Law and Economics and the Global Economic Crises
The behavioral approach in economics and in Law and Economics established itself in recent years as an important addition to economic analysis. However, until now this approach has focused on various phenomena on the level of the individual player and mainly in the context of micro-economics and individual behavior in market conduct. The recent global crises prove the need to extend this approach in additional avenues, among which are macro economic theory. Trust in the economic system, for example, can be of major importance to economic results. It has been thus far assumed, for example, that despite individual psychological effects, which distort individual conduct in the stock markets, on the aggregate level one has to analyze stock markets in a pure rational framework. The current crises prove this to be wrong. Overall fall of trust can bring to irrational micro and macro market activities. If people would not trust their countries economy and government, rescue packages introduced by various governments in order to stimulate the economy might not do the job. Economists analyze real economic activities but it seems that the psychological factors exercise a significant role in economic performance.
Beyond shaking the crud rationality assumption used by traditional economic models, the behavioral approach so far has not produced other methodological tools and models to analyze operation in economic and non-economic markets. Likewise, its findings negate the accuracy of traditional economic models but are far from being rigorously incorporated into existing models. This is an important challenge for the years to come.
Behavioral studies have shown the there is no perfect correlation between wealth and happiness, growth and utility, and these findings are another reason for change of values within economic policy and indeed the economic science. I think that we – the Law and Economics community - have to take seriously a re-visit in the philosophical foundations of our own works.