HOW MARKETS FAIL: The Logic of Economic Calamities by John Cassidy. Viking Canada, Toronto, 2009. Reviewed by William Sheridan.
According to economically-trained Economics Journalist John Cassidy, most of economic theory from Adam Smith to Milton Friedman has been utopian in its assumptions rather than realist. Forces and processes were postulated that reduced real-life complexity to simplistic terms, and then extrapolated these “mental models” to produce a series of “analytic insights” and “policy implications.” In the process, the extent of feedback, feedforward, combinations and permutations was largely ignored.
The result of this simple-mindedness was that the Price System was conceived as a “natural occurrence” with an equilibrium tendency. Cassidy argues that much of this theorizing was “in good faith” – but there has always been a minority in economics who doubted such “pure motivation.” By and large however, the majority of both economists and policy-makers joined the band-wagon effect that dominated market society since 1776.
As Cassidy sees it, this illusionary economics is based on a set of three distinct illusions: (1) the illusion of harmony; (2) the illusion of stability; and (3) the illusion of predictability. The policies based on these illusions have lead to every economic downturn that has plagued market economies since governments started using Smith and his successors to guide their actions. Even Smith saw the necessity of regulating the “Financial Sector,” and subsequent experience has demonstrated the need for considerably more extensive regulation.
Sadly however, many policy-makers adopted the secular faith of laissez-faire, and have been trying to implement it whenever the opportunity to do so arises. Thalidomide babies were the result of an unregulated drug industry – cars that were “unsafe at any speed” were the result of an unregulated automobile industry – overfishing and complete stock depletion were the result of an unregulated seafood industry, etc., etc., etc. And most dramatically, the bursting of all the “economic bubbles” (energy, technology, housing, etc.) were the direct results of these same illusions.
Do either the proponents or the practitioners of these illusions repent of their misdemeanors? Not really! They appear to only regret that these crises interrupted their profiteering, and that some of them were exposed as the perpetrators of such anti-social practices.
But a new brand of economics, realist economics, has been developed to replace this illusionary economics. One of its most important tenants is to limit the amount of risk that those handling other people’s money are allowed incur. Both the size of investment and the kinds of speculative processes that can be put at risk must be governed by the “precautionary principle” so as to avoid the consequences of catastrophic failure. The “herd instinct” that encourages the “lemmings to the sea” habits of exaggerated leveraging and risk-taking, must be reigned in. Let’s hope it works!