The Trouble with Markets by Roger Bootle, published by Nicholas Brealey

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This book is not one for holiday reading and it is likely that only the most committed economists will read it cover to cover, as Chris Goodwin – my adviser for this review – has done. Nevertheless, its implications are important for everyone who wishes to understand more about the causes of the recent financial crisis and the ways in which some of the problems can be overcome.

Bootle’s book argues that a major contributory factor to the crisis was the mistaken belief that markets are always right and can be left alone to sort things out. He believes that this is because many so called economic experts place too much emphasis on quantitative and mathematical approaches and not enough on ‘behavioural economics’. He suggests that the reason why academic economists like to emphasise complex, mathematical solutions is because this is where they are most comfortable and where they can feel superior to others.

He goes on to argue that a greater understanding of behavioural factors enables the more far sighted economists to produce much needed challenges to the ‘efficient market hypothesis’. This belief has justified a laissez faire free market approach, allowing financial institutions to follow the disastrous paths that have led to the current financial crisis. In the specific case of the banks the free market assumption did not work because bankers’ pay reflected the profits in the good times but not the losses in the bad times, and this inevitably led to uncontrolled, reckless behaviour. He regards the argument that this high pay is justified by market factors as ‘risible’; they are in the position of receiving excessive reward without equivalent risk to themselves and this should not be allowed to continue.

Unlike many economists, the author then goes on to make specific recommendations, based on the fact that, because blind following of the free market philosophy is dangerous, some intervention by government is necessary. He advocates:
• Requiring banks to hold more capital to cope with the risk of similar future crises
• Public regulation of remuneration structures
• Restrictions on some of the more complex financial instruments
• Separating commercial and investment banking

He recognises that all these solutions create problems of their own and that there is no perfect solution. But greater understanding of behaviour and its implications will reduce the chances of the same thing happening again.

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