The invisible scam: what if corporate deceptions, like Volkswagen's rigged emissions testing, are not aberrations from, but consequences of, the free market system?

• Author: Finkle, Victoria
• Position: Book review

Phishing for Phools: The Economics of Manipulation and Deception

by George A. Akerlof and Robert J. Shiller

Princeton University Press, 288 pp.

For most of the last two and a half centuries, free markets and the "economic man" have been the backbone of mainstream economics. Adam Smith's revolutionary theory of the "invisible hand" gave us a stunning image for understanding how humans and institutions create broad well-being through the pursuit of their own rational self-interest.

Smith himself was less of a pure free marketeer than is commonly remembered; he was acutely aware, for instance, that markets have a tendency to be taken over by rent-seeking monopolists. And economists have long debated how and when government must intervene to deal with negative externalities like pollution or income inequality. During the Great Depression, John Maynard Keynes offered his own rebuttal, writing that major government intervention was sometimes needed to jolt an economy back to life. His ideas dominated the economics profession and government policymaking until the Keynesian consensus collapsed in the face of a 1970s stagflation it could neither explain nor fix.

In its place, a new generation of free market thinkers came to prominence, epitomized by people like the former Federal Reserve chairman Alan Greenspan. Greenspan, along with countless others, ignored growing risks to the mortgage and securities markets and eschewed calls for more regulation, instead pumping up the housing market with low interest rates. The subsequent financial collapse in 2008 went a long way toward dethroning free market purists--even Greenspan, an Ayn Rand acolyte, conceded to "a flaw" in his vision of how markets work. But a new consensus vision of how the economy operates has yet to emerge.

One contender for that role, a school of thought that has been building since the 1960s, is behavioral economics. The convergence of psychology and economics provides a much richer--if inherently more complicated--understanding of the decisionmaking that underlies markets. Over time, researchers have found a growing number of cases where we fail to act as rationally as economists might hope. For example, were loss averse--the pain of losing $100 is twice as bad as the happiness from gaining $100. Similarly, to save mental energy, were inclined to stick with a default choice--economists have found, for instance, that people are much more likely to participate in posthumous organ...