How Markets Fail by John Cassidy

This book by John Cassidy outlines the main causes of why markets fail, as the title suggests, however it also provides useful analogies and reference to the works of very famous and influential economists who also dealt with this type of market failure and possible solutions.

The book consists of three parts, each offering a different view on the failure of markets from the opinions of well-known economists such as Adam Smith to the effects of rationality. Cassidy offers a very convincing explanation and argument of why these markets and economies, which were once thriving, fail and collapse, not just in the last few years but throughout history.

The theory of incentives that Cassidy offers state that they are crucial in helping to keep economies thriving and expanding and that when there is an absence of them whole markets can collapse, such as markets that follow Communism, as they lack incentives and rewards. This is an accurate comment regarding the crucial role of incentives, however that would inevitably mean that markets that follow ideologies such as Capitalism should thrive and succeed, as incentives are a key part of Capitalism. This is not apparent as most if not all markets that collapsed in the Great Recession of 2008 were Capitalist, instead the comments of Karl Marx, who could be considered as the founder of Communism, were correct as he stated that Capitalism would eventually collapse in on itself, due to it’s fundamental design flaws.

Furthermore, one of the main causes of financial disasters especially the most recent ones, are becoming too confident about the market and relying heavily on formulae and predictions regarding the economy. Cassidy touched this upon as he stated that extreme events such as recession or great financial disasters cannot be predicted and are random. This accurately depicts why markets fail.

Moreover, the analogy used by Cassidy of the vicious circles that markets enter when they fail, is plausible and clear in demonstrating the problems economies suffer once they collapse. Prices fall, which signals to banks that they must sell quickly which again feedbacks to make prices fall further and the cycle continues. This is the main issue with economies and markets when they fail and has been dubbed by Cassidy as a vicious circle. However, this cycle does not accurately portray the entire economy and only looks at the effects on banks, but the impacts on consumers or firms have not been considered. If they had been in this vicious circle, it would have been too complex to understand and analyse, as within the different classes of consumers, reactions are very unpredictable and immeasurable, therefore such a model would not satisfy the complexity of the situation.

In conclusion, John Cassidy powerfully portrays the impacts on a country when a market fails and the reasons why such catastrophes can occur. Cassidy also offers some solutions and the solutions of famous economists to these financial disasters that have brought some countries to their knees.