Wednesday, March 30, 2011

Modern Science, Ancient Philosophy, and why Markets fail

David Brooks’ new book, The Social Animal, calls to mind Aristotle’s definition of man as “Political Animal.” And it turns out Brooks confirms many classical claims about human nature; however, he does so by relying upon modern science, not philosophy. The book is a series of “Studies show” arguments.

Studies show the modern view of human nature as rational, autonomous creatures is flawed i.e. Modern science contradicts modern philosophy. Human beings are dual natured, a combination of god and brute or reason and passion. Reason and passion are at war in every soul and modern economic theory fails to account for this. Indeed, an economist would cringe at even using the word 'soul.' Moreover, human beings are social and relational; Neurobiologists agree with the Poet John Donne that “no man is an island.”

Brooks says these studies have made him rethink his endorsement of free market principles. He doesn’t discuss this further, but it is easy to see why. Free Market Economists believe in some variation of ‘Rational Choice’ Theory which states rational actors always act in favor of material incentives. Based on the Classical/Modern Scientific view of human nature, however, man is NOT exclusively rational. He can act irrationally or let his emotions get the better of his judgment in certain circumstances. Think of Dostoevsky’s Underground (Emotional) Man. For example, it is a principle of financial planning to buy in a bear market, not sell; yet sell is what everyone does.

Free Market Economists also assume man is autonomous and will look at his investments independent of how people around him are acting. But the Classical/Modern Scientific view of man is he is social and relational and thus the climate of fear (or confidence) which surrounds him will affect how he will make his financial decisions. Think of the Bank Run scene in It’s a Wonderful Life.

This isn’t to disavow a Free Market Economy entirely; it is only to suggest it needs some minor revision in light of who we are.

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