Self-Interest May Not Benefit Society As A Whole

John Cassidy, a writer for The New Yorker, talks with Renee Montagne about his new book How Markets Fail. Free market believers say that when individuals act in their own rational self-interest, society benefits. But that theory has skeptics — including Cassidy.

Copyright © 2009 NPR. For personal, noncommercial use only. See Terms of Use. For other uses, prior permission required.

RENEE MONTAGNE, host:

Believers in the free market say that when individuals act on their own rational self-interests, society benefits. There have always been skeptics who say free markets can and do go awry.

Among them now is John Cassidy. He's an economics writer for The New Yorker magazine and has a new book called "How Markets Fail." In one chapter, he describes what happened to a new footbridge over the River Thames in London.

Mr. JOHN CASSIDY (Economics Writer, The New Yorker): Ten minutes after it opened, it started shaking violently with hundreds of people on it, and nobody could explain what had happened. So they closed it down. It was a great embarrassment. Turns out that the problem was as the bridge started to sway, everybody started to step in sync with each other to avoid falling over, and that produced additional sideways forces on the bridge and added to the sway.

So everybody was acting in their own self-interest trying to prevent falling over, but it had a disastrous outcome. People in the financial markets tend to feed on each other, and people follow each other rather than just doing things because they think it's a good idea for themselves. You can get this development of a speculative bubble which then can lead to disaster.

MONTAGNE: Now one of the most influential believers in the general efficiency of the free market was Alan Greenspan, former chairman of the Federal Reserve. Last year, he admitted to Congress, though, that there were flaws in his free market ideology. And we have a clip from that particular testimony. It was from just about one year ago today. Greenspan's being questioned here by Democrat Henry Waxman.

Representative HENRY WAXMAN (Democrat, California): In other words, you found that your view of the world - your ideology was not right. It was not working.

Mr. ALAN GREENSPAN (Former Chairman of the Federal Reserve): Precisely. That's precisely the reason I was shocked, because I had been going for 40 years or more with very considerable evidence that it was working exceptionally well.

MONTAGNE: Yeah.

Mr. CASSIDY: Right. I mean, that's - I think that's going to go down in the history books as a very famous exchange. I actually opened my book with it. The idea of underpinning the free market model is that self-interest plus people acting rationally leads to a good outcome. Greenspan thought the banks would look after their own self-interest and wouldn't do anything which would be damaging to them and then damaging to the economy as a whole. That turned out to be completely wrong, of course.

It turned out that the banks had taken on enormous risks and when the housing market collapsed, the banks, most of their capital was wiped out and they couldn't afford to lend to anybody. And that sent the economy into a big recession.

MONTAGNE: Well then, what's a better approach to the markets?

Mr. CASSIDY: OK. Well, as far as the Fed's concerned, there are two central issues. One, it should go back to its original mission of trying to prevent financial crashes. So if it sees a lot of speculation emerging in various markets, it should act to stop it either by raising interest rates or telling banks not lend people 100 percent mortgages who can't afford it.

Secondly, just the Fed and the rest of Washington needs to take a much more vigorous approach to enforcing laws on Wall Street and thinking about the structure of Wall Street. You know, we've now got these enormous banks. They do everything under one roof, like running your current account, but they're also casinos in that they take big bets themselves. And my argument is that these two functions should be split up.

There should be a heavily regulated banking sector where you can deposit your money and the banks look after it safely, and then there should be a more widely regulated sector where the banks can take risks if they want, but if the risks turn out badly, they go bankrupt.

Under the current system, the banks are too big to fail. So that means that we, the taxpayers, are basically subsidizing the risk-taking activities of the big banks. That appears to me to be intolerable. It's also not a free market idea. You know, the free market idea is that if you take a risk and it goes well, you do well. If you take a risk and it goes badly, you lose your money.

MONTAGNE: When it comes right down to it, who decides which parts of the economy are rational and which ones are - I mean, is the government really more rational and efficient than the marketplace would be if left reasonably unencumbered?

Mr. CASSIDY: Well, I mean, that's a classic, you know, argument of the right that the government doesn't - will do a - will make a worse job of it than the market. But I think we've had a test of that hypothesis in the last 20 or 30 years. After the 1930s, we set up a system of regulation of Wall Street, and in the post-war era from 1945 to 1980 or whatever, you know, we had enormous prosperity in this country. People's wages went up. It was an era which economists now refer to as the Golden Age.

Post 1980, the doctrine of deregulation and what I call utopian economics took over, and we've had, you know, a classic laboratory experiment. How has it turned out? Well, some things have turned out well. You know, you could argue that the airline industry's better than it was. You could argue that telecommunications is better, you know, things are - you can have much, much more choice. We've had the growth of the Internet, etcetera.

But in finance, I think it would be hard to argue that the consequences of deregulation have been good. The last 10 years shows that they've been disastrous.

MONTAGNE: John Cassidy writes about economics for The New Yorker. His new book is called "How Markets Fail."

Thanks very much.

Mr. CASSIDY: Thank you.

Copyright © 2009 NPR. All rights reserved. No quotes from the materials contained herein may be used in any media without attribution to NPR. This transcript is provided for personal, noncommercial use only, pursuant to our Terms of Use. Any other use requires NPR's prior permission. Visit our permissions page for further information.

NPR transcripts are created on a rush deadline by a contractor for NPR, and accuracy and availability may vary. This text may not be in its final form and may be updated or revised in the future. Please be aware that the authoritative record of NPR's programming is the audio.

Comments

 

Please keep your community civil. All comments must follow the NPR.org Community rules and terms of use, and will be moderated prior to posting. NPR reserves the right to use the comments we receive, in whole or in part, and to use the commenter's name and location, in any medium. See also the Terms of Use, Privacy Policy and Community FAQ.