HOW MARKETS FAIL

New Yorker and Condé Nast Portfolio contributor Cassidy (Dot.con: The Greatest Story Ever Sold, 2002) presents an elegant, readable treatise on economics, swathed in current headlines.

“[P]ursuing a policy of easy money plus deregulation doesn’t amount to free market economics; it is a form of crony capitalism,” writes the author. The decline of 2007 and collapse of 2008 make convenient handles for the narrative, and players such as Alan Greenspan—busy making the absurd claim that the market economy is inherently stable—make fine symbols for the schools of thought that underlie the whole mess. Conventionally, these come down to the free-market types such as Hayek and Friedman on one hand and interventionists such as Keynes and Galbraith on the other. However, Cassidy does a nice job complicating that picture by drawing on the entire history of economic thought and introducing such overlooked figures as William Stanley Jevons and Leon Walras, who, it turns out, had a great deal to say about the overall subject of the book—namely, why economies can collapse so rapidly. In an ideal world, Cassidy writes, a market is a win-win environment: “Markets,” he declares by way of introducing the ever-pleasing Pareto equilibrium into the narrative, “facilitate mutually advantageous trading.” Ah, but there are wolves out there in possession of secret information, including players of Ponzi schemes (Madoff) and Ponzi economics (Greenspan et al.). In the case of the subprime mortgage problems that precipitated the current catastrophe, “too many mortgage lenders exploited the information advantage they had over their customers.” Cassidy delivers on the promise of his title, but he also offers a clear-eyed look at economic thinking over the last three centuries, from Adam Smith to Ben Bernanke, and shows how the major theories have played out in practice, often not well.

The dismal science coupled with dismal news—it doesn’t make a promising premise, but Cassidy writes with terrific clarity and a finely tuned sense of moral outrage, yielding a superb book.