Crisis Turns Econ Theory on Its Ear:

Models, and pols, don't account for biases, insecurities: Brooks
By Kevin Spak,  Newser Staff
Posted Jan 16, 2009 1:03 PM CST
Trader Michael McCabe works on the floor of the New York Stock Exchange.   (AP Photo)
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(Newser) – Classical economics is based on the idea that “reason rides the passions the way a rider sits atop a horse,” David Brooks writes in the New York Times—which means classical economics is pretty much out the window right now. The recession proves the market is a psychological entity, governed by participants’ emotions, insecurities and instincts. And neither Republicans nor Democrats have grasped the implications.

Republicans have spent years trying to create a sizable investor class, believing investors to be careful, rational actors. Democrats, meanwhile, seem convinced the economy is a machine—pump in X dollars, it’ll spit out Y jobs. But “an economy is a society of trust and faith,” Brooks writes. “You can run up gigantic deficits, hire road builders and reduce unemployment from 8% to 7%, but insecure people will not spend.”