Akerlof Says Free Markets May Manipulate Our Thinking

At a recent IMF forum, George Akerlof, 2001 Nobel Laureate in Economics, discussed his new book, which is based on the idea that free market forces can produce systemic harm by exploiting human weaknesses.
Ever since Adam Smith, the central teaching of economics has been that free markets provide us with material well-being, as if by an invisible hand. In a recent book, Phishing for Phools—The Economics of Manipulation and Deception, Nobel Prize–winning economists George Akerlof, University Professor at the McCourt School of Public Policy at Georgetown University, and former resident scholar at the Fund, and Robert J. Shiller, Professor at Yale, deliver a fundamental challenge to this insight. They argue that markets are inherently filled with tricks and traps and will “phish” us as “phools.”
Akerlof and Shiller use the word “phish” defined more broadly as businesses getting people to do things that are in the interests of the phishermen (such as banks, drug companies, real estate agents, and cigarette companies) but not in the interest of the target (such as investors, sick people, homeowners, and smokers). The authors bring this idea to life through fascinating stories and examples that show how phishing affects every walk of life.
Hui Tong, Senior Economist at the IMF’s Research Department caught up with George Akerlof to discuss his book.