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How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism

Palgrave Macmillan,

15 min read
10 take-aways
Audio & text

What's inside?

Misguided allegiance to theoretical “free markets” led to destructive deregulation of the financial services industry.

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Neoclassical economists contend that the economy naturally seeks equilibrium, an optimal point where the supply of goods and services equals the demand. This intellectual view has encouraged politicians to deregulate markets to make them more competitive and efficient. But deregulation of financial markets has been a failed experiment in freeing banks and investment firms, says financial writer Yves Smith. She argues, convincingly, that the global financial crisis that began in 2007 has provided ample justification for greater regulation of banks and other related institutions. This book went to press in late 2009, prior to the 2010 passage of the Dodd-Frank Act, a sweeping reform of the US financial services industry that embodies some of the author’s proposed changes. getAbstract suggests Smith’s book to all those affected by the 2008 meltdown for its incisive description of the symptoms, causes of and cures for the financial crisis.


The “Self-Correcting” Economy

In his influential 1776 book, The Wealth of Nations, Adam Smith popularized the classical economic concept of market equilibrium. Smith is famous for comparing individual self-interest to an “invisible hand” that nudges each seller of goods and services to supply just enough to satisfy the needs and wants of buyers. His use of such an evocative metaphor was typical of the times; economics was a social science prior to the 20th century. Today, respected economists take a much more mathematical approach to their field.

Since the 1940s, mathematical expressions of Smith’s ideas have made the economics discipline more accurate, in a narrow sense, but also more abstract and arguably less applicable to real problems. Neoclassical economics, the quantitative descendant of classical economics, developed formulas that identify theoretically optimal economic states – that is, mathematical points where the demand for a product equals its supply.

But disciples of the neoclassical school did more than just reduce the metaphor of the invisible hand to numbers. They embraced unrealistic assumptions about markets as they examined their ...

About the Author

Yves Smith (the pen name of financial writer Susan Webber) established Naked Capitalism, a website focused on economics and finance. Her articles have appeared on Slate and in The New York Times and The Christian Science Monitor.

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