Irrational Economist_ Making Decisions in a Dangerous World - Erwann Michel-Kerjan [5]
The challenge before us now is to better understand when and how rationality fails in this modern world. The chapters in Part Two—“Are We Asking the Right Questions? Economic Models and Rationality”—consider the growing menu of tools we have at our disposal today to meet this challenge. Part Three—“Individual Decisions in a Dangerous and Uncertain World”—looks at the individual decision processes that arise when people are confronted with small and catastrophic risks, and at how experience, uncertainty, and different time horizons can radically threaten rationality. By understanding these processes and thus avoiding the failures of rationality that sometimes result, people can make better decisions for themselves, and also better decisions for others in our society. Part Four—“Managing and Financing Extreme Events”—analyzes how individual behavior can translate into very good or very poor collective decisions by enterprises, markets, and governments. Natural disasters, climate change, terrorism threats, and financial crises are cited as illustrative examples of uncertain and dangerous environments.
WHAT ROLE FOR THE ECONOMIST? FROM THE IVORY TOWER TO THE CIRCLE OF POWER
In many ways, the transformation of economics as a discipline that now includes more realistic behavioral models is similar to what happened over the course of several centuries in physics, chemistry, biology, and medicine. Established paradigms evolve with new knowledge, the discovery of which is fueled, at least in part, by the collective desire to explain more accurately the world we live in, and by the aspiration to make it better. Economics is still a young discipline. To mature, it needs to transform itself into one that not only can better represent human behavior in the real world (the normative approach) but also can propose better remedies to societal issues the world faces (the prescriptive approach).
This leads us to ask: What should be the role of those who study or have a special knowledge of economics and other social sciences in ensuring the success of this transformation? Many pioneers of economics not only were advocates of specific theoretical programs but also participated directly in government. One example is Adam Smith, often cited as the father of modern economics. His work on self-interest was largely prompted by a critique of mercantilism and adherence to a moderate free-market policy (even though his earlier work focused on a morality based on sympathy and benevolence).9 But he was also one of the leading customs commissioners in Scotland appointed in 1778. Another is James Mill, who made significant contributions to classical British economic theory and was also a high-ranking official of the East India Company that governed India. During the 1830s, he was an influential leader in Parliament. A third is David Ricardo, tutored by Mill; after writing his Principles of Political Economy and Taxation in 1817 he entered Parliament as well. And influential laissez-faire economist Michel Chevalier negotiated the free-trade agreement between the U.K. and France in 1860—the same year he became a senator in the French Congress.
This long history of prominent economists influencing policy has continued. For instance, the Italian economist Vilfredo Pareto made important contributions to the study of income distribution and the analysis of individuals’ choices; but he was also a militant laissez-faire liberal who battled for free trade. And of course John Maynard Keynes, the very influential British economist, served in several key government posts during the twentieth century. Keynes would spearhead a revolution in economic thinking that was essentially pragmatic, rather than theoretical. He