How Markets Fail - Essay Example

How Markets Fail John Cassidy made significant contribution towards of the factors that makes market to fail.What prompted John to write about how market fails is a scenario where 508 points were stripped from the Dow Jones industrial average that sparked selling intense enough to snarl the New York stock market exchange. In his writing, Cassidy argues that in any market system, there are unseen variables that ruin the performances of commercial businesses (402). These variables include the hidden information, moral hazard and human emotion. He claims that these concepts curtail the effort of the traders, home sellers, bankers and regulators. He said that despite the fact that there are economic thinkers such as the utopian and reality-based economic thinkers; market can still fail mainly because of the unseen variables. According to Cassidy, market can fail despite the fact that the prevailing conditions are favorable (403). To many, a financial crisis of such nature in an advance economy appears to be a phenomenon of the past. It is like diseases such as smallpox which are still found in poorer countries, but essentially eradicated from the developed countries. However, Cassidy warns that financial crisis can still occur despite the fact that the economy is advanced. Cassidy was aiming at responding to the disaster that hit the western banking system unexpectedly. The financial crisis occurred during the period when most people were expecting positive results. Both the utopian thinkers and real-based economic thinkers could not tell what was going to come. They could not anticipate nor imagined that the disaster would originate at home. All they knew was that there was a growing current account imbalance between the United States and china and that incase of any form of financial crisis, these two countries are likely to be the first one to experience the crisis. Most people believed that changes in technology and the impact of globalization had enabled the central bank to figure out the secret to conducting monetary policy in a stabilizing way. Because of this, most people including the economic thinkers believed that the central was equipped with necessary knowledge, skills and know how having kept the economy on track after a series of ups and down in the 1990s. Most economies did no even stop to ponder about the case of Japan, which experienced economic bubble despite the fact that its economy was advanced. They claim that it would have been a normal phenomenon to find a financial or banking crisis in Japan given that Tokyo, a hybrid economy, lacks real market economy like the Great Britain. Unexpectedly, the disaster struck the economy that was believed to be advanced and strong to resist the tides. Most people, including the economic thinkers had no real answers to the unexpected phenomenon. Cassidy had an idea of what might be the cause of the unusual breakdown. As mentioned above, Cassidy wanted to clarify the fact that in event of financial crisis, bankers do not have bigger responsibilities and therefore, no one should lay blame to them (405). Cassidy argues that even if bankers had tried their best to meet the interest of their shareholders, there is no assurance that would have fulfill the interest of everybody. This is because society, according to Cassidy has different believes and perceptions, which may not be good for banks. Cassidy asserted that the belief that most of the economist have about the market is a mere theory. He particularly criticizes the belief that most of the proponents of the free markets have about market behavior. Cassidy questioned whether producers and consumers in a free market can lead to a beneficial outcome for a whole society. He also questioned the argument brought forth by the famous economist, Adam Smith that states that market systems is similar to an enormous decentralized machine for conveying signals and that the resulting outcome is both efficient and stable. Cassidy cautiously explore various areas of these theories, outlining all the various parts in which markets fail (409). The first area or the first cause of market failure is when the actions of one party impinge adversely on others. Cassidy state that if two markets are antagonist to each other, the probability of failure in one or both markets would be significantly higher. Another cause of market failure is when there is uncertainty concerning the future expectation. Cassidy argues that markets are likely to fail especially when there is hard to describe what makes up a rational course of actions. Example of this is when a person buys stock in a company because other people are buying. Such person would not be certain about the future and hence the investment or the transactions made by him or her are likely to fail. Another example of a case of uncertainty occurs when the buyers and sellers do not have access to the same information. Cassidy concluded that because so much of finance involves making predictions about the future, these markets are particularly prone to problems related to uncertainty and insufficient information. Cassidy argues that the federal government is among the contributors of such crisis. He claims that the cheap financing has a bigger role to play for the real-estate bubble. Another factor is the drastic reduction in credit by banks. This occurs when the issue of securities started taking becoming a basic requirement for borrowers. Excessive compensation that was associated with friendly securities created a perverse environment for bankers and mortgage brokers to do as much lending as possible with little regard for the amount to be paid off. The federal government as well as regulators also failed in their parts mainly because they did not advise the borrowers of the repercussion of the easy money. The collapse of real estate made the financial institutions to sustain greater part of losses. This is because investors rushed to pull out their investment in form of cash. Insufficient information is therefore a major factor causing the failure of the markets (Cassidy 411). Supercapitalism The case of capitalisms is imperative is any commercial sector. It is implicit in the news headlines. Capitalism is implicated to the common commercial and economic problems such as job losses, collapse of the banks, and financial meltdown. Most of the commentators in the news blame the hedge-fund managers as well as the CEOs for such happenings. Reich used the term Super capitalism to describe how capitalist structures have eroded the realm of democracy and eroded it (288). Robert Reich made an effort of answering the question of how economies acquire these levels or structures. It also aims at answering the part played by the politicians and whether the society agrees to be run in that manner. Owing to the fact that Reich had vast knowledge in the field by the virtue of the fact that he was both a professor of public policy at Berkeley as well as a former secretary of labor during the reign of bill Clinton. Because of this, Reich manages to offer a sound argumentative baseline concerning the phenomenon of super capitalism. In order to vividly elaborate his understanding about the principle of supercapitalism, Reich reviewed the economic situation in America between 1945 and 1975 (289). He stated that the economy was doing remarkably well. The economy was characterized by full employment, rising income and technological advancement. There was little time wastage and people had wider range to make different choices. During this period, the American companies were very profitable. The market regulators at that time had the public interest at heart. The kind of democracy that was prevailing was well coordinated. It took place both at the grassroots level as well as at the national level. At the grassroots level, the democracy happened through informal meetings such as local clubs and groups. However, Reich claims that this period did not qualify to be called the golden age simply because little was done to improve equality and citizen’s rights. Reich stated that the corporate interest grew so big that they eroded the democratic power of citizens. The cause of this is what constitutes the central theme that was focused by Reich while describing the phenomenon of supercapitalsim. Reich pointed out that technology was largely responsible for the meltdown that was witnessed (312). This is because technology assisted in precipitating globalization as well as gigantic expansion of the corporate lobby. Reich points out that in the past 30 years, globalization has significantly facilitate the expansion of trade and investment possibilities in US companies. Compounded by advance technology, globalization resulted in huge productivity improvement and high competition in most sectors. Virtually every sector was fighting for profit. This state brought about supercapitalsim. Supercapitalsim is a term used to describe a state when the few section of population, in particular the lobbyists, experts and legal specialist take greater part of money especially during campaign and used for their personal development at the expanses of the common man. Reich argues that in financial services, the benefits associated with the activities are normally privatized whereas the costs are socialized. Having describe the economic and social situation between 1945 and 1975, Reich went ahead to acknowledge the fact that there was a shift of power away from citizens and towards well-known financial institutions (Reich 289). While explaining the possible cause of the socioeconomic challenges of the 21st century, which include: mass layoffs, stagnation among people from humble background and at the same time explosive gains among the rich, Reich stated that as more and more American get preoccupied in their roles to become consumers and investors, they tend to lose their citizenship. Reich arguments were based on the fact that the spread of capitalism to the global level or rather super capitalism does not result into corresponding spread of democracy throughout the world. This has lead to a number of negative consequences at home such as widening inequalities and dwindling the social safety net (Reich 291). Reich was for the idea that although people normally complain of lower wage, the consequences of lower wage are much better than the consequences of efficient and effective economy. This is because such economy does not create conducive environment for democracy because it is less responsive to common values. He gave an example of US auto industry. He states that Vietnam War hampered the US auto industry. This forced the US military to build a super port. The port was expected to be used for supplying the tools for war. However, due to the creed for investment, the shippers began to pick up Japanese goods such as cars and other products for delivery in US. Reich asserted that this behavior is associated with rising inequality. It is also associated to the loss of good union jobs and security for family, poor access to health care. This is because most people get engrossed into investment so much that they forget about other basic and important needs such as health care and good social relationship. Reich said that suoercapitalism places man away from other men because he or she is just interested in money, Reich added that as consumers and investors’ people would like to have the great deals. As citizens they don’t like many of the social consequences that flow from them. Reich concluded by urging the policy makers and stakeholders to distinguish between the desires for profit and desires for good social relationships. He claims that new rules are required to control the widening inequality (Reich 294). Winner-Take-All Politics Hacker and Pierson made a significant achievement by comprehensively exploring the statement that states that winner takes all politics (357). They began by giving the overview of the stunning inequality in the United States. They revealed that 1 in 1000 or rather 0.1 percent of the Americans received approximately 22 percent of all gains in household between 1979 and 2005. On the other the bottom 70 percent of the households enjoyed only 14 percent of household gains. Their aim was to focus on the general rise in income inequality among the Americans. They wanted to distinguish this general rise in income inequality and the astonishing rise income and wealth-holding among the few people. The two authors were for the idea that income and wealth inequality is morally and politically unacceptable in a liberal country that aims to be liberal democratic polity. They argues that rising inequality is a bad thing in that adversely affect the job security, access to health insurance, the likelihood of mortgage foreclosures, the degree of bankruptcies and the chance of upward progression. They therefore come up with the Winner-Take –All concepts to explain the situation (Hacker and Pierson 358). According to the author’s, the winner take all economy is an economy characterized by the loss of labor union power, excessive deregulation of financial markets. It is also characterized by anti-progressive changes in tax policy system. This form of economy also occurs as a result of failure of the federal government to address states government by allowing the policies to drift into obsolescence and ineffectiveness. The authors believed that markets are not the opposite of politics. They clarified that political activities and choices have a tendency of shaping the rules within which markets operate. They associated the rise of income and wealth inequality to the politics by claiming that politics shape the laws within which markets operates. Because of this, they set up conditions that would allow certain groups of individuals t win big and others to lose significantly. As mentioned above, their work was focused into explaining the interplay of American democracy and American capitalism. They claim that despite the fact that democratic political system has the potential of supporting the capitalist economic system; the political system devoid of democracy is largely responsible for the dramatic economic inequality. They claim that one of the reason why politics is responsible foe the income inequality is that the political system oppose tax reduction for the rich. They also stated that most of the elected officials are not responsive to the general policy moods of the citizenry and at the same time, they do not focus on the policy preferences of ordinary citizens. Because of this, they create a conducive environment where the rich win and the poor lose (Hacker and Pierson 361). They also commented that most of the surveys that are carried out with an aim of understanding the economic situation among the Americans do not capture the views of the wealthiest. Because of this, it is difficult for Americans to understand how large the wealth gap is between the top and bottom. This also led to poor representation of the poor during decision making. They claim that such situation were not present in 30 years. They argue that such radical inequality is not a result of uncontrollable economic forces. Instead, the claim that it is a product of poor policy (Hacker and Pierson 364). They blame the government and the politics for this stating that the kind of policies since the late 1970’s has systematically favored the rich. They also asserted that policies governing the corporate sectors have enabled corporations to throw money at their top management team such as CEOs. They do not even base this on their performance. On the other hand, the policies governing the financial markets encourages deregulation and hence has allowed banks and other financial institution to create financial systems that benefits the affluent managers at the expense of the homeowners. They blame the political leaders for failing to adapt public policies that can go along with the shifting realities. They asserted that political leaders or any other influential leaders fails to update policies and hence are responsible for the radical inequality. They state that American politics lacks the aspect of democracy. It involves competing well-organized groups seeking to influence policy making. Because of this, those citizens or voters who do not have a group to represent them would be disadvantaged (Hacker and Pierson 359). The Crisis of Capitalist Democracy Richard Posner wrote this book purposefully to describe the economic situation during the time of financial crisis. Posner commented about the federal reserves as one of the players responsible for financial crisis. He states that the amount of interest rates set by the government has an impact on the situation of the economy. According to Posner, the low interest rates that were set by the federal reserves in the early 200s are responsible for the economic collapse. He also states that the idea of deregulation has a part to play as far as the safety of the banking system is concerned. To sum up his arguments, Posner argues that the low interest rates compounded by inadequate banking regulation were lethal as far as economic situation is concerned. He was particularly concerned about the banking sector. He states that banking industry is a more sensitive sector and is like the circulatory system of the body. He blames the political system for their failure to address the major challenges especially those with no immediate crisis. He pointed out that political culture of United State is equipped with skills and knowledge of how to deal with emergencies. However, they are ineffectual when dealing with the challenges with no immediate crisis. Posner advocated for swift moves and the need for major reforms. Works cited Cassidy John. How Markets Fail: The Logic of Economic Calamities. New York: Farrar, Straus and Giroux, 2009. Hacker Jacob & Pierson Paul. Winner-Take-All Politics: How Washington Made the Rich Richer— And Turned Its Back on the Middle Class. Simon and Shuster, 2010, 357 pp. Posner Richard. The Crisis of Capitalist Democracy. Cambridge, MA, Harvard University Press, 2010. Reich Robert. Supercapitalism: The Transformation of Business, Democracy & Everyday Life, Icon Books, 2007. Read More

 

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