How Markets Fail: The Logic of Economic Calamities »

John Cassidy is a journalist at The New Yorker and a frequent contributor to The New York Review of Books. He is the author of Dot.con: How America Lost Its Mind and

Money in the Internet Era and lives in New York City.

Behind the alarming headlines about job losses, bank bailouts, and corporate greed is a little-known story of bad ideas. For fifty years or more, economists have been busy developing elegant theories of how markets work—how they facilitate innovation, wealth creation, and an efficient allocation of society’s resources. But what about when markets don’t work? What about when they lead to stock market bubbles, glaring inequality, polluted rivers, real estate crashes, and credit crunches?

In How Markets Fail, John Cassidy describes the rising influence of what he calls utopian economics—thinking that is blind to how real people act and that denies the many ways an unregulated free market can produce disastrous unintended consequences. He then looks to the leading edge of economic theory, including behavioral economics, to offer a new understanding of the economy—one that casts aside the old assumption that people and firms make decisions purely on the basis of rational self-interest. Taking the global financial crisis and current recession as his starting point, Cassidy explores a world in which everybody is connected and social contagion is the norm. In such an environment, he shows, individual behavioral biases and kinks—overconfidence, envy, copycat behavior, and myopia—often give rise to troubling macroeconomic phenomena, such as oil price spikes, CEO greed cycles, and boom-and-bust waves in the housing market. These are the inevitable outcomes of what Cassidy refers to as “rational irrationality”—self-serving behavior in a modern market setting.

Combining on-the-ground reporting, clear explanations of esoteric economic theories, and even a little crystal-ball gazing, Cassidy warns that in today’s economic crisis, conforming to antiquated orthodoxies isn’t just misguided—it’s downright dangerous. How Markets Fail offers a new, enlightening way to understand the force of the irrational in our volatile global economy.

Publishers Weekly

Market disasters—and the cycle of delusions responsible—receive lively, engaging analysis by Cassidy (Dot.con), a journalist at the New Yorker. The author focuses primarily on the rise and fall of free market ideology and the mostly unrealistic ideal of a self-correcting marketplace. An excellent comprehensive history of the economic thought that led to this kind of utopian economics provides a refresher course in Adam Smith, Friedrich August von Hayek, Kenneth Arrow and Hyman Minsky. Both a narrative and a call to arms, the book provides an intellectual and historical context for the string of denial and bad decisions that led to the disastrous “illusion of harmony,” the lure of real estate and the Great Crunch of 2008. Using psychology and behavioral economics, Cassidy presents an excellent argument that the market is not in fact self-correcting, and that only a return to reality-based economics—and a reform-minded move to shove Wall Street in that direction—can pull us out of the mess in which we’ve found ourselves. (Nov.)

Introduction 3

Pt. 1 Utopian Economics

1 Warnings Ignored and the Conventional Wisdom 17

2 Adam Smith's Invisible Hand 25

3 Friedrich Hayek's Telecommunications System 37

4 The Perfect Markets of Lausanne 49

5 The Mathematics of Bliss 61

6 The Evangelist 72

7 The Coin-Tossing View of Finance 85

8 The Triumph of Utopian Economics 97

Pt. 2 Reality-Based Economics

9 The Prof and the Polar Bears 111

10 A Taxonomy of Failure 125

11 The Prisoner's Dilemma and Rational Irrationality 139

12 Hidden Information and the Market for Lemons 151

13 Keynes's Beauty Contest 166

14 The Rational Herd 177

15 Psychology Returns to Economics 192

16 Hyman Minsky and Ponzi Finance 205

Pt. 3 The Great Crunch

17 Greenspan Shrugs 221

18 The Lure of Real Estate 235

19 The Subprime Chain 251

20 In the Alphabet Soup 268

21 A Matter of Incentives 285

22 London Bridge Is Falling Down 299

23 Socialism in Our Time 317

Conclusion 335

Notes 347

Acknowledgments 371

Index 373