The financial crisis has caused many economists to reconsider their ideas regarding financial markets and the economy. Megan McArdle at the Atlantic puts it best:

"Economists all over the ideological spectrum are rethinking the lessons we thought we had learned from the Great Depression and the Japanese experience. As it unfolds, we will no doubt be seriously rethinking our model of the relationship between the financial markets and the real economy."

One of these economists is Alan Greenspan, the self-proclaimed libertarian who was the chairman of the Federal Reserve for 18 years starting in 1987. He testified before the House Committee on Oversight and Government Reform on Thursday. In response to a question about whether his ideology pushed him to make decisions he wished he had not made, he said:

"Yes. I have found a flaw. I don't know how significant or permanent it is. But I have been very distressed by that fact."

I'm surprised he only found one. Perhaps the most distressing flaw I have read about in regards to Greenspan's decision making was his insistence that derivative markets did not need to be regulated. In 2003 he said:

"What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn't be taking it to those who are willing to and are capable of doing so."

In other words, Greenspan believed he had made taking on risk much less risky--which clearly does not make much sense. Perhaps it was this belief that caused him to keep interest rates low even as he watched the housing bubble grow, and actively encouraged the practice of issuing adjustable rate mortgages which people were not able to keep up with as interest rates rose.

I am not attempting to place the blame for this entire crisis at Greenspan's feet. Rather, I am trying to demonstrate how rigid adherence to ideology among many people forced them to make bad decisions.

It was ideology that led Greenspan and others to look at trends in the economy and see a story that could only be half supported by the facts--that the free market was fulfilling its potential and creating massive wealth with little risk.

But that is not what was happening. The economy moves in cycles, and periods of growth are eventually, inevitably, followed by slow periods. Rooting your actions in ideology is not necessarily wrong, but allowing ideology to distort your interpretation of reality to the point where you are ignoring other possibilities is not wise.

If we are lucky, then one positive outcome of the current crisis will be an era of economic pragmatism: firstly, a recognition that dogmatic ideology has its limits when making economic decisions, and that, while we all have our economic worldviews, we have to be flexible and adhere to facts; and secondly, a recognition that the market untouched by human regulation or planning is neither rational or desirable.

Pragmatism of this kind would allow us to make real decisions rooted in human agency when it comes to the economy, instead of shying away from this power in the face of the omnipotent, omniscient market. While actors and players might still be motivated by ideological underpinnings, there would be a collective recognition that these motivations cannot be the only factors when making decisions. The cyclical nature of the market would be a recognized truth, leading to the age-old maxim, "in all things, moderation."