by David Gordon
Although Phishing for Phools was published only a few months ago, it has already attracted much attention, owing to the eminence of its authors, both Nobel Laureates; but it has been misunderstood. Reviewers have taken it to be just another popularization of behavioral economics. The book does make use of behavioral economics, but its fundamental emphasis lies elsewhere. It is a radical attack both on the free market and a key part of standard economic theory.
The principal target of the book is a well-known and powerful argument in support of the free market. Akerlof and Shiller do not reject the argument entirely, but they drastically limit its scope. The argument in question is that the free market produces what consumers demand: “The central vision of economists is in terms of [Adam] Smith’s famous butchers, brewers, and bakers; they competitively respond to consumers’ demands, and decide how much to supply, based on what consumers are willing to pay. The system has an insistent equilibrium. If the economy is not in such an equilibrium, there is an opportunity for profit. If so, we would expect people to take advantage of it.”