The deeper policy correction that’s now needed in Washington and financial centers around the world simply can’t take place without a rethinking of the underlying economic theory. Much as Washington is still captured by Wall Street, the economics profession remains captured by the false idea of rationality—the “religious belief” (as Stiglitz calls it) that science can fully explain human economic behavior. This thinking underlies much of the short-sighted thinking in Washington, the persistence-by-default of the old view that letting market forces rip is invariably the best policy choice, at least when compared to government intervention.

So enduring is this idea that, even in the face of the most serious market failure since the Great Depression, policymakers in Washington are still behaving in scared deference to the old rational-market models. Even with the evidence of massive fraud and manipulation in the mortgage and credit industry before them, Congress is intent on blocking or defanging the new Consumer Financial Protection Agency and providing the scamsters of the derivatives industry with new loopholes. When it comes to health care, a great deal of economics work has shown that the free market, dominated by for-profit insurance companies, simply doesn’t work well: people who most want insurance are also the people who are likely to become ill or who are already ill; and for-profit companies, knowing this, work equally hard to eliminate these customers or to minimize the care they can get (a concept called “adverse selection”). Despite that, the first thing to be dropped from the debate in President Obama’s recent legislative triumph was the “public option,” the idea of a government-run insurance alternative. Never mind that it was probably the only measure that could really bring the insurance companies under control.

Hirsh, on the need for a radical new approach to economic thinking