2008 will go down as the great defeat of neoclassical economics. While Ph.D.’s, Nobel Laureates, and pundits debate the efficacy of Adam Smith, Ayn Rand, and the Chicago School of Economics as discussed by Barry Ritholtz on Tuesday, the rest of us will still be reeling from the invisible fist of greed and corruption that took down our old form of capitalism, and replaced it with something still unknown.
While the future of economics, lending, and investment and commercial banking are ripe for change, human nature will likely not be so fortunate. What economists need to account for is that Adam Smith’s Invisible Hand is capable of making a fist. What philosophers will be forced to debate is whether Enlightened Selfishness as outlined by Ayn Rand is in fact an intelligent guiding principal for regulation. And what regulators will need to contend with is a good old house-cleaning.
I have no doubt that the events of 2007, 2008 and likely 2009 are going to change institutions to their core. From Business Schools to the SEC. Corporations who were severely levered will find it hard to borrow even after credit markets thaw. Not so much because credit will forever remain tight, but because our thinking will. Our grandparents accounts of the great depression, and their stories of debt leading to failure are no longer mythical tales of disconnected financial Luddites, bards from some olden time long since forgotten. Regardless of the accuracy of the portrayal of our current circumstances and the numerous comparisons to the Great Depression, truth is that the current financial maelstrom is worse than most anyone living has ever seen.
In my opinion some of the fundamental assumptions of neoclassical economics need to be rethought, or at least redefined. Take utility maximization. The original definition of maximizing utility, was supposed to measure some abstract, immeasurable form of happiness. Instead, utility has often come to mean wealth as a substitute for happiness, and the concept of wealth maximizing behavior is one of the foundations for welfare economics, a fancy way of talking about the “optimal” way of allocating wealth “efficiently.”
Selfish enlightenment or enlightened self-interest is one of the factors that drives Adam Smith’s Invisible Hand theory. Enlightened self-interest was supposed to prevent excessive greed, corruption, and/or other market imperfections by assuming that market participants would act in accordance with a mythical set of guiding principals and values that would protect the system as a whole.
Continued>>.
http://greenewable.wordpress.com/2008/12/27/the-invisible-fist-of-greed-and-corruption/