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A review by holodoxa
كيف تفشل الأسواق by سمير كريم, John Cassidy
2.0
How Markets Fail by John Cassidy (as many others here on GR have described) is roughly a two-part book, where the first portion provides a summary of the history of market economics and then dives into an analysis of the 2008 housing market crash/credit crunch. The animating argument for the work is that the U.S. need to abandon the "utopian economics" of extreme laissez-faire capitalism and embrace "reality-based economics" where smart government regulations and monetary policy moderate boom-and-bust cycles and promote general stability in capital markets.
Although I am an aggressive champion of the free market, there are things to admire in Cassidy's work. First, he is eminently clear about the failures of centrally planned economies (i.e. communism, socialism, etc) and the immense power of markets to drive growth and flourishing. In short, he still is an advocate of capitalism (of course regardless of anyone's advocacy markets are going to persist anyhow). He is simply some flavor of neo-Keynesian. Second, Cassidy's historical summary of market economics (i.e. classical -> neo-classical -> Keynesianism -> Monetarism/neoliberalism) and criticisms of various assumptions of free market models (e.g. perfect information, many small firms, rationality) were reasonable and partially persuasive. Though, these criticisms are completely familiar to most people with some amount of college-level exposure to economics, but at least Cassidy does a reasonable job of detailing these situations. Cassidy presents a lot of the textbook examples of "market failure," including the tragedy of the commons (overfishing of public waters), the prisoner's dilemma (i.e. imperfect information and destructive incentives), and network externalities (e.g. Microsoft Word). Overall, it is useful that How Markets Fail contributes to popularizing more sophisticated understandings of economics that one will usually find in mainstream public discourse today.
How Markets Fail is also beset by several important flaws, which outpace its bright spots. The largest flaw appears to be a generalized overconfidence in the ability of government to effectively and efficiently regulate financial markets (Cassidy's criticism are mostly focused on financial markets). Cassidy doesn't detail the long history of regulatory failures and blunders (e.g. price controls, rent-seeking, zoning laws, sludge, crowding out, corruption, waste). There is no discussion of the morass of incentives that face public officials and bureaucrats (i.e. public choice theory) and how they may guide policy. He also flippantly dismisses the role policy itself played in the 2008 financial crisis (i.e. the spike in home purchasing relative to historical norms wasn't the doing of private economic choices alone). Despite Cassidy's recommendations, which are minimal and relatively vague, it is unclear he could provide a persuasive narrative for how the crisis could have been averted. It would just be ***hand-waving*** Glass-Steagall Act ***hand-waving*** Alan Greenspan ***hand-waving***.
Cassidy's work also completely lacks a discussion about what generates real productive growth in the economy. This is a huge omission, which I worry was intentional. I'm concerned that Cassidy chose to avoid this because it would compel a discussion of the trade off between stability and innovation/growth. Put overly simply, we can have a stable economy that doesn't really grow or we can have a dynamic economy that can explode in any direction. Cassidy decidedly chooses the former and much of American policy over the 20th and 21st century has steered us in that direction. However, Cassidy owes his audience a full discussion of what this means. Hint, there will be a lot more lose-win situations to navigate than win-win situations, which I think bodes less well for social tranquility and overall flourishing.
Of course, maybe it is too much to expect a serious but popular work of economics with an agenda to provide more sophistication and balance and to steelman arguments that conflict with the author's ostensible prior beliefs. But Cassidy's ideas should be subject to the same intense scrutiny he applies to the ideas of classical, neoclassical, neoliberal, Chicago school thinkers. This is a test his book fails.
Although I am an aggressive champion of the free market, there are things to admire in Cassidy's work. First, he is eminently clear about the failures of centrally planned economies (i.e. communism, socialism, etc) and the immense power of markets to drive growth and flourishing. In short, he still is an advocate of capitalism (of course regardless of anyone's advocacy markets are going to persist anyhow). He is simply some flavor of neo-Keynesian. Second, Cassidy's historical summary of market economics (i.e. classical -> neo-classical -> Keynesianism -> Monetarism/neoliberalism) and criticisms of various assumptions of free market models (e.g. perfect information, many small firms, rationality) were reasonable and partially persuasive. Though, these criticisms are completely familiar to most people with some amount of college-level exposure to economics, but at least Cassidy does a reasonable job of detailing these situations. Cassidy presents a lot of the textbook examples of "market failure," including the tragedy of the commons (overfishing of public waters), the prisoner's dilemma (i.e. imperfect information and destructive incentives), and network externalities (e.g. Microsoft Word). Overall, it is useful that How Markets Fail contributes to popularizing more sophisticated understandings of economics that one will usually find in mainstream public discourse today.
How Markets Fail is also beset by several important flaws, which outpace its bright spots. The largest flaw appears to be a generalized overconfidence in the ability of government to effectively and efficiently regulate financial markets (Cassidy's criticism are mostly focused on financial markets). Cassidy doesn't detail the long history of regulatory failures and blunders (e.g. price controls, rent-seeking, zoning laws, sludge, crowding out, corruption, waste). There is no discussion of the morass of incentives that face public officials and bureaucrats (i.e. public choice theory) and how they may guide policy. He also flippantly dismisses the role policy itself played in the 2008 financial crisis (i.e. the spike in home purchasing relative to historical norms wasn't the doing of private economic choices alone). Despite Cassidy's recommendations, which are minimal and relatively vague, it is unclear he could provide a persuasive narrative for how the crisis could have been averted. It would just be ***hand-waving*** Glass-Steagall Act ***hand-waving*** Alan Greenspan ***hand-waving***.
Cassidy's work also completely lacks a discussion about what generates real productive growth in the economy. This is a huge omission, which I worry was intentional. I'm concerned that Cassidy chose to avoid this because it would compel a discussion of the trade off between stability and innovation/growth. Put overly simply, we can have a stable economy that doesn't really grow or we can have a dynamic economy that can explode in any direction. Cassidy decidedly chooses the former and much of American policy over the 20th and 21st century has steered us in that direction. However, Cassidy owes his audience a full discussion of what this means. Hint, there will be a lot more lose-win situations to navigate than win-win situations, which I think bodes less well for social tranquility and overall flourishing.
Of course, maybe it is too much to expect a serious but popular work of economics with an agenda to provide more sophistication and balance and to steelman arguments that conflict with the author's ostensible prior beliefs. But Cassidy's ideas should be subject to the same intense scrutiny he applies to the ideas of classical, neoclassical, neoliberal, Chicago school thinkers. This is a test his book fails.