Q & A with Deirdre McCloskey
How Human Optimism Affects Economy
Do you have a friend who is always overly optimistic?
“Everything will work out fine. It always does.”
But what if even the smartest people are in fact overly optimistic? Let Deirdre McCloskey, Distinguished Professor of Economics, History, English, and Communications offer you an alternative viewpoint on the reasons of economic crises.
1. In a recent interview you explained that most economics crises were caused by human optimism not greed. The dot com crisis was caused by too much belief in technology, the last financial crisis by too much belief in mathematical innovations in finance and so on. According to you is there any way we can harness ourselves against this type of optimism bias? (And must we strive for preventing crises likes these?)
Wisdom, Wise old heads—but not too many of them, or else we keep on doing the old things again and again!
The underlying and insoluble dilemma is that we want an innovative economy, but that such an economy is always (by its very innovation) going to be subject to human optimism. Thank the Lord.
Before 1800, and especially before 1700, the ups and downs in even a relatively well off economy like England’s (though, understand, down at a miserable $6 a day as against $100 now) were caused by wars and harvests.
Now they are caused by being a little too innovative, extending railways too far, being too optimistic about the prospects of St. Louis, expecting rainfall to go on being higher than normal in Kansas, and so forth.
2. As an economic historian, how do you interpret the rise of behavioral economics and neuroeconomics?
Fashion, to which economics is strongly subject. It’s the same as the point I just made about the real economy. In the economy of science we get a New Idea, such as those, or neoinstitutionalism, or Samuelsonian economics, or activity analysis, or 2 x 2 x 2 models of trade, and we tend to optimistically overinvest in them.
It’s not evil, just human. We want dynamic science, so we have to put up with business cycles in it – I’ve seen many, many fashions come and go in my career.
3. One of the goals of behavioral economics is to better predict economic behavior.
It doesn’t. It predicts individual behavior, as psychology aims to do and sometimes does. Economics by contrast is about group behavior, especially in markets. And neuroeconomics has the same weakness. (It is, further, a re-invention of phrenology, confusing knowledge of the brain [“Here is the color center”] with the mind, a very different thing.)
4. Combine the grown interest in behavioral economics and a renewed belief in the unlimited possibilities of technology and I conclude we are overly optimistic that in the nearby future we can precisely predict human behavior. Isn’t this a crisis in the making?
It is of course silly to think we can profitably predict human behavior, even in the mass. I wrote a book in 1990 called If You’re So Smart: The Narrative of Economic Expertise, which made merry of this ancient but silly project.
If you’re so smart, one should ask every time about prediction in the stock market or in the fashion industry or in science, why aren’t you rich? Seriously. It is a wholly legitimate challenge if some light-thinking fellow claims to be able as the French positivists put it long ago, savoir pour pouvoir (know in order to exercise power over people) in a way that easily makes profits.
5. Last question is of course about vla. Proper Dutch prefer eating their vla with hagelslag. What’s your favorite vla and do you have a preferred topping?
Straight. Only a highly uncultivated person would eat vla with hagelslag!