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Robert M. Solow’s review of How Markets Fail, by John Cassidy

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 medalKeynesian/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.

FOOTNOTES

*It’s a joke. Don’t take it too seriously.

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Superfreaks

–UPDATED on Feb 15, see end of post–

You’ve probably heard of Freakonomics, a great popular economics book (and there are an awful lot of those out nowadays, aren’t there?) and you’ve likely heard of the follow-up, Superfreakonomics.  Steven Levitt and Stephen Dubner wrote these books.  Steven Levitt teaches at my school, but I’ve never taken his class.  Either he or the school administration is not interested in offering his class to evening students.  Thanks.  Jerks.

This is not a review of Superfreakonomics.  I loved the first book, but have yet to get my hands on the new one.  I’m mentioning it, because the last chapter on global warming has kicked off quite an energetic volley of phrasemongering.  Dubner & Levitt wrote a chapter that essentially offers some alternate opinions on what we should do about global warming, compared to the currently dominant Al Gore solution.  (For the record I’m all for CFL’s.  Just not in the bedroom–they’re not effectively dimmable.)

So, this has kicked up quite a storm of controversy.  A dusty, dusty storm that threatens to block out the sun.  That wouldn’t be so bad, if you believe in geoengineering as a way to initiate global cooling.  But a lot of the criticism, as you can probably guess, is shrill and nasty and condescending.  And, of course, it is the nastiest stuff that travels across the internet fastest.

Thankfully, there is some in-depth discussion available.  Arguing for the  freakonomists is Nathan Myhrvold.  Myhrvold is probably used to telling people to slow down and listen for a second, just because of how his name is spelled.  He was interviewed in the book, talking about the limitations of solar-cell infrastructure, among other things.  He has some confidence that there are some cheap geoengineering possibilities, that might become solutions.  I won’t go into his bio, because you can read it on the Freakonomics NYT blog, where he’s responded to some of the criticism.  I hope you do read his response to his critics, because contextualization is badly needed when people start slinging mud.

Arguing capably and reasonably against the global cooling chapter in the book (and particularly, against geoengineering) is Real Climate.  What I love about their argument is that they go right after the sound-bite logic that Levitt and Dubner have deployed to simplify their case.  It’s funny to me that many commentators start by praising the first book, then saying this one is garbage.  My guess is they weren’t subject matter experts on any of the chapters in the first book, so they couldn’t dismiss any of it as overly simplistic.

Of course, Levitt and Dubner wrote what was intended to be a popular book.  Of course they’re phrasemongers.  That’s what they set out to be.  But we don’t need to act like children about it, do we, Joe Romm?

P.S. The comments on The Economist website frequently contain excellent information and analysis.  Such is the case with The Economist’s review of SuperFreakonomics.

Feb 15 UPDATE:

On my recent vacation in Costa Rica, we did a little snorkeling and I finished reading Superfreakonomics.  We did the snorkeling because, due to ocean acidification (lots of carbon dioxide is absorbed into the oceans, reducing pH and making them more acidic) coral reefs are being eroded.  We don’t take lots of tropical vacations, so we might not have many more chances to see coral reefs.  Ocean acidification, as Superfreaks Leavitt and Dubner have noted on their NYT blog (but not in the book, which is unfortunate), cannot be helped by blocking sunlight through cheap geoengineering solutions suggested in the book.

A couple weeks in Costa Rica gives you a lot of appreciation for delicate ecosystems, especially if you hire guides for your hikes through cloud forest and reserves and your snorkeling excursions.  A rare species of tree frog that lives only in cloud forests above 2,000 ft. doesn’t really impact our lives, so far as we know.  But species extinction, as a possible unintended consequence of our own economic vigor, should at least lead us to pause and count the cost of cheap consumer goods and long commutes.

Unintended consequences, as it happens, are the Achilles heel of Superfreakonomics.  Leavitt and Dubner do discuss them.  They seem to take glee in the clearly observed fact that well-meaning government policy, for example, can lead to negative unintended consequences.  While they don’t come right out and say it, the implication is that we’d be better off letting the market handle it.  The market is, naturally, composed of individuals and groups selfishly acting in their individually perceived best interests.  But by definition, externalities are market failures, and often require collective action that is not in our individual selfish interests to mitigate.  If such collective actions are not the domain of policy, then what is?  Do we do this perfectly in the policy realm?  Clearly the answer is no.  Sometimes the market can find a solution where politicians dither.  Leavitt and Dubner’s NYC horse manure story is a very entertaining example where the market did, in fact solve an externality problem, but not on purpose.  And, naturally, the solution to urban horse manure build-up (the automobile), brought with it a whole host of its own externalities.

But around this point in the book, the Superfreaks completely drop any mention of unintended consequences when they start discussing global geoengineering.  They present a proposal to pipe sulphur dioxide into the stratosphere, in order to block some sunlight and cool the globe, and never express the slightest misgiving that this might have its own unintended consequences.  This is a major failure of the book.  They are impish contrarians, stirring the pot.  It’s hard to take their proposals seriously.

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