J. Cassidy. Farrar, Straus and Giroux, New York, (2009)Book review in The Economist: JOHN CASSIDY'S new book is a sequel of sorts. In his previous work, “Dot.Con”, which came out in 2002, he chronicled the follies of the stockmarket bubble of the late 1990s. In “How Markets Fail”, Mr Cassidy, a British writer for the New Yorker, recounts the story of America's housing boom and its devastating bust. It is more than just an account of the failures of regulators and the self-deception of bankers and homebuyers, although these are well covered. For Mr Cassidy, the deeper roots of the crisis lie in the enduring appeal of an idea: that society is always best served when individuals are left to pursue their self-interest in free markets. He calls this “Utopian economics”. This approach turns much of the book into a very good history of economic thought. Mr Cassidy starts in 1776 with Adam Smith and his butchers, brewers and bakers, who supplied their wares as if guided by an unseen hand. Smith's analysis was made richer in the 1940s by Friedrich von Hayek, the Austrian who saw market prices as signals of which goods were scarce and which were abundant. Hayek's idea of the free market as a machine for processing and transmitting information “was one of the great insights of the 20th century,” writes Mr Cassidy. The book gives a detailed account of how the formal “proof” of the efficiency of free markets evolved. The breakthrough was made in the early 1950s by Kenneth Arrow, an American economist, and Gérard Debreu, a French mathematician who died in 2004. Mr Cassidy admires the maths, but points out that their findings rely on some unrealistic assumptions, something the two theorists were quite open about. Arrow and Debreu's “general equilibrium theory” seemed to give the stamp of scientific approval to unfettered markets. And it may have made it harder to challenge the purist free-market views of Alan Greenspan, the Federal Reserve chairman until 2006 whom Mr Cassidy partly blames for the dotcom and housing bubbles. Having set out the tenets of Utopian economics, the author then pokes holes in them. Individual self interest does not always benefit society, he argues, and draws on a deep pool of research (what he calls “reality-based economics”) to support his case. Markets fail if prices send the wrong signals. For instance, an increase in house prices ought to discourage new homebuyers. In practice, however, higher prices are a spur to buyers who hope to benefit from further rises. For would-be homeowners, the signal is that it is time to buy; for banks, that it is time to lend. Those who suspect a bubble face the same dilemma as textbook prisoners: it makes sense to act sensibly only if others do so too. Since that cannot be relied upon, it is safer to go with the herd. The result of such individually rational behaviour is a housing and credit boom, followed inevitably by a nasty bust. Markets also founder when there is hidden information—if sellers know more than buyers, for example—and when the prices paid by individuals do not fully reflect social costs, such as pollution. Such failures were evident in the build-up to the current crisis: dud mortgages were packaged as supposedly safe bonds to investors; banks did not factor in the wider costs of bad debt when making risky loans. Policymakers should have intervened to curb the excesses but were hamstrung by free-market ideology. “How Markets Fail” is an ambitious book, and one that mostly succeeds. Despite its title, it makes rather a good case for market economics; what it rails against is “free market idolatry”. Its call for a better balance between individual autonomy and state oversight might have seemed off-centre just a few years ago. Now its prescription is firmly in the mainstream..
J. Abbate. MIT Press, Cambridge, MA, (1999)Provides a good overview over the history of the Internet.
Use of the Internet has grown tremendously in a very short time and we take much of it for granted. We shop online, bank online, purchase airline tickets and make hotel reservations online, all at the click of a mouse through the World Wide Web, a graphical application for using the Internet. But how did the Internet get its start?
In Inventing the Internet, Janet Abbate tells the tale of the creation and evolution of the Internet beginning in the late 1960s with the development of a revolutionary concept for transferring data called packet switching developed simultaneously by Paul Baran of the Rand Corporation in the U.S. and Donald Davies of the National Physics Laboratory in Great Britain.
Abbate discusses the challenges faced by the Advanced Research Projects Agency (ARPA) in creating ARPANET, the first wide-scale computer network. ARPA's challenges ranged from utilizing the new and unproven technique of packet switching to connecting a wide variety of incompatible computers to the fledgling network. Packet switching proved to be a success but as Abbate points out, it is hard to say if packet switching made ARPANET a success or if ARPANET made packet switching a success. Abbate explains the efforts of several organizations that went into developing international standards that were necessary for the Internet to become as successful as it has become.
Abbate also explores the social issues surrounding the creation and development of the Internet; issues such as the cooperation necessary between the builders and the users of ARPANET in the 1970s and 80s that made ARPANET more user friendly to how the users themselves saved the ARPANET and ultimately the Internet through the popularization of an unlikely application. Abbate states 'had the ARPANET's only value been as a tool for resource sharing, the network might be remembered today as a minor failure rather than a spectacular success. But the network users unexpectedly came up with a new focus for network activity: electronic mail.'
Abbate delves into the popularization of the Internet through such applications such as the World Wide Web and how private enterprises including Internet service providers such as America Online, CompuServe and Prodigy quickly transformed the Internet from a dull, text-only entity to a glitzy, graphically oriented medium. The World Wide Web exponentially added to this popularization by providing an application that was not only easy to use but also wildly entertaining to both expert and novice users alike.
Abbate presents this history of the Internet in an easy-to-read style that is both entertaining and informative. Inventing the Internet is well documented with extensive chapter notes and an excellent bibliography..