Book compelling in explaining crisis

HOW MARKETS FAIL: The Logic of Economic Calamities. By John Cassidy. Farrar, Straus. 400 pages. $28.

The reputation of the economics profession has been a major casualty of the recession, and John Cassidy's "How Markets Fail" continues the assault.

Cassidy, a writer on economic topics for The New Yorker, uses the events of the past few years as a touchstone for discrediting what he refers to as "utopian economics," or the idea in economics that free markets always produce the best outcomes.

In doing so, he spends a great deal of time discussing the effects of "rational irrationality," his term for when the rational actions of many individuals result in a collectively negative or irrational outcome for everyone, such as when a run on the banks forces them into insolvency.

Unfortunately, the concept of rational irrationality is neither particularly new (the rest of the world has other, less irritating names for it) nor all that obtuse. And while it is admittedly an important concept for his book, he spends far too long discussing it.

Cassidy also uses the book as a platform to inveigh against prominent economists (especially from the University of Chicago) in the field of "utopian economics," and at times the book seems almost a polemic. However, he fails to clarify what constitutes utopian economics. He excludes Keynesian economics but inexplicably seems to include the New Keynesian variant, which is closely linked to the original and widely recognizes the existence of market failures, the very subject of his book.

Despite these flaws, much of the book is well-worth reading. For those interested in economic history, Cassidy provides an engaging overview of the discipline, and the section he devotes to the housing crisis is absolutely fascinating. Cassidy's strength lies in his ability to make complex economic ideas accessible, which serves him well when delving into the morass of the subprime mortgages scandal.

His account of how the subprime mortgage industry developed and nearly ended up bringing down the financial system is comprehensive, vivid and compelling, and Cassidy leaves readers feeling as if they have a firm grasp of the subject.

In an increasingly competitive market for books on the recent economic crisis, "How Markets Fail" manages to stand out from the crowd.