Professor: Derek Ware
Date April 20th 2012
How Markets Fail
The Logic of Economic Calamities
BY JOHN CASSIDY
In 2009, John Cassidy, noted journalist at The New Yorker published the book, How Markets Fail: The Logic of Economic Calamities. In How Markets Fail, John Cassidy describes what he calls utopian economics and how the utopian thinking has led to economic crisis such as job losses, bank bailouts, and corporate greed. Cassidy attempts to convince that utopian economics does not capture the true behaviors of humanity collectively leading to unanticipated and adverse economic outcomes. He presents the history of economics and contrasts the idea of utopian economics with reality based economics. Reality based economics encompass people’s behaviors and thinking identifying irrational self-interests (Cassidy, 9). Cassidy then explains in detail how economic theory and practice influenced the “Great Crunch” (i.e. collapse in sub-prime mortgage lending during last decade). The timeliness of Cassidy’s publication of a book to address how markets fail is certainly ideal in light of the recent crash in sub-prime mortgages. The financial impact of this economic crisis continues to dictate the pace of the current economy. Cassidy uses the history of economics over the last few decades to demonstrate that his idea of utopian economics versus reality based economics is not new, but has been forgotten and/or consciously overlooked in the interest of other gains causing historical cycles of economic crisis. Cassidy’s political views are evident and he does not give neutral opinions. It is clear that he believes that a strict practice of utopian economics relies on a rational self-interest that is just not actual reality. He believes in investment and corporate profits, but not absence of moderate government regulation. He is a pragmatic among many other scholars and has knowledge and opinions worthy of review. Utopian Economics
Cassidy is critical of utopian economics. Utopian economics rely on rational self-interest meaning that it is believed that the majority of people of society will take into consideration the impact of their actions and take actions that have some promotion of greater good. Cassidy uses the contemporary economic status in the United States with particular emphasis on the housing market crash to address that society did not make their decisions based upon utopian economics. For example, it is not utopian that corporations gave loans to individuals that probably could not afford the payments and that individuals accepted loans that they knew they could not pay. Furthermore, it is not utopian that brokers hunted people to take on such loans to perpetuate a cycle of greed. He further explains that in the world of utopian economics, such an event has a statistically low possibility of becoming reality that it is given minimal attention. With little attention to the risks by the people who are considered experts, it comes as no surprise that the lay persons would not identify economic risks. There has been a transition over the past several decades from the dominant thought that being hard-working and honest leads to a successful life. On the other people are motivated by their self-interest and want quick success. I agree with Cassidy that Utopian economics do not take the psychology and behaviors of the current times and that a traditional utopian view does not apply to current times. Cassidy emphasizes that Utopian economics does promote autonomy, which is generally a good thing. Promoting economic autonomy dates backs to Adam Smith and the famous term, the “invisible hand”. Smith, an 18th century economist, believed that if each consumer is allowed the freedom to choose what to buy and producer what to sell, the market will naturally settle upon product distribution and prices that are beneficial to all members of a community. Efficient production, low prices, and...