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A review by beefbroccoli
How Markets Fail: The Rise and Fall of Free Market Economics by John Cassidy
5.0
This is an engaging, well-written, and clear book about the history of economic theories. It was written back in 2009 after the subprime mortgage crisis, but it still is very applicable to right now in 2024 when people are increasingly worried about "end stage capitalism" and "crony capitalism". An important book to read and I really enjoyed it despite knowing very little about economic theory.
Economists like Milton Friedman have long insisted that the best way to ensure prosperity is to scale back government involvement in the economy and let the private sector take over. When properly functioning, free markets reward hard work, innovation, and well made affordable products and punish companies that make shoddy products, thus ensuring society's resources are allocated to productive uses. Free markets are therefore more efficient than other systems like communism which lacks an incentive structure. A free market that benignly self-regulates as above is a great thing.
But Cassidy shows, through multiple examples, that market failures (speculative bubbles, environmental pollution, rampant inequality, anticompetitive behavior on the part of big companies exploiting monopoly power, health insurers refusing to insure sick people) are primarily the consequence of decisions taken by private companies in an environment of minimal regulation. Bad economic policy play a huge role in this (Cassidy is very critical of Greenspan walking us into two bubbles in a decade - dot.com and housing). Market failures are especially endemic in the fields of healthcare, technology, and finance; these sectors cannot be treated like other sectors that function decently without government supervision like the airlines. Reality-based economics (championed by Keynes, Akerlof, Stigliz, Pigou, Minsky) appreciates that laissez-faire economics may work in some things but in many more it is inapplicable. They believed that capitalism, if left without active supervision "fine tuning", could lead to a slump, instability and possibly another Great Depression, even fascism. Concepts like "rational irrationality" (Keynes), "negative externalities" (Pigou), disaster myopia (Minsky), and representative heuristic (Kahneman and Tversky) are also introduced.
The final part of the book focuses on the subprime mortgage crisis and its contribution to the 2007-2008 global financial crisis. Cassidy explains it very clearly, laying the blame at Wall Street (taking large amounts of risk and dumping it on regular people who do not know better; CEOs inflating their firm's equity capital), the Fed (with the most scorn for Greenspan), and Congress (pursuing a policy of easy money plus deregulation, authorizing bailouts that provide an extensive safety net for big financial firms). He is also critical of the Obama administration for not putting Wall Street in its place... as the financial system is now dominated by a handful of firms too big to fail but can take on as much risk as they please because the taxpayer will be there to bail them out.
Economists like Milton Friedman have long insisted that the best way to ensure prosperity is to scale back government involvement in the economy and let the private sector take over. When properly functioning, free markets reward hard work, innovation, and well made affordable products and punish companies that make shoddy products, thus ensuring society's resources are allocated to productive uses. Free markets are therefore more efficient than other systems like communism which lacks an incentive structure. A free market that benignly self-regulates as above is a great thing.
But Cassidy shows, through multiple examples, that market failures (speculative bubbles, environmental pollution, rampant inequality, anticompetitive behavior on the part of big companies exploiting monopoly power, health insurers refusing to insure sick people) are primarily the consequence of decisions taken by private companies in an environment of minimal regulation. Bad economic policy play a huge role in this (Cassidy is very critical of Greenspan walking us into two bubbles in a decade - dot.com and housing). Market failures are especially endemic in the fields of healthcare, technology, and finance; these sectors cannot be treated like other sectors that function decently without government supervision like the airlines. Reality-based economics (championed by Keynes, Akerlof, Stigliz, Pigou, Minsky) appreciates that laissez-faire economics may work in some things but in many more it is inapplicable. They believed that capitalism, if left without active supervision "fine tuning", could lead to a slump, instability and possibly another Great Depression, even fascism. Concepts like "rational irrationality" (Keynes), "negative externalities" (Pigou), disaster myopia (Minsky), and representative heuristic (Kahneman and Tversky) are also introduced.
The final part of the book focuses on the subprime mortgage crisis and its contribution to the 2007-2008 global financial crisis. Cassidy explains it very clearly, laying the blame at Wall Street (taking large amounts of risk and dumping it on regular people who do not know better; CEOs inflating their firm's equity capital), the Fed (with the most scorn for Greenspan), and Congress (pursuing a policy of easy money plus deregulation, authorizing bailouts that provide an extensive safety net for big financial firms). He is also critical of the Obama administration for not putting Wall Street in its place... as the financial system is now dominated by a handful of firms too big to fail but can take on as much risk as they please because the taxpayer will be there to bail them out.