Between Euphoria and Fear

In the wake of last year’s financial crisis, Alan Greenspan, former chair of the United States Federal Reserve, expressed astonishment at the irrational behaviour of institutional leaders. “Those of us who looked to the self-interest of lending institutions to protect shareholders’ equity—myself especially—are in a state of shocked disbelief.” A strong believer in the rationality of decision making, Greenspan was shocked by the myopic behaviour of bankers who exposed their institutions to large risk for short-term gain.

He is not alone in his confusion. Looking back, we cannot seem to make up our minds about what went wrong. For some, such as Greenspan, it is individual decision making that was “irrational.” For others, such as Joseph Heath in his September essay for this publication, it is individually rational, self-interested decisions that resulted in collectively poor outcomes. These two diagnoses are quite different. In fact, they contradict one...