NBER WORKING PAPER SERIES

THE END OF ALCHEMY:A REVIEW ESSAY

Roger E.A. Farmer

Working Paper 23156http://www.nber.org/papers/w23156

NATIONAL BUREAU OF ECONOMIC RESEARCH1050 Massachusetts Avenue

Cambridge, MA 02138February 2017

I would like to thank Steven Durlauf for inviting me to write this review essay for the Journal of Economic Literature. I would also like to thank C. Roxanne Farmer for editorial assistance. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.

NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

© 2017 by Roger E.A. Farmer. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source.

The End of Alchemy: A Review EssayRoger E.A. FarmerNBER Working Paper No. 23156February 2017JEL No. E0,E02

ABSTRACT

I review The End of Alchemy by Mervyn King, published by W.W. Norton and Company in 2016. I discuss King's proposed regulatory reform, the ‘Pawn Broker for All Seasons’ (PFAS) and I compare it to an alternative solution developed in my own work. I argue that unregulated trade in the financial markets will not, in general, lead to Pareto optimal allocations. As a consequence, solutions like the PFAS that correct problems with existing institutions are likely to be circumvented by the development of new ones.

Roger E.A. FarmerUCLADepartment of EconomicsBox 951477Los Angeles, CA 90095-1477and NBERrfarmer@econ.ucla.edu