Robert M. Solow famously worked out model of how labor and capital are combined with technological advances and other factors for productive output, which demonstrates that a huge part of economic growth comes from those technological advances or other factors exogenous to an individual or firm’s control. The model is a staple of macroeconomics and international comparative economics. He won the Nobel Prize in Economics in 1987. The guy about as famous as economists get without publishing pop-econ books.
Solow has now reviewed a new pop-econ book by New Yorker staff writer John Cassidy, entitled How Markets Fail: The Logic of Economic Calamities. I don’t know if How Markets Fail is going to make my reading list very soon; Cassidy is a smart journalist, and I’ve recommended his work before, but I’m pretty time-constrained. However, Solow is a legend, and his review is extremely cogent, balanced, and educating. You should read it.
Most writing on economics found in the mainstream and business press is ideologically motivated and intentionally pugilistic…
IN THIS CORNER, weighing in at a lean 1 trillion dollars market capitalization*, counting on a knock-out from the Invisible Hand, the defending champion, lately spending a lot of time on the ropes: Neo-Classical Free Market Economics!
IN THE OPPOSITE CORNER, riding on a wave of populist outrage and checking their hair in the reflection of Paul Krugman’s shiny new Nobel medal: Keynesian/Interventionist Economics!
Unfortunately and predictably, nothing gets solved this way. Journalists and pundits and bloggers and think tanks just provide fuel to their respective power brokers, whether politicians or business leaders. While there are plenty of highly respected economists, testing theory against empirical observation, writing excellent academic papers and blog entries, and teaching insightful courses, they are rarely found making comprehensible observations in an arena of high visibility to the general public.
This makes me very gratified to read Solow’s review of Cassidy’s book, in the New Republic. Forget about the book for a second; Solow provides a very sensible set of observations on the limitations of free market economics, but doesn’t throw the baby out with the bathwater. This levelheadedness won’t be found in the bitter mudslinging between Paul Krugman and John Cochrane (NOTE: don’t read those links unless you have a lot of time on your hands and find it entertaining to see respected professors take pot shots at eachother).
While Solow is condensing an awful lot of information into a few pages, requiring a slow and careful read, it is all apprehensible. And, best of all, his focus is not on proving a theory wrong or right. He doesn’t talk at all about the Solow growth model, labor vs. capital, or total factor productivity. He just wants to discuss how markets fail, without taking an ideological stand on it. He does, however, bring up questions that he thinks Cassidy missed, for example:
Why, in the marketplace (sic!) of ideas, have the evangelists for the unrestricted market attracted so much attention and the “realists” so little? [Cassidy] argues, fairly convincingly, that the truth does not lie predominantly on that side of the issue. So is it that believers always make more effective advocates than skeptics do? Are we for some reason more receptive to simple answers than to complex ones?
That’s a really, really good question. Let’s ask ourselves why we believe what we believe, even in the face of contrary evidence. We all do this, but we can still try to intentionally question our assumptions.
Then he mildly echoes Paul Volcker, who recently told finance execs that the only valuable financial innovation of the last 25 years has been the ATM. Solow’s approach to this issue is less entertaining, and more Socratic:
It is nice that Cassidy is able to use the story of the financial crisis to exemplify some of the systematic sources of egregious market failure. But there is a deeper, or at least prior, question that he does not take up. Is all this financial activity socially useful, even in the absence of breakdown? It is worth a moment’s thought.
So, here in one book review, you get more balanced economic wisdom than you are likely to find in any other mainstream media source. Read it.
*It’s a joke. Don’t take it too seriously.