How Markets Fail: The Logic of Economic Calamities / Edition 1
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How Markets Fail: The Logic of Economic Calamities / Edition 1

3.2 19
by John Cassidy
     
 

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ISBN-10: 0374173206

ISBN-13: 9780374173203

Pub. Date: 11/10/2009

Publisher: Farrar, Straus and Giroux

Behind the alarming headlines about job losses, bank bailouts, and corporate greed is a little-known story of bad ideas. For fifty years or more, economists have been busy developing elegant theories of how markets work—how they facilitate innovation, wealth creation, and an efficient allocation of society’s resources. But what about when markets

Overview

Behind the alarming headlines about job losses, bank bailouts, and corporate greed is a little-known story of bad ideas. For fifty years or more, economists have been busy developing elegant theories of how markets work—how they facilitate innovation, wealth creation, and an efficient allocation of society’s resources. But what about when markets don’t work? What about when they lead to stock market bubbles, glaring inequality, polluted rivers, real estate crashes, and credit crunches?

In How Markets Fail, John Cassidy describes the rising influence of what he calls utopian economics—thinking that is blind to how real people act and that denies the many ways an unregulated free market can produce disastrous unintended consequences. He then looks to the leading edge of economic theory, including behavioral economics, to offer a new understanding of the economy—one that casts aside the old assumption that people and firms make decisions purely on the basis of rational self-interest. Taking the global financial crisis and current recession as his starting point, Cassidy explores a world in which everybody is connected and social contagion is the norm. In such an environment, he shows, individual behavioral biases and kinks—overconfidence, envy, copycat behavior, and myopia—often give rise to troubling macroeconomic phenomena, such as oil price spikes, CEO greed cycles, and boom-and-bust waves in the housing market. These are the inevitable outcomes of what Cassidy refers to as “rational irrationality”—self-serving behavior in a modern market setting.

Combining on-the-ground reporting, clear explanations of esoteric economic theories, and even a little crystal-ball gazing, Cassidy warns that in today’s economic crisis, conforming to antiquated orthodoxies isn’t just misguided—it’s downright dangerous. How Markets Fail offers a new, enlightening way to understand the force of the irrational in our volatile global economy.

Product Details

ISBN-13:
9780374173203
Publisher:
Farrar, Straus and Giroux
Publication date:
11/10/2009
Edition description:
First Edition
Pages:
390
Product dimensions:
6.40(w) x 9.10(h) x 1.30(d)

Table of Contents

Introduction 3

Part 1 Utopian Economics

1 Warnings Ignored and the Conventional Wisdom 17

2 Adam Smith's Invisible Hand 25

3 Friedrich Hayek's Telecommunications System 37

4 The Perfect Markets of Lausanne 49

5 The Mathematics of Bliss 61

6 The Evangelist 72

7 The Coin-Tossing View of Finance 85

8 The Triumph of Utopian Economics 97

Part 2 Reality-Based Economics

9 The Prof and the Polar Bears 111

10 A Taxonomy of Failure 125

11 The Prisoner's Dilemma and Rational Irrationality 139

12 Hidden Information and the Market for Lemons 151

13 Keynes's Beauty Contest 166

14 The Rational Herd 177

15 Psychology Returns to Economics 192

16 Hyman Minsky and Ponzi Finance 205

Part 3 The Great Crunch

17 Greenspan Shrugs 221

18 The Lure of Real Estate 235

19 The Subprime Chain 251

20 In the Alphabet Soup 268

21 A Matter of Incentives 285

22 London Bridge Is Falling Down 299

23 Socialism in Our Time 317

Conclusion 335

Afterword: The Great Disconnect 347

Notes 363

Acknowledgments 389

Index 391

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How Markets Fail: The Logic of Economic Calamities 3.2 out of 5 based on 0 ratings. 19 reviews.
mrfreeze_ak More than 1 year ago
There is finally a book out that extends Keynes ideas about what to do when markets fail to how they fail in the first place. This books goes into a history of different economic writers and their ideas. Now my problem is how to get my congressmen to read this book before they gut the Federal Reserve.
nolitawatch More than 1 year ago
Very clear presentation of America's economic history from the Great Depression through the Great Recession. Cassidy uses language that general readers can appreciate to explain the economic theories, financial practices, and lack of governance that led to the near miss.
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Magneto More than 1 year ago
I don't wish to be unkind to Cassidy, but I keep waiting for a logically respectable refutation of genuine free markets to come forth and John Cassidy's How Markets Fail is yet an additional disappointment in reason. Out of the chute, I was left slack-jawed by Cassidy's opener in the book; Alan Greenspan's now-famous testimony to Congress where he describes his change of heart and admits that free markets fail. One of the most in vogue, terrifically shallow and common errors pop critics of free markets make is to paint Alan Greenspan as a "free markets guy" or an "Ayn Rand disciple". Logic easily brings this assertion down when one considers that, in honest economic circles, Greenspan is famously recognized as a traitor to free markets by his venal ascendancy into the post of Chairman of the Federal Reserve during the Reagan administration - the same Federal Reserve that exercises de facto centralized economic planning through forced interest rates (read, interventionist capital markets) and fiat money printing. Greenspan is a bane of free markets and soul-sold poster boy of government created economic disasters. Among Cassidy's disjointed examples of why rational, self-interested people cause markets to fail is the story of a pedestrian bridge built over the river Thames. I am expecting to read the account of how a bridge was built by a free-market entity (usually a "infrastructure" task that unimaginative thinkers cede to governments) and how the venture failed. Instead, he gives an example of how people begin to step in unison, setting up a dangerous rythmic sway of this bridge. It turns out to a cute metaphor with dubious applicability to markets, especially considering that people were reacting with instinct on the bridge and not the rational behavior that the author intends to lambaste. It fails to recognize good investors' first rule: venture where others are not. It is an example best left for structural engineers and not markets. Cassidy is contradictory in that the regulations he calls for are well known fences that create the 'self-interested and rational' herds he condemns. The book discusses banks in the housing bubble of 2002-2007 as exemplary of free market failures. He fails to notice the blaringly obvious fact that banks did not and do not operate in the free-market, especially in regards to the housing market (Fannie? Freddie?). Banks are the first recipients of inflated Fed funds (printed money), highly regulated and shot through with implicit governmental guarantees behind them and thusly, for failure. Cassidy uses the period between 1945-1980 as an example of how regulation works to spur economic growth, citing depression-era laws as the reason for "enormous prosperity". He called this a lab. Every scientist knows that any experiment can endure a certain amount of infiltration or deviation. Cassidy's reverence towards regulations as promoting of economic growth is likely spurious and non-causal. So, another book hits the shelves of the genre, full of poorly researched economic history and logically inept conclusions. With it, Cassidy joins the seemingly coordinated chorus of anti-freedom drones, making philosophically and historically unsound arguments in favor of the financial nanny state.