2011: Comment on Stiglitz’s “Freefall”
I have just finished reading Joe Stiglitz’s “Freefall”, which I recommend. It provides a knowledgeable insight into the financial crisis, subsequent weak policy responses and outlines alternative policies. I knew Joe a little while we were both at Stanford more than 30 years ago, but not as a professor. He was dating a friend whom he later married and still later divorced. At that time, my impression of him was that he was a “man for all equations”. A story circulating about him was that he usually came into a classroom and started writing equations on the blackboard. On one occasion, after he had filled the board, a student pointed out to him that he was not addressing the topic of the lecture. He apologized, erased whatever he had written and replaced it with a whole new set of equations, all from memory.
He has come a long way since then, helped perhaps by traveling the world while he was at the World Bank. For one thing, his writing is as clear and fluent as his equations. More importantly, he anchors economics in ethics and ties economic development to social development. Even more importantly, he critically focuses on the same assumptions and concepts in economics that I did in my blogs/rants such as speculation and short-term profit maximization leading to an efficient allocation of resources, efficient markets obviating the need for regulation and supervision, etc. Instead, these economics assumptions have resulted in a misallocation of resources, a widening inequality in income and wealth and an increased risk of social returns being much lower than private returns leading to economic and social crises in a bunch of countries. It feels good to be validated by a Nobel Laureate.Not only have economists been complicit in creating the current crisis (see the documentary “Inside Job”), but so has the discipline of economics. Joe rightly questions the “Washington Consensus”, which has guided economic policy throughout the world. He suggests that the unrelenting pursuit of profits and self-interest and has helped create a “moral deficit” in business behavior. But he does not connect the lack of ethics to the discipline of economics. Has it promoted such behavior, curbed it or been neutral? I think the assumptions and concepts of economics mentioned above have at best acquiesced in, and at worst, promoted greedy behavior. Faith in an efficient market has clouded the need for better policing of economic agents. It should be improved and put in the context of a broader social and economic compact.Joe suggests enhancing the role of government while recognizing the possibility of government failure. Good luck with trying that in US with its mythical development by rugged and free individuals under cowboy capitalism, Ayn Rand’s John Galt from “Atlas Shrugged”. Indications are that a larger role for government works better in countries where a social and cultural compact has evolved and a career in government service is prestigious and pays well. In the US, regulatory agencies seem to always be under-respected, underfunded and understaffed, in numbers and skills. Most likely, Joe’s “new society” will emerge in some other country, maybe China?