Skidelsky is correct to note that the economics profession needs reform. By the summer 2009 various economists and journalists such as Paul Krugman, the editors of Economist magazine and Paul de Grauwe were both noting the limitations of standard economic models and calling for modifying the analysis so as to allow for more reality. Indeed I was cautiously optimistic that the 2008 meltdown and its aftermath would foster a major reevaluation and reorienting of modern economics. It seems, however, that many are learning all the wrong lessons.
Most would-be reformers quickly turned to behavioral economics as a way to incorporate more reality into economic analysis. Unfortunately, this amounts to little more than asserting that emotions impact human behavior and transforms economic science into something more resembling applied psychology. While no one should doubt the importance of emotions on the actions of people, it is not clear that such recognition fundamentally alters sound economic analysis. This was noticed decades ago by Ludwig von Mises:
Many champions of the instinct school are convinced that they have proved that action is not determined by reason, but stems from the profound depths of innate forces, impulses, instincts, and dispositions which are not open to any rational elucidation. They are certain they have succeeded in exposing the shallowness of rationaIisrn and disparage economics as "a tissue of false conc1usions drawn from false psychological assumptions."
Yet rationalism, praxeology, and economics do not deal with the ultimate springs and goals of action, but with the means applied for the attainment of an end sought. However unfathomable the depths may be from which an impulse or instinct emerges, the means which man chooses for its satisfaction are determined by a rational consideration of expense and success.
He who acts under an emotional impulse also acts. What distinguishes an emotional action from other actions is the valuation of input and output. Emotions disarrange valuations. Inflamed with passion man sees the goal as more desirable and the price he has to pay for it as less burdensome than he would in cool deliberation. Men have never doubted that even in the state of emotion means and ends are pondered and that it is possible to influence the outcome of this deliberation by rendering more costly the yielding to the passionatc impulse (Human Action, pp. 15-16).
There are further issues with Skidelsky's assertions, but they are matters for another day.
