Culture and Prosperity: The Truth about Markets -- why some nations
are rich but most remain poor by John Kay

Rating(1-10): 8.5

Overall Summary

The book is a good general overview of economic ideas and microeconomics.
He talks about the market system and what is good and bad about it.
He talks about the ABM (American Business Model) and explains how no rich countries,
including the US, really follow this model and what the problems with it are.
His conclusion is that there are no "Grand ideas" and truths that explain everything
but instead a lot of "small stories" each of which explains some things and the "truth"
is a complex mixture of these.

The last paragraph in the book: "There is no grand narrative, only little stories.
but the need for a grand narratives is so firmly ingrained in human thinking that the
fruitless search for it will never end. This book is dedicated to those for whom a partial
understanding of a complex reality is better than the reassurance of false universal explanations."

Thought and main ideas in the book

• Real markets are not totally "free" -- they exist in a context of rules and conventions --
  political, social and cultural.
• Specialization is the key to increasing productivity.
• Disiplined pluralism is the key to success of a market economy.
• Markets find solutions by "designing" the system -- it takes a lot of experimentation and
  the result depends on where you start (called "path determinism").
• Perfect markets require lots of buyers and sellers.
• When products are differentiated you no longer have perfect markets.
• Risk markets depend more on opinion than markets in physical goods because of imperfect information
• What is true for individual firms in not necessarily true for economies as a whole.
• Whole economies must be in equilibrium, reductions in one place lead in increases somewhere else.
• Arrow and Dereau: equilibrium theorems: lots of simplifications, convex needs and constraints,
  perfect markets, self-interest.
• Results: the markets always reaches an equilibrium which is Pareto efficient. And any Pareto efficient
  final state can be reached by the market action if you start from the right place.
• Good place to start but too simplified to model reality.
• People do not always act rationally, sometimes they act adaptively instead, their genes makes them do things.
• People do not always act in their self-interest. Again the genes make them do other things.
• Behavioral economics and evolutionary biology provide insights into this.
• People act adaptively, they conform to the system they are in, path dependency is important.
• Information asymmetry: wallet auction, lemon problem, dealt with by: reputation and advertising.
• Used car markets can work but information uncertainty ruins lots of risk markets, unemployment, insurance.
• Imperfect information changes everything. Markets can still work but not like perfect competition.
• Risk markets: imperfect information leads to adverse selection, risk insurance leads to moral hazard - you
  become less careful. It is dangerous to insure risks that are under the control of the insured.
• Cooperation, public goods. Cooperation is adaptive.
• Adaptive behavior is not always rational in terms of self-interest.
• Coordination and externalities: standards and networks, social institutions help coordination.
• Economics and business are the last bastions of modernism.
• Postmodernism is eclectic and draws on multiple interpretations.

The American Business Model: claims

1. self-interest rules: self-regarding materialism rules our economic lives
2. market fundamentalism: markets should operate freely and attempts to regular them almost always fail
3. the minimal state: government should enforce contracts and private property rights and do nothing else
4. low taxation: taxes should not be used to redistribute wealth

Problems and issues:

1. Greed is not the only motivation. People like to accomplish things.
2. A number of different property rights regimes are possible.
3. Markets have many problems and are hardly ever perfect.
4. Grossly unequal distribution of wealth is a problem.
5. None of the rich countries, including the US, really use the model. Their economies depend
   critically on their institutions.