Wednesday, March 11, 2009

A New Economist for Capitalism after the Crisis

This post relates to the following Keystone Economic Principles:

3. All choices have consequences.

4. Economic systems influence choices.
5. Incentives produce “predictable” responses.

Economist Amartya Sen, who won the 1998 Nobel Prize in Economics, has an interesting piece in the New York Review of Books (HT to Arts & Letters Daily). In it, he discusses the economic debate that seems to focus on the works of Adam Smith and John Maynard Keynes.

Sen discusses some of the advantages and disadvantages of the capitalist system described by Smith in The Wealth of Nations (WN). And by adding insights from Smith's Theory of Moral Sentiments (TMS), he provides the more-rounded view that is frequently overlooked by critics of market capitalism who often have not read TMS, and more frequently are unfamiliar with the total of WN.

Sen also discusses Keynes, but largely as a way of introducing another economist - a contemporary of Keynes - Arthur Pigou. Pigou and Keynes not only knew each other, they taught together at Cambridge. Pigou was the heir of Albert Marshall and was the target of some of Keynes' criticisms of neoclassical economics. Other, post-Keynesians gave short-shrift to Pigou's work in other ways.

But Sen sees something in Pigou that is relevant to our current situation - the role of psychology in economics. This is important because the combined areas of psychology and economics are increasingly the subject of study. How they affect each other is at one of the frontiers of many behavioral studies. It seems that Pigou may have been on to something. And what he thought may be of more than just academic interest in the current environment.

I recommend the article, and I look forward to your comments.

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