Behavioral Economist Robert Shiller said in a recent New York Times Op-ed said, “We need to invent financial institutions that take into account the kinds of communities we want to build. And we need to base this innovation on an approach to economics that captures the richness of human experience—and not efficient-market economics.”
Dr. Shiller is one of many economists decrying the lack of sustainable financial institutions that have led to so many recessions, including the current Great Recession—sustainable institutions that build communities rather than destroy them. Their lack has been mainly because they targeted the wrong economic goals—productivity over sustainability, or efficient markets (i.e. markets with minimal oversight) over markets that attempt to sustain longer-term economic growth.
We seem to have mastered the means of production, as economist John Maynard Keynes predicted in his 1930 treatise, “Economic Possibilities for our Grandchildren”, yet not how to put such growth on a sustainable path that benefits future generations rather than indebting them. As the originator of an economic theory that advocated government support during the Great Depression, Keynes believed that markets did not cure themselves without widespread suffering. The “animal spirits” of a populace that was discouraged by prolonged unemployment had to be boosted by governmental job creation measures in order to boost economic growth, if private sector employers weren’t hiring.
In other words, most modern economic theory has concentrated on producing the maximum amount of goods and services (hence emphasis on efficient markets), but ignoring their social welfare aspects. I.e., how sustainable is such a system that venerates individual effort (i.e., self-interest), but ignores its results? When whole communities are destroyed by a succession of bursting asset bubbles—it was first the dot-com bubble in 2000, then real estate bubble, and now the credit bubble bursting that has almost destroyed our banking system—then it is time to begin looking for a more sustainable economic system that preserves assets for our grandchildren.
Economists, sociologists and psychologists in particular are beginning to look at systems that capture the “richness of human experience” advocated by Dr. Shiller. One pioneer is economist Hazel Henderson, who helped to found the Calvert family of eco-friendly mutual funds. She also created the Calvert-Henderson Quality of Life Indicators (at http://www.calvert-henderson.com) that helps to measure what makes up a better quality of life. Its education component highlights why U.S. elementary education has flagged—the U.S. is ninth in the list of eighth grade math and science scores, for instance—behind nos. 1 and 2 Singapore and Taiwan, and what should be done to remedy it.
The research of behavioral economists such as Dr. Shiller are also debunking the efficient markets’ economists who generally advocate privatization (and deregulation) of financial institutions in the belief that individuals are the best regulators of their own behavior. Behavioral economists find that most people either do not have the time or knowledge to make intelligent financial decisions without some regulation to govern errant behavior. Former Fed Chairman Alan Greenspan once famously said,
“It is not that humans have become any greedier than in generations past. It is that the avenues to express greed had grown so enormously.”
Though private enterprise is the foundation of capitalism, and its source of wealth, we now know it only enriches the few without adequate regulation and governmental oversight.
And so Lord Keynes concludes, “The strenuous purposeful money-makers may carry all of us along with them into the lap of economic abundance. But it will be those peoples, who can keep alive, and cultivate into a fuller perfection, the art of life itself and do not sell themselves for the means of life, who will be able to enjoy the abundance when it comes.”