Cassidy describes what he calls utopian economics and how the utopian thinking has led to economic crisis such as job losses, bank bailouts, and corporate greed. Cassidy attempts to convince that utopian economics does not capture the true behaviors of humanity collectively leading to unanticipated and adverse economic outcomes.
He presents the history of economics and contrasts the idea of utopian economics with reality based economics. Reality based economics encompass people’s behaviors and thinking identifying irrational self-interests (Cassidy, 9).
Cassidy then explains in detail how economic theory and practice influenced the “Great Crunch” (i. e. collapse in sub-prime mortgage lending during last decade).
The timeliness of Cassidy’s publication of a book to address how markets fail is certainly ideal in light of the recent crash in sub-prime mortgages. The financial impact of this economic crisis continues to dictate the pace of the current economy.
Cassidy uses the history of economics over the last few decades to demonstrate that his idea of utopian economics versus reality based economics is not new, but has been forgotten and/or consciously overlooked in the interest of other gains causing historical cycles of economic crisis. Cassidy’s political views are evident and he does not give neutral opinions. It is clear that he believes that a strict practice of utopian economics relies on a rational self-interest that is just not actual reality. He believes in investment and corporate profits, but not absence of moderate government regulation.
The Report on Economics 202
Christopher James Liebetrau G08L2114 Tutor: Candice Hittler Period 1 The Differences Between the Great Depression and the Current Global Financial Crisis Economics 202 Essay 1 29 April 2009 Abstract This essay sets out to distinguish the differences and similarities between the Great depression of the 1930’s and the current global financial crisis. It is an important discussion as a depression ...
He is a pragmatic among many other scholars and has knowledge and opinions worthy of review. Utopian Economics Cassidy is critical of utopian economics. Utopian economics rely on rational self-interest meaning that it is believed that the majority of people of society will take into consideration the impact of their actions and take actions that have some promotion of greater good. Cassidy uses the contemporary economic status in the United States with particular emphasis on the housing market crash to address that society did not make their decisions based upon utopian economics.
For example, it is not utopian that corporations gave loans to individuals that probably could not afford the payments and that individuals accepted loans that they knew they could not pay. Furthermore, it is not utopian that brokers hunted people to take on such loans to perpetuate a cycle of greed. He further explains that in the world of utopian economics, such an event has a statistically low possibility of becoming reality that it is given minimal attention. With little attention to the risks by the people who are considered experts, it comes as no surprise that the lay persons would not identify economic risks.
There has been a transition over the past several decades from the dominant thought that being hard-working and honest leads to a successful life. On the other people are motivated by their self-interest and want quick success. I agree with Cassidy that Utopian economics do not take the psychology and behaviors of the current times and that a traditional utopian view does not apply to current times. Cassidy emphasizes that Utopian economics does promote autonomy, which is generally a good thing. Promoting economic autonomy dates backs to Adam Smith and the famous term, the “invisible hand”.
Smith, an 18th century economist, believed that if each consumer is allowed the freedom to choose what to buy and producer what to sell, the market will naturally settle upon product distribution and prices that are beneficial to all members of a community. Efficient production, low prices, and investments all would all be automatic (Cassidy, 26).
The Dissertation on Economics: Portfolio Theory
Sometime during the 1980s, investors on the whole concluded that internationally diversified portfolios produced the best risk-adjusted returns, and that it was possible to identify and trade in a sufficient number of international stocks to make this conclusion a reality. Indeed, performance could also be enhanced by investing in a well-selected mix of stocks from other economies. The lasting ...
The French termed it “laissez-faire” meaning leave it be implying that the economy would work itself out. Smith’s theory was successful in local markets and the basis of free market trade (Cassidy, 31).
Cassidy agrees that there needs to be freedom in the markets, but assuming that the people involved in the markets will make sound decisions is not realistic. A “laissez-faire” mentality left the players of the economy to create the “Great Crunch” crisis (Cassidy, 344).
Cassidy believes that some extent of government regulation could have prevented this outcome. I agree with Cassidy that a reality based approach towards the economy among influential figures may have resulted in different outcomes. Cassidy discusses Friedrich Hayek’s work in the field of economics.
During the 1900s, Hayek, built upon the basic laissez-faire concepts and elaborated on economic theories introducing the concept of an information processing system. He addressed that economies do occasionally experience profound economy-wide coordination failures and he aimed his research on discovering the sets of circumstances or, more appropriately, the sequence of events that could cause such failures, (i. e. economic depression) (Cassidy, 39).
In other words, Hayek’s contributions to the field of economics are more in line with Cassidy’s beliefs.
Hayek believed that “laissez-faire” and utopian economics did not cover it. A thinker like Hayek would have seen the “Great Crunch” coming, for he would have looked at many circumstances that were not adding-up. Cassidy discusses how Leon Warus and Vilfredo Pareto’s work which continued in the 1930s with the goal to formalize the theory of the invisible hand ultimately reinforced Hayek’s theory that there was no hope for improving the efficiency of free market through the use of theory (Cassidy, 51).
Cassidy highlights the contributions of Milton Friedman, during the mid to late 1900s, to free market theory: 1) cutting government programs; 2) reducing taxes; 3) promoting individual measures; and 4) deregulating industries. Friedman was well aware of the dangers that can arise in an unregulated financial system, but did believe in the spirit/invisible hand of the free market. Friedman believed that the concept of the free market worked just as effectively in the financial market.
The Term Paper on The Creation of a Common Market for Financial Services in the European Union
Of all the global achievements in the last 50 years, economic integration in Europe may be considered as the most notable of all. From a continent separated by war and differences in culture, Europe has proceeded to become an economic and political leader today. The formation of the European Union (EU), the accession of the 15 European countries to the Community, and the introduction of a single ...
Cassidy would consider Friedman an extreme promoter of “laissez-faire” and that he approach is dangerous. Interestingly, Friedman’s approach was more reflective of the time and people at that point in history. Friedman believed that these goals were important to promote a healthy financial market too which raises issues (Cassidy, 72).
Louis Bachelier, a French 1900s mathematician, wrote a doctoral dissertation entitled “The Theory of Speculation” which emphasizes the coin-tossing (i. e. risk/gamble) view of finance (Cassidy, 87).
In the financial world today, this would be referred to as the “Random Walk Theory. ” It is titled the “Random Walk Theory” because it implies that the prices of stocks and other speculative assets will wander about aimlessly like an inebriated person. This is contrary to the efficient-market hypothesis which asserts that financial markets are “informationally efficient” (Cassidy, 88).
Information efficient means that on would have all the information that they need to know in order to make safe decisions minimizing risk.
Informationally efficient would be considered utopian economics, for one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis given the information publicly available at the time. The “Random Walk Theory” would be more consistent with reality based economics in that based on so many circumstances and sources of uncertainty. I agree with Cassidy in that promoting financial markets under the “Random Walk Theory” would be counterproductive to profits of large financial firms. It is apparent why the utopian view would dominate the financial market. Utopian economics triumphed.
Robert Lucas, in the past several decades, trying to show that government attempts to manage the economy were unnecessary, counterproductive, or both. He developed a theory that relationships that appear to hold in the economy, such as an apparent relationship between inflation and unemployment, could change in response to changes in economic policy. Lucas is also well known for his investigations into the implications of the assumption of rational expectations and individual optimization. Even subsequent policy makers would agree that these policies do not work during a financial crisis (Cassidy, 97).
The Term Paper on Hong Kong Singapore Financial Government
Could a burgeoning China drive Singapore and Hong Kong the way of the dinosaur? Some economists fear the answer could be yes. China's emergence as a manufacturing powerhouse spells competition for every Asian economy, but none face a more compelling need to shape up for the challenge than the two city economies. Each has got a different response strategy -- while Singapore scrambles to reshape ...
Cassidy turns back to Hayek’s theory in that the information processing machine does it perfectly in the sense that at all times, prices reflect economic fundamentals and send the right signals to economic decision-makers. Reality Based Economics It is evident that Cassidy promotes reality based economics. Reality based economics involve people’s behaviors and identifying irrational self-interests.
A significant term is the “rational irrationality” that characterizes circumstances that lead to outcomes that are against the greater good of society and creates government burden which ultimately affects the tax payer (e. g. ealth insurance example, where insurers do not want individuals with pre-existing conditions, but leads to deteriorated health and public costs).
Cassidy discusses the historical economic figures and economic concepts to provide the reader with a stronger foundation for this concept. Cecil Pigou (1877-1959), a prominent economist, enumerated a number of areas where a laissez-faire policy could not be justified because resources could not be counted on being distributed appropriately without government intervention. Pigou’s point is fundamental in that he believes that there needs to be a balance of social costs and social benefits.
Free markets do not lead to such a balancing and this creates a lot of risk in the economy. He highlights that there are many economic interdependencies. Ignoring the interdependencies can create an economy that produces neither efficient nor socially desirable outcomes (Cassidy, 115).
There are many examples where the economic interdependencies can be considered. For example, a carbon tax or other pollution taxes could be very beneficial to the government and environment in exchange for freedom for private enterprise.
The government has the resources and power to find these areas of interdependencies and create regulation that is mutually beneficial. In the case of the “Great Crunch”, Bush liberalized existing regulation requiring certain reserve funds for companies in the financial industry (Cassidy, 284).
The Essay on National Government Economic Party Areas
During the 1920's many economic problems occurred in Britain. However the main problems did not occur until 1929 when the Wall Street Crash occurred. The Wall Street Crash involved share prices falling to about 1/4 or even less than what they were bought for. This essay will examine how Britain was affected during the 1930's and will look at the reforms introduced by the National Government. This ...
The outcome of this is that the financial institutions were given more freedom to continue their business and increased the financial burden on the government during the mortgage collapse. There was no overall gain for the government.
The interdependency was not reflected in addressing such regulation. Market failures can have all kinds of outcomes. They could play out like a monopoly which provides no competition. A monopoly can be created absent any government regulation of natural resources, tolls, bridges, and roads to name a few (Cassidy, 154).
To the contrary, if everything were public goods then there would be no incentives for private enterprise to exist and pay taxes.
This leads to the concept of human interdependence also addresses the rational irrationality of what I do affects me and vice versa (e. . two firms debate to install fume emission blockers for it will interfere with their profits, so absent government mandate, neither firm will install the fume emission blocker) (Cassidy, 174).
In this example, the rational self-interest leads to inferior outcome. The first way to address this is to recognize the challenging nature of this rational irrationality. It becomes almost impossible for the individual, with separate interests and purpose, to make the decision that is most beneficial for the society as a whole without government intervention.
This is all very relevant to the “Great Crunch” in that the self-interest of each individual investment firm to earn money on sub-prime mortgages succeeded over any second guessing to the overall investment plan and strategy. Hidden information is a concept that is not addressed in Utopian economics but is a reality (e. g. used cars, health insurance, hiring a new employee).
Many free market theories do not address these factors, but they are economic realities (Cassidy, 154).
Rational economics must also consider the concept of “Surfing the bubble”, “The Rational Herd” and Crowd psychology.
Relying on the judgment of others can be dangerous (Cassidy, 183).
Economic ideas are essentially arbitrary in these cases. With everyone, taking sub-prime mortgages, it had the appearance of being safe and normal. Nobody would think about their financial risk, especially in light of the fact that it was the trend. Cassidy believes that psychology is essential in the practice of economics. There have historically been a lot of research and theorists that study how the brain will interpret economic issues. Cassidy’s view is that people are not stupid, but they do not necessarily know what they really want or where their best interest lie.
The Term Paper on Korean Economic Crisis Government Financial Korea
Korean economic crisis: The intervened Banking system This paper is divided into 2 parts. The first part seeks to validate that government intervention on the banking system in Korea as a primary cause for the collapse of the economy in 1997; the second part examines the intent and rationale behind the intervention. Causes for the collapse of the Korean economy Currency crisis is commonly cited as ...
He distinguishes two types of brains: 1) brain tells people to save for retirement, plan ahead, and act cautiously while 2) brain screams at them to enjoy the moment, make a quick buck, and get ahead of the other fellow. Many people with built-up equity were inclined to refinance in order to please this concept of the brain addressing to enjoy the moment. Hyman Minsky is an economist that raised the idea of investment through future promise of money. The future of the economy was based in people’s willingness to invest in the future.
While this is a valuable concept, and encourages financial markets, it also includes risk (Cassidy, 205).
The concept of Ponzi Finance which is a fraud disguised as an investment opportunity, in which initial investors and the perpetrators of the fraud are paid out of funds raised from later investors, and the later investors lose all funds invested is part of rational irrationality. It benefits the original investors, but is a premeditated way to disadvantage the later investors (Cassidy, 209).
In many ways, the sub-prime mortgages were designed to benefit the financial firms and for many mortgagees, there was great financial loss.
The Great Crunch & Conclusion Cassidy has some criticism of Greenspan. Cassidy’s exact view: “for almost two decades, Greenspan had headed an institution that was designed to save financial capitalism from itself. For him to claim that the market economy is innately stable was not merely contentious it was an absurdity. If he had seriously believed what he wrote, he would have surely have followed the lead of his fellow Randians and argued for the abolition of the Fed and the reestablishment of the principle that struggling financial institutions should be allowed to fail. Cassidy ultimately believes that Greenspan helped make it easier for financial institutions to take on extra leverage and risk in the future knowing that they will be backed-up by the Federal government. Cassidy also believes that the outcome becomes hypocritical of the basic belief that a free market shall promote wealth for all and not have a bulk of money going to a small group of wealthy people. Much of the losses are socialized which ultimately have negative impacts on the typical taxpayer.
Cassidy stated that “since the Fed has abdicated its responsibility of preventing excessive risk-taking, rational irrationality will eventually ensure that the system moves toward what Minsky referred to as a Ponzi finance. ” Cassidy closes hoping that society may be able to learn from the “Great Crunch”. He desires that the government would implement regulation to put Wall Street in its place. He is afraid however, that with the government bail-outs that no corporate lessons will be learned and that society will never really feel the impact that will help them remember the gravity of this economic crisis.
I think that Cassidy strikes a balance. He understands and promotes all of the foundations of the free market, but identifies areas where it can still be promoted with implementation of regulation that will create positive and mutually beneficial outcomes. He identifies generational changes stimulating the need for a paradigm shift from Utopian economics to reality based economics. Ultimately, I agree with Cassidy in that the government can intervene in without compromising the forces of the invisible hand.
