How Markets Fail

How Markets Fail : The Logic of Economic Calamities by John Cassidy

This is a lengthy book trying to generalize market failures. It is very informative : lots of 20th century history of economics is chronicled - Keynes, Minsky, Friedman and the Chicago school, Greenspan, what not. Of course, the goal is to explain the most recent financial market crisis. There is a brief description of the climax in fall 2008, but "The End of Wall Street" by Roger Lowenstein does a very thorough job of documenting that.

Cassidy's main argument is that free markets left to themselves (Adam Smith's "invisible hand") don't always work. What is perfectly rational from an individual’s point of view can result in a calamity for the market as a whole. The kicker is, the players (CEOs of financial firms, for instance) are forced to make such choices even if they recognize this peril. Prisonner’s Dilemma, basically. He calls this rational irrationality. That, and other issues like hidden information and bad incentives will always lead free markets to booms and busts, as Minsky pointed out.

Cassidy places a lot of the blame for the financial crisis of 2008-09 squarely on Alan Greenspan and his laissez faire (Ayn Rand) ideology. He dubs such faith in free markets as professed by the Chicago school (Friedman, et al) as “utopian economics”. Keynes, Minsky, et al, on the other hand are in the “reality based economics” gang.

As a history lesson on the economics of 20th century, this is a great read. The author being a journalist with background in economics helps. As a source for solutions to these issues, this book is a bit dubious - too much faith is put on governments to do the right thing.