Irrational exuberance and the path not taken



"It is this deception which rouses and keeps in continual motion the industry of nature"

-Adam Smith, The Theory of Moral Sentiments, IV.I.10, 1759

Wojcik cautioned the council against following a "path of irrational exuberance" where funding was not accounted for.  postbulletin.com 4.17.15

Alan Greenspan, naked and wet

"The concept of irrational exuberance," writes Alan Greenspan in his 2007 autobiography, The Age of Turbulence: Adventures in a New World, "came to me in the bathtub one morning as I was writing a speech."

In that speech, "The Challenges of Central Banking in a Democratic Society," delivered at the annual dinner and Francis Boyer Lecture of The American Enterprise Institute for Public Policy Research in Washington, D.C. on December 5, 1996, the former chair of the Federal Reserve Bank asked, "But how do we know when irrational exuberance has unduly escalated asset values...?"  

"Irrational exuberance" has since been something against which most persons would caution us. And so were we recently cautioned by a member of the city council. Probably not bad advice as far as it goes, but a bit late.

In Rochester, we're not just following a path of irrational exuberance, we're laying pavement.

Is it worth noting that the wet and naked Ayn Rand disciple did not say irrational exuberance was bad, but only pondered how we might discern when its influence is undue? 


Adam Smith: Money can't buy happiness, but thinking it can isn't all bad - or - what's that invisible hand doing?

In his story of the poor man's son, Adam Smith considers the fruits of a life spent in pursuit of wealth and greatness. Thinking it will grant him tranquility and happiness, the son finds instead it affords him neither. 

Yet, having made this observation, Smith concludes even though it may "keep off the summer shower, but not the winter storm" (and we all suffer and die anyway), it is this delusion that wealth brings happiness that prompts us:

...to cultivate the ground, to build houses, to found cities and commonwealths, and to invent and improve all the sciences and arts, which ennoble and embellish human life; which have entirely changed the whole face of the globe, have turned the rude forests of nature into agreeable and fertile plains, and made the trackless and barren ocean a new fund of subsistence, and the great high road of communication to the different nations of the earth. 

So: much as our desires might jerk us around, the invisible hand pleases nonetheless.


From the market to a market

Virginia Postrel - who got me to Smith - writes in "In Praise of Irrational Exuberance,"

All this delusion can, of course, become destructive. But there’s more to it than mere foolishness. The illusions that spur entrepreneurial ventures and consumer daydreams point to the nonmaterial side of markets. Markets not only expand health and comfort, providing a sustaining material existence. They also spur ambition and imagination, the quest for achievement and the pursuit of meaning. They give us an opportunity to exercise our creativity, to enjoy the satisfactions of absorbing, productive work, and to fashion and express our identities.

She is speaking to markets, as are Greenspan and Smith, but what she says (and Smith as well in his way) speaks to not just how the market comes to be a human enterprise, but that it is a human enterprise. Fully, thoroughly human.

I would not be the first to observe that in this human enterprise the difference between business-as-usual and entrepreneurial innovation is a joy that knows nor needs no other reason. We'll see plenty of both in the years ahead. You'll know them by the path not taken.