Dr. Law and Economics: or How Richard Posner Learned to Stop Worrying and Love Keynes

Richard Posner, the uber-author and notorious law and economics 7th Circuit judge, just wrote a good piece for TNR on how he has become a Keynesian in the wake of our economic crisis. Posner is often seen as right-of-center so it's interesting to see him analyize and explain what made Keynes appealing to him. This is one of my favorite critiques of neo-classical economics ... and Posner recognizes it, and because of it is drawn to Keynes:

The dominant conception of economics today, and one that has guided my own academic work in the economics of law, is that economics is the study of rational choice. People are assumed to make rational decisions across the entire range of human choice, including but not limited to market transactions, by employing a form (usually truncated and informal) of cost-benefit analysis. The older view was that economics is the study of the economy, employing whatever assumptions seem realistic and whatever analytical methods come to hand. Keynes wanted to be realistic about decision-making rather than explore how far an economist could get by assuming that people really do base decisions on some approximation to cost-benefit analysis.

The General Theory is full of interesting psychological observations--the word "psychological" is ubiquitous--as when Keynes notes that "during a boom the popular estimation of [risk] is apt to become unusually and imprudently low," while during a bust the "animal spirits" of entrepreneurs droop. He uses such insights without trying to fit them into a model of rational decision-making.