We’ve been taught that the invisible hand of the free market brings unintended social benefits. However, Nobel Prize-winning economists George Akerlof and Robert Shiller explain that we get more than just social benefits in their book Phishing for Phools: The Economics of Manipulation and Deception. Necessary parts of the market equilibrium are “tricks and traps.” The authors explain these ideas in a surprisingly easy read.
“The free market system exploits our weaknesses automatically.” If one seller of unhealthy baked goods wasn’t there to catch us at our weakest moments, another would step into the void. The authors go through many examples of markets where we get “phished for phools” including cars, houses, credit cards, prescription drugs, tobacco, alcohol, and junk bonds. They make a strong case that phishing is a major part of our free markets.
One interesting example of phishing is the way that credit cards affect us. Studies “show that credit cards get you to spend ... quite a bit more” compared to using cash. When retailers and credit card companies battle over the fees retailers have to pay to accept credit cards, these two groups are battling over the spoils of our overspending.
“Free markets make people free to choose. But they also make them free to phish, and free to be phished.” Our “competitive markets by their very nature spawn deception and trickery, as a result of the same profit motives that give us our prosperity.” As a result, “phishing for phools is not some occasional nuisance. It is all over the place.”
The authors argue that “economists’ understanding of markets systematically excludes [trickery and deception].” As a result, “modern economics inherently fails to grapple with deception and trickery.”
I have often argued that we need effective government to police our markets for monopolistic behaviour, misleading advertising, and externalities. I can now add that we need government to help even when we make our own choices with our eyes open. I see no other way to deal with our obesity epidemic. The challenge is to find a way for government to do what is necessary (and no more) for a reasonable cost.
I highly recommend this book to anyone with an interest in economics, even if you find other economics books boring. This book is written to be understood rather than written to impress.