>Very few economists foresaw the great recession of 2008–2009<p>I just can't get past the very first sentence. First, it ignores the realities of both economists and financial insiders who made attempts to blow the lid off of the ARM/toxic loan schemes - not unlike pre-Snowden whistle blowers who were equally ignored and erased from history. Second, even as a 17 year old kid, in 2001, I wrote an economics paper about the impending housing collapse - only I was guessing 2005 not 2008 - based on ARM's; 103% financing with 0% down; and stated income.<p>The next thing will be people talking about how very few economists foresaw the issues with reverse home mortgages, or how no regulators foresaw the dangers of equity crowdfunding for non-accredited investors.
The term "free market" is thrown around rather easily in this article, oftentimes with the assumption that consumers have absolutely no recourse in said "free market." A few places, you could replace "free market" with "freedom of speech" and it would read the same. Of course the "progressive" thing to do is to limit speech as well, for our own good.<p>When an economy has a strong central bank meddling with the interest rates, firms and individuals receive an incorrect signal in the time-preference for money, since the interest rates are not determined by the market. Coupled with an inflationary monetary regime and Keynesian ideology throughout, the "free market" has no chance to produce optimal outcomes.<p>Come back with a book that examines actual free markets and we'll talk.
I'm glad to see that this book review is by Cass R. Sunstein, who has devoted much of his research to related issues. Human psychology works in ways not completely anticipated by classical liberal economists like Adam Smith (although Smith deserves more credit than he gets for a deep understanding of human psychology). One interesting paragraph in the review tells the tale: "To support this claim, Akerlof and Shiller point to an uncanny prediction by John Maynard Keynes in 1930. Keynes expected that by 2030, the standard of living would be eight times higher. We are on track to get in that vicinity. At the same time, Keynes made a profound mistake. He predicted that the workweek would plummet to fifteen hours and that people would struggle not with financial problems, but with a surfeit of leisure. That isn’t going to happen. What Keynes missed is that free markets generate new desires. In Akerlof and Shiller’s words, markets 'do not just produce what we really want; they also produce what we want according to our monkey-on-the-shoulder tastes.'" In other words, producers can act jointly more effectively than consumers can in exploiting weaknesses of human psychology. This seems to be a fair statement with a lot of empirical support.<p>I think the reviewer does a good job at the end of his review of critiquing the book's view of behavioral economics by asking for more specificity about which mechanisms most lead to "phishing" (dishonest marketplace behavior to fool consumers). To say that free markets take advantage of consumers does not guarantee that making markets less free is any better for consumers, unless some new form of regulation is based on careful research and an affirmation of commonly held human values.
Along with inestimable human livelihood and wealth, the free market creates various possibilities to foolishly harm oneself. Some questions Sunstein does not raise are:<p>1. Does the option of self-harm have value? If such options are forcibly removed, is the human condition degraded? For example, if one is stripped of having the sense of self-ownership, is that person limited in their level of human development and functioning?<p>2. Can harmful products be forbidden without the threat and use of violence against their would-be producers and consumers?<p>3. How successful could we expect such efforts to be, based on similar past and current efforts? And how costly, monetarily, socially, and in human lives?<p>4. How likely are such efforts, and the institutions that exert them, to be corrupted and bent to the service of powerful interests?
Exploitation of irrationality is how rationality evolves in biological systems. In other words, if we get the government to play the role of a protective nanny, we the citizen will remain intellectual equivalent of infants.
Don Boudreaux has done a reasonable job of highlighting Akerlof and Shiller's dishonesty in their latest book:<p><a href="http://cafehayek.com/2015/12/phoolishly-against-phreedom-of-speech.html" rel="nofollow">http://cafehayek.com/2015/12/phoolishly-against-phreedom-of-...</a><p><a href="http://cafehayek.com/2015/12/a-baseless-charge.html" rel="nofollow">http://cafehayek.com/2015/12/a-baseless-charge.html</a><p><a href="http://cafehayek.com/2015/12/daffy-elitists.html" rel="nofollow">http://cafehayek.com/2015/12/daffy-elitists.html</a><p><a href="http://cafehayek.com/2015/12/mostly-exaggerated.html" rel="nofollow">http://cafehayek.com/2015/12/mostly-exaggerated.html</a><p><a href="http://cafehayek.com/2015/12/more-on-phishing-for-phools.html" rel="nofollow">http://cafehayek.com/2015/12/more-on-phishing-for-phools.htm...</a><p><a href="http://cafehayek.com/2015/12/the-role-of-market-forces-in-protecting-against-phishing.html" rel="nofollow">http://cafehayek.com/2015/12/the-role-of-market-forces-in-pr...</a><p>I would also like to note that anyone criticizing neoclassical economics (and it's full of dubious assumptions, don't get me wrong) based on straw men about "rationality" is fighting windmills. But don't take it from me, take it from a heterodox post-Keynesian: <a href="https://unlearningeconomics.wordpress.com/2012/06/29/how-not-to-criticise-economics/" rel="nofollow">https://unlearningeconomics.wordpress.com/2012/06/29/how-not...</a><p>And, unsurprisingly, Akerlof and Shiller stop at yelling "market failure" without proposing a theory of government and ignoring the very fruitful area of government failures.<p>Anyone who argues for intervention on basis of asymmetrical information without having read up on public choice is in no position to speak of anything, since their model is stuck in assuming government is a mystical exogenous equilibrator and that all of its constituents have virtually no expectations whatsoever (which is an even worse assumption than full rationality).<p>Akerlof and Shiller are obviously well aware, but their book is little more than a political polemic.
The central problem of a free market is also its greatest strength: it relies on the people making the purchases to decide what constitutes a good product or service. It asks us to vote with our wallets.<p>This works best when the individual educates him/herself about each purchase.<p>However, when individuals make purchases based on popularity rather than merit, or based on what they're used to, their ability to vote with their wallet suffers.
And when producers begin to settle into a position of comfortable mediocrity, when they refuse to compete and improve, they also hurt the consumer's ability to vote with their wallet.
Does the appropriation of the term "phish" disturb anyone else? To me, it confuses the distinction between auspiciously legal capitalistic behavior and the work of con artists. The appropriation equates tempting irrational actors to act against their own interests with defrauding rational actors into acting against their own interests. I also shutter at the thought of reading a 272 page book littered with various "phish", "phool", "ph"-etc'd terms.<p>[Edit: grammar]