How Markets Fail The Logic of Economic Calamities

John Cassidy




Trade Paperback

416 Pages


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A Pulitzer Prize Finalist
A New York Public Library Helen Bernstein Book Award Finalist

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.


Praise for How Markets Fail

"Cassidy clearly knows a great deal of economics, and he tells the story extremely well . . . Many of his chapters—on the development of general equilibrium theory (how everything in the economy systematically depends on everything else), for example, or marginalism (why prices are determined by what we're prepared to pay for the very last item of something we buy, rather than the whole amount is worth to us)—would make useful supplementary reading in an undergraduate economics course."—Benjamin Friedman, The New York Times Book Review

"[How Markets Fail] is more than just an account of the failures of regulators and the self-deception of bankers and homebuyers, although these are well covered. For Mr. Cassidy, the deeper roots of the crisis lie in the enduring appeal of an idea: that society is always best served when individuals are left to pursue their self-interest in free markets."—The Economist

"I started the year by reading a dozen books on the Wall Street implosion . . . How Markets Fail by John Cassidy has the best, deepest backstory, and is as well written as you would expect from someone who covers economics for The New Yorker."—Tom Stoppard

"Federal Reserve Chairman Ben S. Bernanke delivered the wrong speech this week at the Economic Club of Washington. The correct script appears in How Markets Fail, an admirably lucid account of how "utopian economics" drove us to disaster . . . This is a book about how flawed ideas, and the people who promoted them, tipped us into the worst financial crisis since the Great Depression. It's high time, Cassidy says, for the Fed to repudiate the Greenspan Doctrine, the former Fed chief's argument that modern markets—so efficient, so rational—can be counted on to disperse risk and police themselves. There was no point in trying to prick asset bubbles, Alan Greenspan argued, because they can't be detected until they burst . . . How Markets Fail is three books in one. The first traces the rise of free-market theory, taking us from Adam Smith's invisible hand (and highly visible nose) through Friedrich Hayek's description of price signals as a 'system of telecommunications' and on to Greenspan's bubbles . . . The second explores what Cassidy calls 'reality-based economics.' Humans don't really behave like homo economicus, calculating pros and cons with the speed of a Roadrunner supercomputer. The messiness of life tends to gum up the elegant models of the efficient market hypothesis . . . In the third section of the book, Cassidy shows how rational irrationality pumped up the housing bubble and wrecked the financial system. This is a compelling synthesis that derives most of its narrative energy from the author's clarity of thought and exposition."—James Pressley,

"In his ambitious How Markets Fail: The Logic of Economic Calamities, Cassidy, an economics writer for The New Yorker, offers a powerful argument that the current generation of investors and policymakers has been manacled by what he calls the ‘utopian' free-market school of economics. In an effort to debunk that 'ideology,' which he sees as holding sway in academia and among policymakers in recent decades, Cassidy marshals a deep understanding of economic intellectual history, deftly explaining the principal ideas of such towering figures as Adam Smith, Friedrich von Hayek, Léon Walras, Kenneth Arrow, Milton Friedman, and Robert Lucas. This long view allows him to place in context the free marketers' notion that self-interest and competition 'equals nirvana.' In the author's words: 'Between the collapse of communism and the outbreak of the subprime crisis, an understandable and justified respect for market forces mutated into a rigid and unquestioning devotion to a particular, and blatantly unrealistic, adaptation of Adam Smith's invisible hand.' And it was this faith, he goes on to say, that led Alan Greenspan, among others, to turn a blind eye to what was happening in the real world of money and business . . . How Markets Fail is a nuanced book. That's a major attraction in an era when shrill commentators bicker crudely about government vs. markets and liberty vs. socialism. Even the portrait of Greenspan, perhaps the closest figure to a villain in Cassidy's account, is drawn with a measure of empathy. Yet this book can provoke angry questions in the mind of the reader. Why did so many smart economists, including Robert Lucas and Eugene Fama, refrain from protesting as their ideas were hijacked and abused by demagogic politicians and messianic think tanks? The scholars knew the exceptions, the qualifications, and the heroic assumptions that lay behind their market models. Why, then, didn't they take issue with the op-ed and cable-TV table-pounders who twisted their thinking? . . . The author doesn't offer the reader any juicy bits of gossip. There aren't any vivid recreations of tense negotiations over an investment bank's future. Yet he brings ideas alive. More important, the reader comes away persuaded that reality-based economics can play a critical role in what the 18th century British conservative Edmund Burke called 'one of the finest problems in legislation, namely, to determine what the state ought to take upon itself to direct by the public wisdom, and what it ought to leave, with as little interference as possible, to individual exertion.' Let's hope the legislators in Washington share this principled view of their role. Cassidy makes a compelling case that a return to hands-off economics would be a disaster."—Chris Farrell, Business Week

"An essential, grittily intellectual, yet compelling guide to the financial debacle of 2009."—Geordie Greig, Evening Standard

"The last major attempt of 2009 to make sense of what has become of the discipline of economics."—Stefan Stern, Financial Times (UK)

"A well constructed, thoughtful and cogent account of how capitalism evolved to its current form."—Edmund Conway, The Daily Telegraph (UK)

"Both a narrative and a call to arms, [How Markets Fail] 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."—Publishers Weekly

"An elegant, readable treatise on economics, swathed in current headlines . . . 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 . . . Cassidy writes with terrific clarity and a finely tuned sense of moral outrage, yielding a superb book."—Kirkus Reviews (starred review)

Reviews from Goodreads



  • John Cassidy

  • 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.