Thursday, May 21, 2009

Book Review: "A Failure of Capitalism" by Richard Posner

City Journal reviews a new book from Harvard University Press on the current meltdown.

Don't panic! I haven't given up on capitalism, and neither has author Richard Posner. Blurb from the review:
Coming from a leading free-marketer, Richard Posner’s new book may look at first glance like a confession of intellectual defeat. Actually, it is closer to healthy self-criticism. Capitalism, writes Posner, should be not rejected but repaired. Posner has joined the still-modest number of scholars who try to understand their mistakes without jettisoning their entire system of beliefs.
There's even more interesting stuff in the review. You may find this thumbnail sketch to be useful (my emphasis):

. . . Posner’s book is an explosive manifesto in the ongoing philosophical feud among economists between rational-action theorists and behaviorists. This may sound arcane and tangential—but it’s central. Today, free-market economists and the politicians who more or less follow their lead split into two leading schools of thought. On one side, the rational-action theorists, led by Chicago economist Gary Becker, think of individuals as behaving rationally, with their own best interests in mind . . .

Behaviorists, on the other hand, based on some still-limited psychological experiments and brain scans, conclude that individuals are moved more by passions—Keynes called them animal spirits—than by reason. (Nobel Prize–winning psychologist Daniel Kahneman is the founding father of this school, and Robert Frank, author of the just-published The Economic Naturalist, is its best public advocate.) We thus are prone to make financially unsound choices that eventually work against our best interests. Rational-action theorists are inclined to let individuals choose what’s best for them in slightly regulated markets where information flows abundantly. Behaviorists suggest strong government regulations to protect people against their own instincts.

I don't need to tell you which camp I belong to, do I?

I don't want a nanny government in my bank accounts anymore than I want one in my refrigerator or anywhere else, trying to protect me from myself. And who are they to know better, anyway? The only protection I want or need is called the United States Constitution, if you really want to get down to brass tacks. Now I'll be off with my life, liberty, and pursuit of happiness (where happiness includes property, thanks), which I shall chase with other unrepentant rational-action individualists.

UPDATE: Gentle reader Jay of the Blackstone in America blog recommends the New York Times review of the book. It's a nice one; do take a look.


lumpy said...

A quibble with an otherwise excellent review:

Posner has joined the still-modest number of scholars who try to understand their mistakes without jettisoning their entire system of beliefs.Isn't that what VIRTUALLY ALL scholars do? Isn't that why socialism remains embedded so deeply in academia and must be reinvented with each generation, because despite its huge flaws MOST scholars will try to rework some of their ideas rather than jettison an entire system of belief?

This isn't a critique of the book or of capitalism, just disbelief in the notion that once some flaws are found people generally abandon their entire belief systems.

Other than that, kudos to Guy Sorman for an informative review. It's great that he brings up the fact that many seem to believe this HAD to happen, and that they are wrong, just as Karl Marx was wrong about capitalism.

About the book, this bit alarms me:

Eventually, like a newborn Keynesian, Posner blames the crisis on an absence of regulation and sees more regulation as the cure, overlooking how heavily regulated the markets already were. Certainly the existing regulations weren’t adequate, but to this day, no one knows for sure what the right regulatory approach would be.Right - it wasn't a LACK of regulation, but rather BAD regulation.

Mad Minerva said...

I hear you. Also, part of the problem is the blind faith of some people in "regulation" per se...complete with the corollary that if any kind of regulation doesn't result in good outcomes, what we need is MORE regulation.

Jay said...

The book is well worth reading. As with everything Judge Posner writes, it's much subtler than the reviews allow (although the Times review is, surprisingly, the best one I've seen so far).

I've posted chapter summaries of the book on my blogger blog, Blackstone in America.

Mad Minerva said...

Thanks, Jay!

Good point about how reviews can't capture subtleties. The New York Review of Books has a review seems more interested in bring grumpy than in engaging ideas, or so it looked to me.

Will check out your blog!

Mad Minerva said...

Should read "BEING grumpy." My coffee hasn't kicked in yet! Maybe I'm grumpy too.