During his 18 years as chairman of the Federal Reserve, Alan Greenspan didn’t so much testify before Congress as pronounce oracles. He was held in such awe that, even when they weren’t sure of what he had said, members of Congress didn’t dare press him.

Well, times have changed. At a Congressional hearing last week, a committee chairman did press Greenspan, and exposed the biggest gap in the former Fed chairman’s understanding—not of economics, but of human nature.

Greenspan told a House committee that he had “made a mistake in presuming that the self-interests of organizations,” like banks, made them “best capable of protecting their own shareholders and their equity in the firms.”

When chairman Henry Waxman said to him, “in other words, you found that your view of the world . . . was not right,” Greenspan replied, “Absolutely, precisely.” He then confessed to being “shocked” by this “flaw” in his thinking.

Greenspan, it seems, was shocked by the existence of something called “human nature.” He was confounded by the idea that people, instead of being utility-maximizing machines that act in accordance with an ideological script or academic theory, might act like, well, people!

It apparently didn’t occur to Greenspan, as Los Angeles Times columnist Tim Rutten writes, that “presented with a chance to make a killing,” people might put their own interests first, regardless of the consequences for others.

Greenspan was a devotee of Ayn Rand, author of Atlas Shrugged, the bestselling book which is still very popular. Her worldview, called objectivism, promoted the idea that if you pursue your own self-interest, it will always be rational and help the most people. We’ve seen in recent weeks where that leads.

To be fair, Greenspan is not the only person to be surprised at how human nature intrudes on the best-laid economic plans.

For the past month or so, the financial crisis and stories about it have followed a recurring pattern: Financial markets drop, often precipitously, and government officials put in place measures designed to restore “confidence” in those markets.

After an initially positive response, markets then continue to slide, and government officials and the media scratch their heads. They seem to have forgotten the role that human emotions like fear play in decision-making and how those emotions operate independently of our most elegant theories.

It isn’t a coincidence that memorable economic downturns have been labeled “depressions” and “panics.” To imagine that the economic realm operates independently of human nature and emotions is to live in a fantasy world, as we have been painfully reminded these past months.

Greenspan, to his credit, has acknowledged his mistake. Too bad he didn’t see it earlier before he pumped up the artificial wealth which resulted in our economic collapse.

It’s hard to imagine a clearer example of how bad ideas can have a huge impact. Worldviews matter and following wrong views of reality, as we’ve seen here, is a recipe for disaster.

It’s one thing to avoid excess regulation—it’s another to assume that, left to their own devices, people will selflessly look out for the interests of others. Not so. Forget human nature and you don’t get free markets, you get the Darwinian law of the jungle—a view of the world that shouldn’t come as a shock to any Christian.