The Limits of the Market: The Pendulum Between Government and Market

Let’s get the bad bits out of the way quickly: I don’t agree Paul De Grauwe’s politics. To cut a long story short, he’s to my left and he makes a number of common “attribution errors” which I find irritating. For example, we all know that Europe in 1945 was flat like a parking lot from all the bombing and missing a fair number of men, to boot.The way we calculate GDP (where an earthquake really adds to GDP because we count the “flow” of work we have to do to re-build but we do not count the massive hit to the “stock” of buildings which was destroyed) it is impossible to experience anything other than monumental growth after a war. If you add into the mix that protracted wars (i) shatter often ossified business structures, (ii) bequeath us newly-developed technology, (iii) force us to replace obsolescent plant and equipment with investments that embody the latest technology (including the very latest that was developed for the war effort), it is entirely normal that Europe (and the US) experienced GDP growth from 1945 to 1970 that has yet to be replicated.The author twice attributes this growth to causes that suit his argument, but I find unconvincing. On pages 71-72 he charts GDP growth in the West against tax rates and strongly hints that the higher tax rates of the post-war period had a hand in the higher growth. He repeats this trick on pages 89-90, where he charts GDP growth in the West against income distribution and again strongly hits that the more equitable income distribution of the post-war period was conducive to higher growth.There’s more lazy stuff like this, which strongly, but highly unnecessarily, detracts from the credibility of what is otherwise a total gem of a book.Now for the good stuff: In 155 very short, very readable and very approachable pages, the author manages to:1. Lay out his objective, which is to demonstrate that market and democratically elected government must work together and do not provide standalone alternatives for one another.2. Weave into his narrative all recent contributions to the theory of “what just happened” to get us to 2008, from sources as diverse as Daron Acemoglu, Daniel Kahnemann and Thomas Piketty, but without neglecting past giants like Mansur Olson, John Meynard Keynes or Milton Friedman, all in the interest of answering the question posed by Marx (and answered many times over by history, the author argues)3. Explain clearly and simply but very thoroughly all the textbook limitations of capitalism (externalities regarding public goods, externalities regarding the environment and ex-post unfair distributional outcomes in the presence of economically “optimum” outcomes)4. Explain (less exhaustively and less thoroughly, his heart is into it a lot less) that there are limits to the ability of a central government to allocate, additionally that people won’t get out of bed to work for others as hard as they will for themselves and finally that there are important issues regarding coercion when you tax.5. Pause his analysis to underline that high pay is a goal of our system rather than a bane to employers, because when the system is working properly high pay merely reflects higher productivity.6. Synthesize all of the above to ask Capitalism “quo vadis?”The book does not mention market power and its abuse as much as I would have liked. It stays on Piketty more than I’d like and if it was going to stay with him that long I’d really want the author to have debunked r > g, rather than suggest a tax on wealth that would merely result in a re-pricing. I would also have liked more analysis of and more emphasis on what the exact foundations are that government provides to capitalism (beyond the democratic support): property rights, a legal system to underpin its transfer and disputes that transfers entail, strong enforcement of competition, a system to resolve bankruptcy in an efficient manner (zero mention here of the tenet that capitalism without bankruptcy is meaningless, beyond a quick mention of “moral hazard”) etc. etc. On another note, the use of Kahnemann's System I and System II to discuss inequality may eventually date this account.Also, I found the conclusion of the book (that either the internal conflicts of capitalism will lead us into the embrace of populists or that we will hit the environmental constraint) too pessimistic.But the book does not end there. It offers a prescription, which the author attributes to Albert Camus: we all have a job and our job is to try our best. In the author’s words, “It will be extraordinarily difficult to prevent future catastrophes. We have a small chance of preventing decline with the reforms I outlined above. But even if that does not work, we are left with the option of doing as Sisyphus did, of starting again each day. It is the only way of giving meaning to our existence.”What an unbelievable conclusion. I spent 155 pages disagreeing with much of what Paul De Grauwe had to say, but his call to arms is a total inspiration. It is our duty to fight, even if sometimes we find ourselves on the opposite side of the argument. It is our only way forward.The book is a template of what it is we’re all fighting for. It is a tour de force. Buy it and read it and then go check out the sources it refers to.

In his long time search for the truth Paul De Grauwe has changed his view that the market could offer a solution to most economic problems and that governments should play minimal role. Both the market and the state are needed for the prosperity. But as their relative importance increases in the economy both the market and the state faces either the internal or the external limit. Applying Kahneman's systems I and II (See Thinking Fast and Slow) De Grauwe provides an interesting way to analyse the strengths and the weakness of the market and the state. Excellent choice.

The title says it all.

Lucid and demonstrative

A very well written book. It could be useful for students of first course of economics or for journalists. However is to too basic for economists