This fascinating book, written in 2011, has certainly come at a welcome time with the recent meltdown of our entire financial system.
http://www.amazon.com/How-Markets-Fail-Economic-Calamities/dp/0312430043/ref=sr_1_1?s=books&ie=UTF8&qid=1375826357&sr=1-1&keywords=john+cassidy+how+markets+fail
Over the last 5 years, we continue to have conservatives who insist the market can't fail-the words market failure are simply an oxymoron. The market by definition cannot fail. I should say that Scott Sumner is probably the best of this breed-in that his argument is probably the most compelling. The Monetarist case for the impossibility of the market failing has always been the most subtle conservative attempt to explain the Great Depression-and now the Great Recession-as not a market failure, but a government failure.
It's kind of paradoxical as while Monetarism calls these government failures what it actually calls for is more rather than less government involvement at least in the monetary realm. Of course, usually these conservative arguments err when they're taking too far-as I've said, I find the Laffer Curve, certainly, at least, Jude Wanniski's version of it, quite compelling-this model, just like Sumner's NGDP targeting takes you in because it's so intuitive. Of course, intuitiveness is not Truth-because an idea or a concept is highly intuitive doesn't mean it isn't wrong.
In fact, in this vein, Cassidy points out that an idea that seemed very intuitive that was pushed by both Friedman and later Bob Lucas has turned out to be flat out wrong. While Friedman was right that the Phillips Curve-or at least the bastardized version that gained currency in the 60s and 70s-was wrong, his reasoning was actually also wrong.
As it turns, out, it's not true that only unanticipated changes in monetary policy can have any effect and that once the market figures out what the Fed is doing, the gig is up as it were. As it turns out this is exactly backwards: not only do anticipated monetary changes have an effect but their effect is actually greater than unanticipated changes.
Another crucial concept about the market that Cassidy tells us about is the Prisoner's Dilemma. What this entails is that we can make choices that are rational for us but irrational for society. This idea has all kinds of market implications, none bigger than the environment. Often, environmental activists will shake their heads at our irrationality at not facing the environmental crisis-here I'm thinking of course of global warming especially- more squarely.
What this indignation misses is that it might be rational if 'everyone would be environmentally responsible.' The trouble is that there is no 'everybody.' Each of us are individuals with are own problems, fears, hopes, and needs.
This problem that cooperation makes social sense but no on the individual level is a recurring issue for the market. It all goes back to the concept of Paretto efficiency: many things can be left to the market and often Paretto efficiency will lead us to the best outcome. However, there aer always those things which it isn't sufficient for. Sometimes Paretto efficiency is not socially efficient.
The classic example of the Prisoner's Dilemma is where two people are being interrogated by the police. If they both deny they get 1 year each in prison. If they both confess they get 5 years each. If, however, one confesses and the other doesn't, then the confessor goes free and the one who continued to deny goes to prison for 15 years.
What this bares on is how often the cooperative option doesn't work because we're dealing with others, whom we can neither control nor predict. See Cassidy, pgs. 139-150 particularly 143-148.
Interestingly, there has been recently a game show based on the Prisoner's Dilemma-Friend or Foe? I used to love this show though it's been cancelled a few years now.
http://en.wikipedia.org/wiki/Friend_or_Foe%3F_(TV_series)
In the game you're paired off with another contestant and there are three pairs. There are tree rounds of questions, at the end of each one pair is eliminated based on which team got the fewest questions right. After the first round the team with the lowest score-the score is in dollars-goes to the trust box. So say you and your teammate banked $400 dollars. You then each have a choice-will you choose to be a friend or foe? If you say friend and your partner says friend then you both collect $200 each.
However, if you say friend and they say foe, then you're screwed-as they take the whole $400. On the other hand if you both say foe then you both go home with nothing. I always loved that game and wondered what I would do f on it. Ideally, I'd want to say friend. However, I know myself and if the other person said foe I'd really hold it against them.
My guess is that I'd have to go by gut feeling and instinct-if I thought they would go friend then I'd go friend but if I felt they were shaky then I'd go foe. Of course, it's possible I would be wrong and they'd go friend in which case I'd feel pretty crappy.
On the other hand many people on that show would say they planned on going foe no matter what. So it's tough-going foe is tempting as you avoid any chance of getting sucker punched on national television. Yet the Prisoner's Dilemma is that this is the same reasoning your partner is going through.
Anyway, the best we can say is that while cooperation often does happen, it's not guaranteed. Indeed, here I can't resist the opportunity to quote Zizek who says the toughest thing about the Other is that we don't have an absolute guarantee which is why we can never totally trust them. It's the human condition.
If you;re not familiar with Zizek I recommend him though understand he's not for the faint of heart. If you're looking for some light reading he's not your guy.
http://www.lacan.com/zizekother.htm
http://www.amazon.com/How-Markets-Fail-Economic-Calamities/dp/0312430043/ref=sr_1_1?s=books&ie=UTF8&qid=1375826357&sr=1-1&keywords=john+cassidy+how+markets+fail
Over the last 5 years, we continue to have conservatives who insist the market can't fail-the words market failure are simply an oxymoron. The market by definition cannot fail. I should say that Scott Sumner is probably the best of this breed-in that his argument is probably the most compelling. The Monetarist case for the impossibility of the market failing has always been the most subtle conservative attempt to explain the Great Depression-and now the Great Recession-as not a market failure, but a government failure.
It's kind of paradoxical as while Monetarism calls these government failures what it actually calls for is more rather than less government involvement at least in the monetary realm. Of course, usually these conservative arguments err when they're taking too far-as I've said, I find the Laffer Curve, certainly, at least, Jude Wanniski's version of it, quite compelling-this model, just like Sumner's NGDP targeting takes you in because it's so intuitive. Of course, intuitiveness is not Truth-because an idea or a concept is highly intuitive doesn't mean it isn't wrong.
In fact, in this vein, Cassidy points out that an idea that seemed very intuitive that was pushed by both Friedman and later Bob Lucas has turned out to be flat out wrong. While Friedman was right that the Phillips Curve-or at least the bastardized version that gained currency in the 60s and 70s-was wrong, his reasoning was actually also wrong.
As it turns, out, it's not true that only unanticipated changes in monetary policy can have any effect and that once the market figures out what the Fed is doing, the gig is up as it were. As it turns out this is exactly backwards: not only do anticipated monetary changes have an effect but their effect is actually greater than unanticipated changes.
Another crucial concept about the market that Cassidy tells us about is the Prisoner's Dilemma. What this entails is that we can make choices that are rational for us but irrational for society. This idea has all kinds of market implications, none bigger than the environment. Often, environmental activists will shake their heads at our irrationality at not facing the environmental crisis-here I'm thinking of course of global warming especially- more squarely.
What this indignation misses is that it might be rational if 'everyone would be environmentally responsible.' The trouble is that there is no 'everybody.' Each of us are individuals with are own problems, fears, hopes, and needs.
This problem that cooperation makes social sense but no on the individual level is a recurring issue for the market. It all goes back to the concept of Paretto efficiency: many things can be left to the market and often Paretto efficiency will lead us to the best outcome. However, there aer always those things which it isn't sufficient for. Sometimes Paretto efficiency is not socially efficient.
The classic example of the Prisoner's Dilemma is where two people are being interrogated by the police. If they both deny they get 1 year each in prison. If they both confess they get 5 years each. If, however, one confesses and the other doesn't, then the confessor goes free and the one who continued to deny goes to prison for 15 years.
What this bares on is how often the cooperative option doesn't work because we're dealing with others, whom we can neither control nor predict. See Cassidy, pgs. 139-150 particularly 143-148.
Interestingly, there has been recently a game show based on the Prisoner's Dilemma-Friend or Foe? I used to love this show though it's been cancelled a few years now.
http://en.wikipedia.org/wiki/Friend_or_Foe%3F_(TV_series)
In the game you're paired off with another contestant and there are three pairs. There are tree rounds of questions, at the end of each one pair is eliminated based on which team got the fewest questions right. After the first round the team with the lowest score-the score is in dollars-goes to the trust box. So say you and your teammate banked $400 dollars. You then each have a choice-will you choose to be a friend or foe? If you say friend and your partner says friend then you both collect $200 each.
However, if you say friend and they say foe, then you're screwed-as they take the whole $400. On the other hand if you both say foe then you both go home with nothing. I always loved that game and wondered what I would do f on it. Ideally, I'd want to say friend. However, I know myself and if the other person said foe I'd really hold it against them.
My guess is that I'd have to go by gut feeling and instinct-if I thought they would go friend then I'd go friend but if I felt they were shaky then I'd go foe. Of course, it's possible I would be wrong and they'd go friend in which case I'd feel pretty crappy.
On the other hand many people on that show would say they planned on going foe no matter what. So it's tough-going foe is tempting as you avoid any chance of getting sucker punched on national television. Yet the Prisoner's Dilemma is that this is the same reasoning your partner is going through.
Anyway, the best we can say is that while cooperation often does happen, it's not guaranteed. Indeed, here I can't resist the opportunity to quote Zizek who says the toughest thing about the Other is that we don't have an absolute guarantee which is why we can never totally trust them. It's the human condition.
If you;re not familiar with Zizek I recommend him though understand he's not for the faint of heart. If you're looking for some light reading he's not your guy.
http://www.lacan.com/zizekother.htm
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