Wednesday, November 4, 2009

A Failure of Capitalism

As I mentioned earlier I recently read Richard Posner's book, "A Failure of Capitalism", about the financial crisis. Richard Posner is a federal judge on the Seventh Circuit Court of Appeals. He is a famously prolific and often cited jurist. Still he has somehow found time to write many books of which this is the latest.

It would be nice to be able to recommend this book but I can not. One problem is the book is not very lively. Based on this book Posner seems to be a mediocre writer. Another problem is I don't think Posner is especially qualified to be writing about the financial crisis. Posner may be more knowledgeable about economics than the average federal judge but he isn't a professional economist. Finally I don't think Posner had much of interest to say. The book is 330 pages long and a few days after finishing it I don't remember much of it.

I mostly remember points of disagreement. Posner seems heavily invested in the idea that the bankers and banks involved were acting intelligently and rationally taking reasonable risks that unluckily led to collective disaster. This is somewhat defensible in the case of individuals but I don't think it is defensible for many of the institutions. Collectively they made some very dumb decisions. There was a complete collapse of underwriting standards for home mortgages leading to among other things widespread fraud. This was not a reasonable risk that unluckily went bad. I am not sure why this is important to Posner as it doesn't affect his conclusion that more regulation is needed. This is true whether banks are intelligently or stupidly taking the risks that are collectively unacceptable for society as a whole. Either way their freedom of action needs to be restricted.

There is an unattractive tendency among some economists, overly invested in the virtues of markets, to come up with elaborate rationalizations for why obvious market failings are really for the best. Perhaps Posner is similarly over invested in economic models based on rational actors. But if such models are useful it is because they are a reasonable approximation to reality not because humans individually and collectively really are invariably rational actors.

Posner thinks most of the mistakes leading to the crisis were excusable but that the failure of the government to have contingency plans was not. This doesn't make a lot of sense to me. As Posner correctly states we don't have a good idea of how to best recover from this sort of crisis. Which makes contingency planning for recovery of very limited usefulness. Better to worry about how to stay out of trouble in the first place.

I don't want to claim this book is completely worthless but I don't think the value to length ratio is very favorable. I expect there will be better books about the financial crisis.

1 comment:

  1. You know, there's a reason I put up with you at Unfogged as much as I do -- while I haven't read this book, I've read a fair amount by Posner, and you've pegged him quite accurately. Not guaranteed wrong about everything, but oversimplified to the point of being wrong often, and without much useful insight even where not actually wrong. I'd been planning to skip this anyway, but it's pleasant having support for that decision.

    It may make the reaction I have to "Econ 101" arguments a little clearer if you remember that Posner's a shining star of Law and Economics -- economic arguments that make it into the legal academy are immensely influential, but often really simpleminded and misleading.