Self-Interest May Not Benefit Society As A Whole
RENEE MONTAGNE, Host:
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.
JOHN CASSIDY: 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.
HENRY WAXMAN: In other words, you found that your view of the world - your ideology was not right. It was not working.
ALAN GREENSPAN: 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.
CASSIDY: 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?
CASSIDY: 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?
CASSIDY: 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: Thanks very much.
CASSIDY: Thank you.
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