached out a little bit, into other behavioral sciences, they might have seen clearly that we cannot rely on rational actors in world of irrational ones.