John Cassidy, How Markets Fail: The Logic of Economic Calamities (2009)

Another Will Pyle-recommendation, another hit! I plan to use selections in my upcoming course on "capitalism(s) since 1945. Cassidy writes about the economy for the New Yorker and in this book he explains even difficult ideas quite clearly. While I was generally familiar with much of what Cassidy covered, I still learned quite a bit; and the refresher was most welcome. The book is divided into three sections: 1) utopian economics; 2) reality-based economics; and 3) the 2008-9 Global Financial Crisis. In the first part, Cassidy focuses on how economics became a mathematical science, based on many unrealistic assumptions, describing the fiction of innumerable, interconnected markets, i.e. where supply and demand are in equilibrium. This was known as "general equilibrium theory." One of the unrealistic assumptions, previously unfamiliar to me, was this was a world made up only of small producers - large oligopolies and monopolies would ruin the equilibrium. (One of my only quibbles with this excellent book, perhaps my only one, is that Cassidy barely discusses Schumpeter, who wrote a lot about how companies seek to escape price competition, by dominating markets, innovating, or creating niches.) Utopian economics depends on three illusions of the market - that market interactions are harmonious, stable, and predictable. It is more unified than reality-based economics, which has identified endemic externalities, informational asymmetries ("lemons"), skewed incentives ("moral hazard"), prisoner's dilemmas, Keynesian beauty contests, Minskyian ponzi schemes, herd behavior, heuristics and biases, etc. One of the points that was new to me was that Adam Smith's vision of the market depended on negative feedback, which brings the system back to equilibrium (as a thermostat and heating/cooling system do), while in reality, especially in financial markets, there are positive feedback loops, which take the system ever further away from equilibrium.