Everything for Sale: The Virtues and Limits of Markets. - book reviews

Anyone reading Robert Kuttner's Everything for Sale: The Virtues and Limits of Markets will probably be left with one burning question: Who put the huge bee in his bonnet?

This book is as ill-natured as any I have read in a long time. Despite the title, Kuttner finds little virtue in the market and none in the economists who admire it. Indeed, he dismisses some who have won Nobel prizes as stupid, banal, and extreme. Like the verdicts in the O. J. Simpson trials, the function of the market is not, apparently, a topic which sensible people can debate amicably.

Kuttner is a columnist for Business Week and co-editor of The American Prospect. I used to read him when he wrote for The New Republic and while I hadn't read him in a long while, I seem to remember his work as good-natured lefty stuff; I certainly don't remember (and this I would definitely recall) his pretending to know anything about economics. Yet here he is, bloviating like mad. Trouble is, he still hasn't learned any economics. As anybody who has had the remotest connection with a basic economics course knows, most concepts have rather precise meanings. Unfortunately, those meanings have nothing to do with the meanings Kuttner thinks they have.

Take the fifth chapter, on "Money Markets and the Corporation." The first sentence - "Financial markets are the very essence of capitalism" - is fine. But the very next sentence throws up a mighty fog: "They are markets whose product is money itself." Well, no. Actually, the product of the financial markets is credit. Not a difficult concept, either: Financial markets link up lenders with borrowers; they bring together those with money to spare and those who need some cash, but they do not create money. The chapter also harbors an utterly fuddled discussion of the Efficient Market Theory. Here Kuttner seems ignorant of the central concept that stock prices reflect available information at a point in time and change with new information; he seems to think the Efficient Market Theory argues that stock prices are "accurate."

Hence, Kuttner takes the stock market crash of October 1987 as proof positive that the EMT is wrong. How can prices be accurate one minute and not the next? Especially when, he writes, the market crashed even though there was "scant change in the prospects of the underlying assets represented by the stocks." I hope Kuttner doesn't manage his own portfolio. There were indeed plenty of reasons to change one's mind about the future, including the secretary of the treasury's hint that the dollar would be allowed to fall free against the German mark in a kind of devaluation war and monthly data indicating that the economy was weaker than expected. The '87 crash reflected that unexpected change in the economic climate, and, when the Federal Reserve rushed to the rescue with lots of liquidity, the recovery in stock prices reflected this new information as well. Just as the Efficient Market Theory would predict.

Swinging from mistake to mistake, Kuttner goes on to misunderstand the Capital Asset Pricing Model. That's the nifty little notion that returns are a function of risk - a combination of the risk-free rate and market risk, to be exact. It's a beautifully useful achievement, but it's not good enough for Kuttner, who complains that the CAPM leaves out "unique" risk - by which, I can only assume, he means nonsystemic or nonmarket risk. Thus, he whines, what good is a model that could not predict that Toyota would trounce Chrysler - or prevent investors from suffering the consequences of (the nonmarket risk of) having bought Chrysler rather than Toyota stock? Well, duh. Beyond the rhetorical malfeasance of blaming a cat for not being a dog, nonmarket risk is what investing is all about.

The determined display of ignorance continues. Kuttner points to the de-bacle in the savings and loan industry as evidence that regulation is worthy. He omits the fact that the crucial factor - tax-payer-backed deposit insurance - was left in place. That insurance, of course, provided a government guarantee for all the bad risks that the thrifts took on. Indeed, deposit insurance, by creating perverse incentives for thrifts to gobble up high-risk, high-return investments in order to compete in the deregulated part of the business, was almost a form of entrapment. Contrary to Kuttner's opinion, the resulting debacle says more about the folly of regulation than the dangers of deregulation.

OK, I'll stop even though we haven't finished with Chapter 5. But if you multiply the errors so far by nine (the total number of chapters in Everything for Sale), you can see why, in its own way, Kuttner's book offers a breathtaking demonstration of why economists go berserk when civilians venture onto their turf.

It's also unfair for Kuttner to write so many mean things about something he doesn't even vaguely understand. Of course, even if Kuttner knew what he was talking about, he still wouldn't like the market. The term free market has become shorthand for just the sorts of things of which Kuttner has never been fond: choice, responsibility, risk, change, impersonal verdicts, and freedom from central authorities and "experts" like, well, Kuttner.

Consider his feeling toward supermarkets. (Yes, supermarkets. In a half-hearted attempt to find virtue in markets, Kuttner treats us to his opinion of supermarkets.) Do those endless aisles of almost all the products under the sun delight him? Inspire him with the goodness of an invisible hand that produces and procures 150 different brands of breakfast cereal? They do not. Kuttner, the grim schoolmarm, tut-tuts that we don't want or need all those choices; the choices are a sign that consumers are manipulated beyond "any rational need" by food conglomerates.

Right. Those wily food congloms use their precious shelf space to stock cereals that nobody wants or buys. Those sneaky food congloms would rather engage in an awesome display of untrammeled power than turn a profit. And their shareholders agree with that strategy. Who would want a decent return on an investment if they can fill Kuttner with disgust?

Not to put too fine a point on it, but Kuttner is suggesting that it's much better to put him in charge of determining the tastes of the cereal-eating public. Why divert scarce resources to pleasing the many when the one, Kuttner, knows better? It's much more efficient - in Kuttner's dopey interpretation of the term - to make only four or five kinds of cereal. And it's certainly kinder to consumers to restrict their choices so as not to befuddle them.

I confess that I can't imagine why anybody would buy nonmicrowaveable oatmeal, yet people do. The lovely thing about the market is that it makes possible both kinds of oatmeal, and then some. That's the way the market works, and that's probably why the bee in Kuttner's bonnet is buzzing so loudly.

Susan Lee is the author of Hands Off: Why the Government is a Menace to Economic Health (Simon & Schuster). She is a senior editor at Forbes magazine.

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