This morning Reuters hosted a very timely and important discussion on the impact of the ongoing credit/liquidity crisis on the financial stability of major economies. After a warm introduction by Prime Minister Gordon Brown, Alan Greenspan, former Chairman of the US Federal Reserve, shared his thoughts on the crisis. These remarks have been well reported elsewhere - most notably, of course, on reuters.com.
In a private chat after the event, I had the chance to explore further with Dr. Greenspan the observation he made during his formal remarks that after a long and distinguished career as a central banker, he had concluded that human beings were naturally inclined to create and fall victim to speculative financial bubbles (e.g, the tulip bubble, the South Sea bubble, and, more recently, the equity and housing bubbles). While this somewhat psychological explanation might seem at odds with the classical economic position often ascribed to Adam Smith, Dr. Greesnpan noted that one needed to read the far better known and widely read The Wealth of Nations alongside Smith's other great work, The Theory of Moral Sentiments.
In reaching for a more holistic interpretation of Adam Smith's legacy, Dr. Greenspan is, of course, very much in keeping with the recent work in behavioral economics which has come to challenge the view that all market participants are fully rational actors who will only act in their own self-interest. If this summer's market shenanigans are any indication, this more humanistic side of the "dismal science" will be working overtime on new empirical data