Why Rational Economists Behaved Irrationally

Prior to the 1970s, economic science maintained a relative consensus centered on the Keynesian approach. This approach relied on neoclassical ideas regarding rational agents and functioning markets. Milton Friedman's rising monetarism emphasized money supply control. In this paradigm, everything appeared logical: rational subjects made optimal decisions, markets efficiently allocated resources, and prices reflected real supply and demand ratios.

However, the economy functioned quite differently. It contained hidden pitfalls and a dark subconscious that influenced nearly all processes. Two economists noticed this reality and attempted to warn others before the situation escalated into a crisis. Their warnings, however, were largely ignored.

Until the 1970s, economic science maintained a relative consensus. The central theory stood on the Keynesian approach. This approach relied on neoclassical representations of rational agents and functioning markets. Additionally, the rising monetarism of Milton Friedman placed emphasis on the control of the money supply.

In this prevailing paradigm, economic processes appeared entirely logical. The theory suggested that rational subjects consistently made optimal decisions. Consequently, markets were viewed as efficient mechanisms for resource allocation. Furthermore, prices were believed to accurately reflect the real ratio of supply and demand.

Despite the established consensus, the economy operated in a fundamentally different manner. It was filled with hidden pitfalls and a dark subconscious. This psychological undercurrent influenced practically all economic processes.

Two economists identified these underlying issues. They recognized that human behavior in markets was not always rational. These observers attempted to warn their peers about the potential for crisis before the situation deteriorated further.

The narrative of this economic shift involves two major figures. Milton Friedman represented the monetarist view that dominated the era. His focus remained strictly on the control of the money supply.

The article also references Freud. It suggests that the economy contained a subconscious element, 'almost by Freud,' which operated covertly. This comparison highlights the psychological depth missing from the rational models of the time.

The transition from a purely rational economic view to one acknowledging psychological factors was significant. While the consensus prior to the 1970s focused on logic and optimal decision-making, reality proved more complex. The warnings issued by the two economists highlighted the existence of a subconscious influence on the market. Ultimately, the failure to heed these warnings suggests that the global markets were indeed susceptible to the irrational behaviors that the consensus had overlooked.