Utopian Economy and Markets - Book Report/Review Example

Utopian Economy and Markets While Adam Smith promotes regulation of market by government, his concept of self-regulatory market is idealist and does not incorporate externalities within the scope of market that requires changes. Reality based economy supports changes within the environment and incorporates them within the market fundamentals to enhance equity and development. This is the major difference between the Utopian economy and Reality based economy. Indeed, the efficient market hypothesis becomes outdated primarily because of its belief that economic agents use rational approach to regulate market.

The self-interest behavior of agent in market economy becomes the important element that helps create maximum benefit for the society. The hypothesis fails when market reacts differently to the crisis situation which could be due to myriad reasons like change in economic policy, rising unemployment, increased rate of bank credit rates etc. Hayek’s economic philosophy emphasizes the role of information within the market hypothesis and says that market prices convey information that is asymmetrical because different stakeholders might have different types of information or perceived value.

Hence, government cannot fix prices. The market’s self-regulation depends on the information that is available which is used by firms to make appropriate decisions, reflecting the needs of the market. The information cascade from different sources provides vital inputs for market. Hayek has raised critical issue of wrong market signals that can jeopardize market fundamentals. The main reason is the spillover effect due to wide differences in the social and individual cost and benefit. While the individual cost could be lower resulting in improved financial benefit, the social cost could be huge vis-a-vis environment degradation, adverse impact on society etc.

impacting long term benefits to society. Thus, market price based on private cost could give wrong signal leading to market crash. Minsky’s criticism of Utopian economy clearly demonstrates the utility of reality based economy as people tend to invest as per the prevailing market conditions. So if financial markets are doing well, people tend to take more risks with their investment. The meltdown of current American economy is an example which has happened due to bubble burst, leading to withdrawal of funds from the market.

He asserts that market stability relies on instability because stable markets attract more investors which drive up the prices to unrealistic proportion. This leads to destructive speculation resulting in crash. Cassidy’s claim that individual rational decisions often lead to collective irrational outcome mainly because individuals work on self interest and wider welfare of society or nation is ignored. Hence, these are critical parameters of reality based economy that emphasize the differences against the Utopian economy.

Answer 2 The six main causes of 2008 financial crisis are as below: 1. Deregulation Deregulation leading to increased liberalization of the market and free trade policies of the government became one of the most important reasons for the meltdown. 2. Financial innovation The financial innovation for private benefit was also critical issue that led to the crash of US economy. 3. Insurance The inability of government to meet the expenses Medicare and pension of the people was the key reasons that