This thoughtful book by George Akerlof and Bob Shiller is reviewed at length in The New Republic by Richard Posner. It is a mixed review, it's fair to say. Prof Posner welcomes many of the detailed arguments made by the authors, but disputes their interpretation of Keynes, and makes this broader point:
“As one reads this book, one has the sense that deep down Akerlof and
Shiller believe that being rational is the same as being right. That is
a mistake. It prevents them from entertaining the possibility that what
has now plunged the world into depression is a cascade of mistakes by
rational businessmen, government officials, academic economists,
consumers, and homebuyers, operating in an unexpectedly fragile
economic environment, and that what is retarding recovery is not the
“unreasoning fear” of which Franklin Roosevelt famously spoke but the
rational fears–the reasoning fear, to use Roosevelt's idiom–of
businesspeople, consumers, and officials who confront economic
uncertainties for which no one had prepared them.”
I recommend the book (reviewed on this blog by Richard Bronk recently) and the review alike – much food for thought in each.
As you've noted an unspoken tension in the book and in the reviews seems to be whether we apply a behavioural model of economics (based simply on what people do) or a cognitive model (based on what we deduce that they were thinking when they acted). In the end economics seems to be a science of people’s actions rather than their thoughts. Although I can't help wondering if maybe a deeper understanding of people's thinking will lead us to better predictive analysis?
I think you're right, and it takes us back to Milton Friedman's famous 'as if' arguments for economics as a positive science. We're more uncertain now than at any time I can remember about whether economics is or should be positive or normative. The accusation is that we economists pretend the former as a cover for a cloaked normative agenda, but I don't think that was ever intentional, not being a conspiracy theorist.
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