How Markets Fail

The Logic of Economic Calamities

John Cassidy

Farrar, Straus and Giroux

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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.

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1. WARNINGS IGNORED AND THE CONVENTIONAL WISDOM
Acommon reaction to extreme events is to say they couldn’t have been predicted. Japan’s aerial assault on Pearl Harbor; the ter­rorist strikes against New York and Washington on Septem­ber 11, 2001; Hurricane Katrina’s devastating path through New Orleans—in each of these cases, the authorities claimed to have had no inkling of what was coming. Strictly speaking, this must have been true: had the people in charge known more, they would have taken preemptive action.

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Praise for How Markets Fail

“Cassidy clearly knows a great deal of economics, and he tells his 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 what the whole amount is worth to us)—would make useful supplementary reading in an undergraduate economics course.” —Benjamin M. Friedman, The New York Review of Books

“[A] wonderful book . . . The most concise and elegantly written account, among the many that have come out, of how we got into this mess.” —Liaquat Ahamed, The National Interest


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About the Author

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.

John Cassidy

John Cassidy

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How Markets Fail
The Logic of Economic Calamities
John Cassidy

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Pulitzer Prize - Finalist

e-Book Agency

e-Book Agency
Farrar, Straus and Giroux
November 2009
e-Book Agency
ISBN: 9781429990691
ISBN10: 1429990694
6 x 9 inches, 400 pages, Includes Notes and an Index
$9.99

Hardcover

Hardcover
Farrar, Straus and Giroux
November 2009
Hardcover
ISBN: 9780374173203
ISBN10: 0374173206
6 x 9 inches, 400 pages, Includes Notes and an Index
$28.00

Trade Paperback

Trade Paperback
Picador
November 2010
Trade Paperback
ISBN: 9780312430047
ISBN10: 0312430043
5 1/2 x 8.25 inches, 416 pages
$17.00
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Farrar, Straus and Giroux

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