In This Review

How Markets Fail: The Logic of Economic Calamities
How Markets Fail: The Logic of Economic Calamities
By John Cassidy
400 pp, Farrar, Straus & Giroux, 2009

Much has been written about the failures of bankers, rating agencies, and regulators leading up to the financial crisis of 2008. This highly readable book focuses on the ideas that informed the actors who contributed to the debacle. It heavily implicates the profession of economics of recent decades, with its discovery and refinement of notions such as perfect financial markets (all available information is reflected in the current prices of financial assets) and rational expectations (all actors accurately know how the economy works and have unbiased forecasts of the future), along with its claim that all markets are stable and self-equilibrating. This ideology questioned the need for government regulation. And it resonated strongly with parts of the business and financial communities -- and with some legislators -- leading to the extensive deregulation of financial markets. Cassidy offers a clear and occasionally colorful exposition of the evolution of relevant economic thought in a way that is accessible to non-economists.