Tuesday, June 19, 2018
How Markets Fail: The Logic of Economic Calamities, by John Cassidy
As I said, Cassidy spends quite a lot of time talking about the history of economics as a field and the growth of free-market ideology. Cassidy takes time to point out that figures such as Adam Smith and John Stuart Mills envisioned roles for government within a free market system, such as providing protection of property, national defense, infrastructure development, and education. In fact, as Cassidy illustrates in his book, for much of its history economics saw a need for the government to intervene, especially in projects where there is a net benefit for society but not necessarily an individual benefit. More importantly, Adam Smith and other early economists did analyze banks or financial markets so what may be true for commercial markets does not hold true for financial markets. As Cassidy argues, the idea that there is no role for the government in the economy is a relatively new development, Cassidy dates it to the anti-Communist movement following World War II and it only became ascendant with the conservative resurgence in the Eighties.
Cassidy takes a fairly moderate position by arguing that there is a place for the free market because of the inherent complexity of production. Even products as simple as bread or soap are dependent on massive amounts of information that a government central planner simply doesn't have access to. How much bread do people want to buy? What sort of bread do people want to buy? What prices should we charge for the bread we produce? How much wheat should go into making bread for people to eat? This is all information that a government central planner doesn't have access to, but fortunately the workings of the free market enable all of this to be done. The important thing to remember, though, is that the free market ensures people most able and willing to pay for goods and services are the ones who have access to their goods and services. And as my old economics professor said, this works fine for bobbleheads but it raises some serious ethical questions when it comes to healthcare.
The biggest issue Cassidy points out with free market ideology, however, is the ideological constraints it assumes as categorical absolutes that are always true, including belief that prices in financial markets reflect actual value and people always act rationally. With these assumptions free market economists came to the conclusion that speculative bubbles simply could not happen because people would not fall into the euphoria surrounding bubbles and the prices would never get inflated beyond true values. However, there is ample historical evidence that bubbles do happen and basically anyone who isn't an economist can tell you people don't act rationally. Cassidy utilizes these and other arguments to illustrate why government regulation of financial markets is a vital and necessary function.
The oddest thing about this book is the fact that it has become dated so incredibly quickly. It was published in 2009 and so Cassidy argues that increased regulation of banks and financial institutions will be an important step for Obama's government, as well as changes in healthcare and a strong environmental policy to combat climate change. Cassidy even states that Republicans will have to acknowledge these facts as self-evident and work with Democrats to create new legislation. Sitting here nearly ten years later, we all know how well Republicans responded to the attempts of the Democrats to better regulate health care, rein in the banks, and cap carbon emissions. In hindsight the book feels charmingly naive and it makes me wonder what Cassidy would say to the various Republican arguments advanced in the past few years.
Overall I think this book is still valuable because it delves so deeply into the history of economic thought and explains not only how the financial crisis happened, but the ideological forces that enabled it to happen in the first place. I don't know if it's because this is the third book I've read on this subject or if Cassidy does a better job of explaining, but I feel like I'm finally beginning to truly understand the past crisis. This is definitely worth checking out.