Free Markets Reward Bad Things, Not Just Good Companies
Market equilibriums aren't just about supply and demand leading to efficient prices. Forces that prey on our faults also arrive at market equilibriums.

Adam Smith wrote that free markets are the best way tools for providing the optimal types and amounts of products and services at the best prices. However, markets aggregate everything that’s put into them. Smith’s equilibrium was always an economy’s ideal, not its inevitable endpoint.
We have frailties that can be taken advantage of. We don’t always have the information we need to make optimal decisions. Sometimes, we make choices that benefit our short-term wants instead of long-term needs. Other times we’re fed false information that leads us far away from any kind of ideal equilibrium that an economist would define.
Phishing for Phools breaks down how bad incentives can keep markets from reaching their ideal equilibrium points. Whether it’s on everyday purchases or electoral decisions, George Akerlof and Robert Shiller’s work describes novel ways that markets can go wrong.
Avocadoes and the Financial Crisis
Early in the book, Akerlof and Shiller define phishing and phools. Phishing in their book means getting someone else to serve the “phisherman’s” interest instead of their own. Phools are people the “phisherman” tricks.
Akerlof and Shiller cite “Big Phood” as one of the phishing equilibriums that harms us. At the time of Phishing for Phool’s publication, “about 69 percent of American adults” were overweight, and “36 percent of Americans” were obese. Fast food was — and continues to be — one of the reasons.
A study of 120,000 people, many of whom were registered nurses, followed their eating habits and weight at four-year intervals from the 1970s to 2006. Participants gained an average of 3.35 pounds every checkup. The study found that potato chips contributed to 1.69 pounds, 1.28 pounds for french fries, and one pound for soda.
“They [the nurses] made those choices voluntarily,” Akerlof and Shiller wrote. “But beyond the nurses, and more generally, we know that Big Phood commissions scientific laboratories to calculate consumers’ “bliss points” that maximize their craving for sugar, salt, and fat. Yet no one wants to be obese.”
Fast-food companies are bad for us. However, that hasn’t stopped Americans from creating the largest fast-food market in the world. Market forces have created restaurants that satisfy our short-term cravings, but they’ve done so at the cost of our long-term health. The free market didn’t automatically make fast food a good thing, even if it created jobs and what historians will call food.
Bad outcomes aren’t limited to specific industries. In 2008, market forces wreaked havoc on the economy itself.
Market Theory for Lousy Products
“If I have a reputation for selling beautiful, ripe avocados, I have an opportunity. I can sell you a mediocre avocado at the price you would pay for the perfect ripe one. I will have mined my reputation. I will also have phished you for a phool.”
This passage forms the core of the authors’ critique of financial firms during the 2008 Financial Crisis. The authors noted that in the decades preceding the crisis, ratings agencies started rating complicated securities instead of bonds. Bonds were straightforward, and consumers had learned to trust bond ratings. Mortgage-backed securities had the same ratings attached to them but “it was hard for buyers to know whether they were being rated correctly.”
“…the avocado-buying (security-buying) public failed to understand phishing equilibrium. If they could not themselves tell apart the good avocadoes…from the mediocre, and in some cases, truly rotten, the new-avocado growers…had little incentive to produce good new avocados. They could, more cheaply, produce bad new avocados…and take them to ratings agencies, which would mine their reputations by rating them AAA. In parable, regarding avocados — and in reality, regarding mortgage-based asset-backed securities — that is what happened.”
Market forces are the reason so many mediocre products are available. A lousy product that’s similar to a great one doesn’t just get sold at a lower price. The great products must lower their price to compete with the cheap versions.
The market eliminates inefficiencies. It’s not a steady march to the greatest good.
A Role for Government
Phishing equilibriums exist because we always have imperfect information and incentives. We don’t know everything we need to know about our products. We also make many decisions based on our short-term wants instead of our long-term needs. These two shortcomings create market inefficiencies that are separate from any inefficiencies that governments introduce.
Governments can’t control economies. Soviet Russia and Communist China revealed the devastation that occurs when a central authority tries to micromanage the economy. Capitalism has raised more people out of poverty than any other economic system, and it both supports and is supported by democratic government.
But market forces can only do so much. The market rewards fraudsters as well as legitimate actors. At its best, government regulation keeps the worst actors out of the market. Financial regulators making sure that financial firms have enough cash to pay customers are good things.
Near the end of Phishing for Phools, the authors emphasize that they aren’t rewriting economics. They explicitly say it’d be incorrect to try to rewrite capitalistic economic theory. Rather, the authors introduce new variables to explain how the economy works. This book helps round out views of the economy that praise free markets but also recognize a role for regulators.