Investors sometimes behave irrationally, and so do regulators

Excerpts from: Taming ‘Animal Spirits’ By Kevin Williamson in National Review.


“Animal spirits” is John Maynard Keynes’s abstraction of all that goes into quotidian economic decision-making beyond the rigorously rational pursuit of self-interest. . .

Animal spirits are indeed at play, and mischievously so, both in the marketplace and among those who seek to govern the marketplace. . .

There is no need to address the problems of that passage beyond cataloguing them: We have lots of government intervention in the economy, but employment levels do swing, financial markets have fallen into chaos, scoundrels do flourish with great exuberance, etc. And neither Adam Smith nor his intellectual heirs believe that economic man is an icy rationalist, or even that he is rational, broadly defined. Ludwig von Mises put the idea into theoretical form, but it has long been understood that man acts rationally in the sense that he takes actions that seem to him sensible in order to achieve a certain end, but that end itself may be irrational, erroneous, or criminal: Scientific researchers act rationally to achieve certain ends; so do serial killers, religious fanatics, drug addicts, and Wall Street traders.

The fallacy implicit in the conventional argument for more robust financial regulation is that animal spirits — the whole menagerie of greed, panic, pride, thrill-seeking, irrational exuberance — distort only profit-seeking activity. But they are at least as likely to distort efforts to regulate profit-seeking activity. In truth, the animal spirits of regulators probably are more dangerous than those of Wall Street sharks: Competition and the possibility of economic loss constrain players in the marketplace, but actors in the political realm have the power to compel conformity and uniformity among those under their jurisdiction. The entire economy is yoked to their animal spirits, and the housing bubble was a consequence of that fact. We have bred an especially dangerous hybrid creature in the “too big to fail” private corporation, the bastard offspring of a union between Wall Street’s animal spirits and Washington’s.

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