As Avishalom Tor wrote in the previous posting, an interesting discussion on the causes of and remedies to the global economic crises took place in the EMLE midterm meeting in Hamburg. The discussion, however, was conducted in the framework of the dominant economic paradigm – trust in the operation of markets, focusing on traditional market failures and extensive discussion of the failure of regulation in correcting these market failures, under the assumption that wealth maximization is the prime goal of policy makers including the law. I believe that the current economic crises ought to prompt us to re-think about the paradigm and indeed about Law and Economics and its future development. I would like to mentions here two points among many others meriting discussion– psychology and fundamental values.
The behavioral approach in economics and in Law and Economics established itself in recent years as an important addition to economic analysis. However, until now this approach has focused on various phenomena on the level of the individual player and mainly in the context of micro-economics and individual behavior in market conduct. The recent global crises prove the need to extend this approach in additional avenues, among which are macro economic theory. Trust in the economic system, for example, can be of major importance to economic results. It has been thus far assumed, for example, that despite individual psychological effects, which distort individual conduct in the stock markets, on the aggregate level one has to analyze stock markets in a pure rational framework. The current crises prove this to be wrong. Overall fall of trust can bring to irrational micro and macro market activities. If people would not trust their countries economy and government, rescue packages introduced by various governments in order to stimulate the economy might not do the job. Economists analyze real economic activities but it seems that the psychological factors exercise a significant role in economic performance.
Beyond shaking the crud rationality assumption used by traditional economic models, the behavioral approach so far has not produced other methodological tools and models to analyze operation in economic and non-economic markets. Likewise, its findings negate the accuracy of traditional economic models but are far from being rigorously incorporated into existing models. This is an important challenge for the years to come.
The second point is in the realm of normative economic analysis and the philosophical foundations and values that has been dominating economic theories in the last few decades. One of the sources of the current global crises is borderless greediness. The corporate world and its actors were trying to make more and more money, far beyond is needed for good life. This behavior is reflection of the prime and sole normative goal set by economic policies in recent decades – maximization of wealth and growth, which is also reflected by most of scientific writings including Law and Economics work. The success of the Chicago school, intertwined with the Regan-Thatcher ideology leaving its marks on the policies of both left and right in the western world, affected not only policy-makers and scholarly analysts and advisers, but also individual conduct, as the very ones that brought to the bubbles causing the financial crises.
Behavioral studies have shown the there is no perfect correlation between wealth and happiness, growth and utility, and these findings are another reason for change of values within economic policy and indeed the economic science. I think that we – the Law and Economics community - have to take seriously a re-visit in the philosophical foundations of our own works.