How Markets Fail
The Logic of Economic Calamities
By: John Cassidy
Published: December 1, 2009
Format: Hardcover, 256 pages
ISBN 9780670068609
Publisher: Viking Canada/Penguin Group (Canada)
"Once a bubble begins, free markets can no longer be relied on to allocate resources sensibly or efficiently", writes New Yorker journalist John Cassidy in his incisive and compelling book How Markets Fail: The Logic of Economic Calamities. The author explores why markets enter into bubble phases, and the logic of rational irrationality that drives people to continue investing in the bubble economy, even if mainstream economic theory, and the idea of the rational market, would suggest that to not be the case.
John Cassidy describes what he considers the myths surrounding free market economics, which he refers to as utopian economics. The author describes how misreading the classic Wealth of Nations by Adam Smith, following the ideological teachings of Milton Friedman, and an adherence to the concept of a market that behaves in a rational manner, were all contributors to the bubble economy. John Cassidy points out that bubble creation and the eventual bursting of those bubbles are inevitable results of human decision making that are not recognized in classical economic theory. The author presents his concept of real world economics as an alternative. His revised economic thinking draws heavily on behavioral sciences, game theory, and discarding the idea that people behave rationally in their decision making process. He calls his real world economics rational irrationality that follow a very logical and predictable path.
John Cassidy (photo left) recognizes that Adam Smith did not extend his famous analogy of the invisible hand to the banking community. Instead, Smith understood that the banks would behave in a rationally irrational way if they had no oversight. As John Cassidy makes clear in the book, the banks had little choice but to enter the irrational market activity of the housing bubble. To not make risky loans, and then sell those loans into the derivative market, was to fall behind the competition and to lose stock value. As a result, it was rational for banks, also for their borrowers, to take excessive risk. The same sort of rational irrationality also operates in the health care field, rendering classical market economic thinking irrelevant in that sector, according to the author.
For me, the power of the book is the persuasive case that John Cassidy presents for the causes and inevitable collapse of the housing and stock market bubbles. The author outlines what he considers severe shortcomings in free market theory with clarity and in easy to understand language. Indeed, the entire book is thoughtful and convincing in its argument for a new paradigm in economic thinking. John Cassidy discusses in detail how supporters of free market thinking were taken by surprise by the growth and size of the housing bubble. The author shows how classical theory doesn't even allow for the possibility of bubbles, despite obvious evidence to the contrary. John Cassidy's real world economic theory is drawn from what he considers to be the way people actually behave when confronted by the uncertainty of the market. The author makes a strong case that instead of behaving rationally, as many economists believe, people act rationally in an irrational way. Real life decisions are made through emotion and not rational analysis, as believed previously.
I highly recommend the brilliant and must read book How Markets Fail: The Logic of Economic Calamities by John Cassidy, to anyone seeking a deeper understanding into the true nature of the causes and expansion of economic bubbles. Far from being an anti-market diatribe, the book is about understanding how markets really work, how people really make investment decisions, and why choices that appear to be irrational on the surface are actually rational and follow their own logic, within the context of the bubble economy.
Read the important and very convincing book How Markets Fail: The Logic of Economic Calamities by John Cassidy, and you will never listen to an economist or consider mainstream economics in the same way again. The author invites the readers to open their minds to an alternative way of looking at the economy, and he does so in an entertaining and enlightening format. The end result is a treatise on the way the economy really works, backed up with modern economic thought, application of game theory, and by leading edge behavioral science.
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