Over at The Conversation, Yale University economist Robert Shiller and Georgetown University economist George Akerlof argue that free market capitalism preys on human weakness and exploits it for economic gain.
Here is a taste of their article:
Just as free markets can serve the public good “by an invisible hand” (as Adam Smith saw more than two centuries ago, and is the foundation of the field of economics), free markets will do something else. As long as there is a profit to be made, they will also deceive us, manipulate us and prey on our weaknesses, tempting us into purchases that are bad for us. That is also a fundamental feature of market equilibrium, in which supply and demand balance each other out.
My fellow economists, while they recognize such behavior in individual instances, fail to see this as a general principle. And thus a lot of bad things happen, such as the candy at the checkout counter. Most notably, we economists should have been a chorus warning of the financial crash of 2008. We should have recognized that people should not be buying overrated mortgage-based securities, nor should banks have been creating the insecure loans that backed them. Instead there were at most a few lone voices of protest. We should have been more skeptical.
But this is not just about economists and what we think, because through long chains of reportage and other channels (such as this one), what we say in our faculty lounges affects politicians and the public opinion more generally.
This failure to understand that markets have this downside is then passed on into policy more narrowly defined. The public fails to understand that in the economic equilibrium, if there is a profit to be made, someone will take it up, as long as it is legal and as long as there is no public protest against it. Now that we are overpopulated with companies that will help repair your credit, we are asking ourselves questions, its’s too late for that one, we need to be vigilant for the next one.
Read the rest here.