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Not only How but Why Markets Fail
on 27 April 2012
How Markets Fail by John Cassidy provides a detailed review of economic theories relating to the operations of markets and illustrates the power of ideas; sometimes - bad ideas.
Cassidy provides the reader with a highly relevant historical journey that weaves the development of economic theories (particularly in finance and macroeconomics) with their practice in the real world leading up to the breaking of the financial crash of 2008-2009 centred on the US housing bubble. Key characters include economists from both sides of the spectrum together with pivotal policy makers.
This is definitely one of the better books I have read on the financial crisis since Cassidy illustrates how we came to be in this dreadful place through a combination of factors. Grounded in a fair representation of the conflicting theories of finance and macroeconomic policy this books avoids the kind of ranting witnessed in certain other publications on the subject.
Perhaps most valuable in this book is the way in which Cassidy traces the thinking of theoreticians about how markets operate from the classical to the contemporary period and illustrates how these various theories were adopted by politicans and financiers in the real world. Sometimes with disastrous results.
Hence whilst the book goes to some lenghts to explain the relevant theoretical constructs of the economics community, it is complemented by an equal consideration of the psychology and political economics at play amongst some of the key players.
As recorded in other publications on the financial crisis the book reinforces the sense that the demise of millions of people results from the games played by a relatively small number of players at the top of the power pyramid.
Sadly, although the conclusion of the book offers up some suggestions on how the crisis might be turned into an opportunity for significant reform in banking (particularly investment banking), the intervening three years since the book was published witness very little has been changed. A seriously missed opportunity.
At its heart this is a book that revisits the intellectual struggle by top economists from Adam Smith to Friedrich Hayek and Milton Friedman, from the ideas of Karl Marx to the insights of John Maynard Keynes. But it also includes some less well known figures whose contributions have greatly enriched our understanding of how people behave in market situations, in particular Daniel Kahneman and Amos Tversky in their contributions from psychology and Hyman Minsky's grasp of reality of how markets really work.
It reminds us that as students of political economics, there are two sides to consider; namely, the political (in particular the use of power) and the economic. The same can be said of financial economics, where there are the increasingly mathematically based models to consider, but there are also the psychological and political elements of the players. At its heart, this book reads as a review of the ideological battle between those (both theorists and practitioners) who believe in the efficiencies of the market and the need to minimise government intervention, versus those who take a more pragmatic approach that acknowledges the realities of market failure and the need to insulate society from its excesses. It is of course a conflict that continues to this day.