Fraud, fools, and financial crises

Because we can be manipulated or deceived, free markets can persuade us to buy things that are good neither for us nor for society

Adam Smith famously wrote of the "invisible hand," by which individuals' pursuit of self-interest in free, competitive markets advances the interest of society as a whole. And Smith was right: free markets have generated unprecedented prosperity for individuals and societies alike. But, because we can be manipulated or deceived or even just passively tempted, free markets also persuade us to buy things that are good neither for us nor for society.

This observation represents an important codicil to Smith's vision. And it is one that George Akerlof and I explore in our new book, Phishing for Phools: The Economics of Manipulation and Deception.