Too many risks, too few rewards: Fresh thinking on the limits of free markets

Imagine yourself in an economics class, handed a pop quiz on the fundamentals of international finance with the following true-false statement: "When capital is allowed to flow freely across borders, it goes to the most productive investments."

Dutifully remembering Adam Smith's The Wealth of Nations, you might be tempted to answer "true". You'd be in good company. A slew of International Monetary Fund officials, along with US treasury secretary Robert Rubin (and no doubt countless investment bankers) would probably agree with you. But then a more recent economics lesson springs to mind: the south-east Asian crisis. All that capital flowing into speculative real estate - that surely couldn't have been the most productive use of it, could it? As a post-modern student of...