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Book Review: The Limits of the Market by Paul De Grauwe

by Andrew White  |  July 13, 2017  |  Submit a Comment

The Limits of the Market- The pendulum between government and market, Paul De Grauwe, 2017, Oxford University Press.

I was thoroughly enjoying this short, simple book that was saying a lot to me with its concise and focused material.  The short book does a great job, until the last third, in explaining the theory and implication of how resources are allocated under a market system (think capitalism) and a government system (think communism).

Mr. De Grauwe (of the LSE – think Jim Hacker, MP) calls out some of the limits of the free market: such as externalities not being priced into economic decisions.  This is black and white irrefutable.  After explaining that centralized government would then step in and ‘save capitalism’ from itself, he affirms the impossibility of this by explaining the information problem for central planners who have no detailed understanding of the word.  This too is irrefutable.  But rather exploring these limits, the author concludes by the end that more governance control is needed.  It is as if manual exceptionalism should be trusted more than sound logic.

The author confused me and upset me.  He suggests that markets and governments are equal; and affirms that governments are needed to save the free market from its own failings.  Worse, the author suggests that our economy today is a free market system.  It is not.  He makes the mistake of explaining how carbon trading has failed in Europe.  Since permit prices were set too low (ie the information problem), the allocation of permits has failed.  This is not a failure of capitalism or free markets; it’s testament that the information problem will forever hamper governments and people who seek to influence markets.

So the author concludes with Piketty in that he agrees that we need a need a new, additional, progressive wealth tax.  It seems that increased government expenditure is the answer.  I remember hearing this same argument by Keynesian economists in the U.K. in the 70s and early 80s.  When has this ever worked?  The authors explains how the recessions triggered in 1929 and 2008 were similar in that capital accumulation and return on investment failed; and that more taxes would temper the free markets desire to centralize capital (it does not).

So I conclude the author is not a free market at all but a pro-government type.  The market described by him is not free market; it is heavily regulated, then re-regulated and then regulated again.  The increased regulations have de-risked many investments that would have driven growth and spun off profits for distribution, under urgent tax rates.  Current monetary policy has driven inequality directly.  These polices did not save capitalism, as the author claims, but bastardized it.

I still recommend the book for the simple, well written aspects comparing the basics of the free market against the complexity of a controlled system.  I refute the bland and unchallenged weaknesses expressed, and the erroneous solutions based on taxes and increased government.  We need more, pure free markets with light and agile regulation, not a return to the 1970s.

Recommended, just.  7 out of 10.

Category: book-review  

Andrew White
Research VP
8 years at Gartner
22 years IT industry

Andrew White is a research vice president and agenda manager for MDM and Analytics at Gartner. His main research focus is master data management (MDM) and the drill-down topic of creating the "single view of the product" using MDM of product data. He was co-chair… Read Full Bio




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