John Cassidy wrote a very good book which look at the credit crisis from a longer-term perspective, How Markets Fail: The Logic of Economic Calamities. He writes about the failure of economics to address these real world problems, in a very clear manner. "For whatever reason, 'market failure economics' never took off as a catchphrase. Some textbooks refer to the "economics of information" or the economics of incomplete markets" Recently, the term "behavioral economics" has come into vogue. For myself, I prefer the phrase 'reality-based economics'."
He takes a strong tour of economics through the last century to address many failing of the free market school of thinking on market issues. Many of these issues are standard discussion in graduate school but have not been emphasized in the overarching issues of describing policy alternatives. The Pigouvian tradition of analyzing welfare economics focused on market failures and imperfections. Here social costs are not trivial. We cannot price the social costs of failure regardless of the elegant arguments of Ronald Coase. Too often we do not discuss social costs because they are difficult to explain.
Cassidy describes the work of Francis Bator, the popularizer of many market failures. For example, time's arrow works against knowing the economy and all potential problems. We cannot know all information in order to make a good decision. There are firms with monopoly or oligopoly power. There are public goods that will not be supplied through normal supply and demand. There are externalities. Chance and network effects mean that the bets technology will survive in the economy.
This is a sweeping book which describes the history of economic thought on the subject of market failure and the Great Recession. I would currently put it at the top of the list of books which provides a foundation for any discussion on the cause and effects of the Credit Crisis.
He takes a strong tour of economics through the last century to address many failing of the free market school of thinking on market issues. Many of these issues are standard discussion in graduate school but have not been emphasized in the overarching issues of describing policy alternatives. The Pigouvian tradition of analyzing welfare economics focused on market failures and imperfections. Here social costs are not trivial. We cannot price the social costs of failure regardless of the elegant arguments of Ronald Coase. Too often we do not discuss social costs because they are difficult to explain.
Cassidy describes the work of Francis Bator, the popularizer of many market failures. For example, time's arrow works against knowing the economy and all potential problems. We cannot know all information in order to make a good decision. There are firms with monopoly or oligopoly power. There are public goods that will not be supplied through normal supply and demand. There are externalities. Chance and network effects mean that the bets technology will survive in the economy.
This is a sweeping book which describes the history of economic thought on the subject of market failure and the Great Recession. I would currently put it at the top of the list of books which provides a foundation for any discussion on the cause and effects of the Credit Crisis.
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