Market failures

I have been reading a book, "How Markets Fail", by John Cassidy, borrowed from the local library (and when he says local he means less than 200 yards away, European readers, about 180 metres - ed) and have not only been understanding what it says, but actually enjoying reading it (how can that be - amazed ed)!

Now being that kind of sad person (What? You have a problem with lack of light in Winter in the Northern Hemisphere - medical ed), in that I read books on Economics amongst other things. I have now read more than a few books on the most recent recession and this particular book is damn fine (like a wine, it seems to get better the more I drink of it - waxing lyrical ed).

It gives a history of economic theories over the past 150 years or so, and trips lightly to the conclusion that most (but not all - economics ed) economic theories fail to explain anything that appears to happen in the real world at all (you just can't trust those trusty theories - ed). There does seem to have been a move to more realistic theories in recent years, as they start to take into account that most interesting factor, "real people" and psychology. What took them so long you may well ask?

Most (if not all - ed?) of the older theories that had been put forward (and taught as gospel in many Universities - education ed) had a large number of assumptions that failed to match the real world, and unfortunately for us, were used as tools to help in policy making by governments and financial authorities  world wide (oops - ed)

What economics seems to boil down to is; that the world is inhabited by irrational people with an inbuilt herd instinct, who are forgetful of  history and have absolutely no ability to foresee the future (well how many more booms and busts do there need to be before we get that it is the norm - economics ed). 

So given this, what I do find amusing, is that most of us in work have pension schemes where our pension fund managers invest our money to beat "the market" but where history shows us and time again that most managers fail to beat the market average (Worth reading Nassim Nicholas Taleb's books, The Black Swan & Fooled By Randomness, which although are a bit of a hard read, are very enlightening - economics ed). Worth noting that there will always be some people who beat the market, but that is most likely (tee hee - maths ed) down to probability.

Markets of all kind seem to move in cycles, generally boom and bust (like in in the UK the market for houses - see here, for the boom and busts over just the last 40 years, including our latest one - ed) but we seem to forget it after a few short years! Remember even Gordon Brown (hiss, boo - ed) told us with all sincerity that, "we will never return to the old boom and bust", as recently as 2006, just before we entered the longest recession in generations! So much for that theory!

So, if you are a little interested in why we are where we are, this is a book I can recommend.

Afterthought
Another entertaining and very readable book is, "Whoops", by John Lanchester, a book which is a breeze to read and very informative on the subject of how we got into this current mess.