The King is dead. Long live the King

from Juan Pablo Pardo-Guerra

The financial crisis has the makings of a Kuhnian revolution. In competition for a reconstituted sense of legitimacy are at least two houses of economic thought. The established regime of neoclassical economics provided the theoretical, normative and rhetoric scaffolds of financial regulation since at least the late 1960s. Behavioral economics, in contrast, emerged more recently as a reaction to the apparent illusion of rationality, uncovering the anomalies and biases that are unintelligible to the theoretical instruments of the previous regime. And today, whilst regulators scramble to rescue the institutions of the past and secure the markets of the future, economists wrestle – perhaps not nearly as explicitly as one would think – to redefine the nature and scope of their discipline in relation to the state and its regulatory practices. The contest between two royal households is on, between the extended neoclassical family and the smaller though by no means less robust house of behavioral economics.