An Economy of Faith and Trust

By DAVID BROOKS
NYT

Once there was just Newtonian physics and the world seemed neat and mechanical. Then quantum physics came along and revealed that deep down things are much weirder than they seem. Something similar is now happening with public policy.

Once, classical economics dominated policy thinking. The classical models presumed a certain sort of orderly human makeup. Inside each person, reason rides the passions the way a rider sits atop a horse. Sometimes people do stupid things, but generally the rider makes deliberative decisions, and the market rewards rational behavior.

Markets tend toward efficiency. People respond in pretty straightforward ways to incentives. The invisible hand forms a spontaneous, dynamic order. Economic behavior can be accurately predicted through elegant models.

This view explains a lot, but not the current financial crisis — how so many people could be so stupid, incompetent and self-destructive all at once. The crisis has delivered a blow to classical economics and taken a body of psychological work that was at the edge of public policy thought and brought it front and center.

(More here.)