There was a time

There was a time that the role of economic theory was to promote market outcomes, to understand and explain how they worked and why they are beneficial to us all. Now economists seem to see their role, so far as the majority of the profession is concerned, as explaining why markets cannot be expected to work and why their operation can be expected to cause harm to the majority of the population. And not just some of the time but all of the time. I have been reading Joe Stiglitz’s The Price of Inequality (2012 – see how up-to-date I am) which is a quite sobering experience. There is no form of interference with the operation of the market that he would not endorse on the road to greater “equality”. He and Krugman are the Marx and Engels of American economic theory. This more or less sets it out:

Private rewards and social returns are not well aligned when competition is imperfect; when there are externalities (where one party’s actions can have large negative or positive effects on others for which he does not pay or reap the benefit); when there exists imperfections or asymmetries of information (where someone else knows something relevant to a market trade that someone else doesn’t know); or where risk markets or other markets are absent (one can’t, for instance, buy insurance against many of the most important risks one faces). Since one or more of these conditions exist in virtually every market, there is in fact little presumption that markets are in general efficient. This means that there is an enormous potential for governments to correct these market failures. (p34)

Enormous and never ending. Compare the above with a second bit of analysis, again from a Nobel Prize winner, this time the 1977 winner, James Meade. If there’s a dime’s worth of difference between the two, I haven’t run across it yet. The following is from Meade’s The Intelligent Radical’s Guide to Economic Policy (1975) which I have been reading at the same time as I have been ploughing through Stiglitz.

On the foundation of this market mechanism there must be built a superstructure of of governmental interventions and controls. Some of these interventions are needed simply to set a background of conditions in which free competition can work effectively; others are needed to replace entirely the mechanism of competitive markets, where the mechanism cannot be expected to operate effectively; others have an intermediate purpose, namely to modify without replacing the operation of a market price mechanism. (p14)

If you want to understand our economic problems, there’s nowhere better than to look at the advice from the economics profession itself. Everything needs fixing by governments. Virtually nothing can be left to run itself. If there is anything left of the free market after this, I am not sure where it is.

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27 Responses to There was a time

  1. Jim Rose

    smoking joe stiglitz’s never learns.

  2. Pingback: An Enabling Macro Fallacy

  3. MattR

    Lefties just love quoting Joe “one Trillion more” Stiglitz because he is a ‘nobel prize winner’ (like this somehow means anything anymore). In reality he’s nothing but a marxist with modern clothing. He’s a fool pushing a failed ideology and lefties listen to him because let’s face it, lefties aren’t very bright.

  4. John A

    Since one or more of these conditions exist in virtually every market, there is in fact little presumption that markets are in general efficient. This means that there is an enormous potential for governments to correct these market failures. (p34)

    Trusting that this is accurately transcribed, I think Stiglitz has done a slide from “perfect/imperfect” markets (theoretical concepts) to “efficient/inefficient” mechanisms (and is thus attacking them with self-defeating government interventions).

  5. Rodney

    The use of the word Keynes greatly muddies the issues. Keynes said many different things at different times and was undoubtedly smart.

    The better term for Stiglitz, Krugman and their numerous groupies is “The Argentinian Model”. This provides not only the theory but a practical demonstration of their ideas in action.

  6. Skuter

    Since one or more of these conditions exist in virtually every market, there is in fact little presumption that markets are in general efficient. This means that there is an enormous potential for governments to correct these market failures. (p34)

    What Stiglitz conveniently ignores is that political institutions are most often worse than free markets. Markets are flawed. So what? Governments are worse.

  7. Rabz

    There was a time when people believed in unicorns, dragons and fairies at the bottom of the garden.

    Stiglitz is still a believer.

  8. Johno

    Since one or more of these conditions exist in virtually every market, there is in fact little presumption that markets are in general efficient. This means that there is an enormous potential for governments to correct these market failures

    Has Stiglitz or any of this mates every been able to demonstrate how real world governments can actually bring about an increase in efficiency?

    They can demonstrate that the flawed model based on perfect competition and general equilibrium contains hypothetical inefficiencies, but where is the detailed models of how government intervention can actually improve efficiency.

    Given that the marginal dead weight loss of taxation is around 20 per cent, they have to demonstrate a marginal social benefit of at least 20 per cent to justify government spending. Where is the evidence to support this level of social benefit?

  9. Youngster

    While it may be true that markets are not always efficient or perfect, it takes a remarkably naive person to think that governments are always efficient and perfect. Given that markets and governments are both made up of the same basic ingredient – people making decisions, I cannot see how it is possible to argue that government is intrinsically better than markets.

  10. Pedro

    FWIW, Krugman has been disputing some of Stiglitz’s assertions in the book, but PK is an avowed liberal so they are solid on the big picture.

    I recall reading of a survey of economists (perhaps academics only) showing a strong liberal bias. That is irrelevant to the quality of an economist’s work, provided you remember it and you don’t mistake claims about social outcomes as always being informed by their economic expertise.

    The preference between social-dem and classical-lib are value judgements that also have efficiency implications.

  11. William Bragg

    There was a time that the role of economic theory was to promote market outcomes, to understand and explain how they worked and why they are beneficial to us all.

    As usual, Kates starts from a false premise and, unable to contain himself, goes down hill from there.

    He fails to recognise the difference between promoting a better or more efficient economy, or understanding the economy – which was and is closer to the role of economic theory – and “promoting market outcomes”. Now, to be sure, market outcomes will often be efficient or, at least, more efficient than government-directed outcomes. But that should flow from good economic analysis – it is not the starting point of economic analysis. Otherwise, all you would need for an economist is some monkey parroting “Oh Yea The Market”.

    Oh, hang on a minute, we’ve already got one … Steve Kates.

  12. Jc

    Braggs:

    Stop ranting. You’re better off explaining to us why we need a suit tax in case someone wears a more expensive suit to a job interview than other interviewees.

  13. Perhaps the “Golden Age” is a myth or a fiction.So what is a market anyway, beyond the parameters of production, exchange and consumption? What purpose does the myth serve? Does scale matter, and if so what are the implications for government and markets? Who creates the conditions for the development of the market system? I would suggest that historically the answer is very clear. What are human needs, as distinct from wants? How does control of information prefigure the market process and the democratic process? How does inequality, across the range of indicators, influence and reinforce the operation of market processes?

    I would suggest markets do not create a sustainable basis for freedom for all. Secondly, that markets have never been beneficial to all. Thirdly, that specialization of labor and the experience curve are not inimical to common ownership of production and consumption. Fourthly, efficiency should be subordinate to the common good, and particularly the processes of dialogue and reflection, and by implication education, should not be governed as a business. Fifthly, that circumstance is likely to produce authoritarianism and fascism (in the literal sense).

    These propositions, a definite non-expert here, should be contested. I know I am not supposed to suggest an alternative view of reality – too much like free speech. I acknowledge breaking the rules, especially my own to never comment on economics.

  14. Gab

    You were doing okay up to this point:

    I know I am not supposed to suggest an alternative view of reality – too much like free speech. I acknowledge breaking the rules, especially my own to never comment on economics.

    Now you just sound like a sobbing imbecile who has no idea what free speech means – unless of course you think this blog is run by the government.

  15. Rococo Liberal

    Harping on about inequality is another way of trying to justify the politics of envy.

    Economics is a useless activity unless it is used to predict what the market will do. Governments are silly fascistic areholes who need to be constantly reminded of the fact. That is what economists should be doing. Stiglitz and co are poor dills with the cunning to see that tey will get lots of grants if they bang on about government being the cure-all. Equality other equality before the law is bunk.

  16. Jc

    Stiglitz and co are poor dills with the cunning to see that tey will get lots of grants if they bang on about government being the cure-all. Equality other equality before the law is bunk.

    I’ll say. Listen to stig spinning for Greece at an hourly rate and getting the living shit kicked out of him by a hedge fundi.
    http://www.youtube.com/watch?v=sAAnV-AolTI

  17. Warwick

    Hi, Steve. Meade addresses his book to “the intelligent radical”,but the IR would stop reading after the first few lines of the preface … “This short book may be regarded as a sequel to my Planning and the Price Mechanism.” Meade says the IR will start by “advocating the removal of all unnecessary restriction on the operation of free competitive markets”. Read on and realise there is no such thing as “an unnecessary restriction” in Meade’s utopia. He offers no fewer than eight(!) categories into which government may dip to to select restrictions on “free competitive markets”. I once saw Ralph Willis, ex-ACTU, ex-Labor Treasurer, wandering around parliament house with a copy of this book. Said something to me.

  18. Tel

    While it may be true that markets are not always efficient or perfect, it takes a remarkably naive person to think that governments are always efficient and perfect. Given that markets and governments are both made up of the same basic ingredient – people making decisions, I cannot see how it is possible to argue that government is intrinsically better than markets.

    You beat me to it, exactly.

    The pro-government advocates are happy to point out market imperfections (and legitimately so in many cases) but only a hypocritical tool would point out market imperfections without similarly holding government up to scrutiny to demonstrate how and why collective decision making overcomes the problems of individual decision making. The examples of this stupidity abound:

    * Why are individual workers/consumers not smart enough to make high quality employment/purchasing decisions, and yet they are smart enough to be trusted to vote for representatives who make those decisions for them?

    * Why can government make successful counter-cyclic monetary policy, when individual investors are unable to earn a fortune with counter-cyclic investments?

    * Why is asymmetry of information a disaster in a market scenario, and yet government can justify lack of transparency and refusing FOI requests on a regular basis?

    * Who gets to decide “social returns” and global efficiency metrics when the individual participants apparently cannot decide for themselves what their preferences are? On what basis are these global metrics derived?

  19. I would suggest that free speech includes the exchange of differing ideas. That is the necessary condition for democratic discussion.

    Now, and I am not surprised to be denigrated. To call any person a “sobbing imbecile” is a form of violence, a form of dehumanization. You may not understand the nature of this ad hominem, which is so typical and predictable here. By definition violence destroys free speech and democratic process, because it proposes a particular way of solving disputes and conflict.

    Once we acknowledge we have a common purpose to both maintain and to create a more free and open society. There are other implications as well.

  20. Gab

    I’ll send you some tissues to dry your eyes.

  21. Jim Rose

    A man of his times, back in 1996, smoking joe stiglitz used to be an admirer of the Japanese banking system because of its long-range thinking and lending

    Cooperative behavior between firms and their banks was also evident in the operations of capital markets.

    In Japan each firm had a long-standing relationship with a single bank, and that bank played a large role in the affairs of the firm.

    Japanese banks, unlike American banks, are allowed to own shares in the firms to which they lend, and when their client firms are in trouble, they step in.(The fact that the bank owns shares in the firm means that there is a greater coincidence of interest than there would be if the bank were simply a creditor; see Stiglitz 1985.)

    This pattern of active involvement between lenders and borrowers is seen in other countries of East Asia and was actively encouraged by governments.

    That did not stop him criticising the Japanese Zombie banks in 2009.

  22. Pedro

    WMMB self-identifies as a person who doesn’t know what the fuck they are talking about:
    “To call any person a “sobbing imbecile” is a form of violence, a form of dehumanization.”

    Given that being a human is a necessary condition fore being an imbecile, it’s hard dehumanising. It’s not violence either. It’s name calling and you should be such a pussy.

  23. WhaleHunt Fun

    ” To call any person a “sobbing imbecile” is a form of violence,”
    No, to kick the shit out of someone then stomp their head is violence. To explain to someone that they are considered worthless is to convey a useful fact, not so much that they are worthless, but they are considered such. This is the sort of nonsense that allows whatever Roxon is, to make it illegal to offend someone.

  24. WhaleHunt Fun

    Anyone who has dealt with the Japanese would have encountered situations where the Japanese practices re co-operation between vendor and customer or between competitors are quite unlike the normal or even legal in this country. Their practices have advantages and disadvantages both, I suspect.

  25. JamesK

    Krugman has recently rebutted Stiglitz’s column in the NYT based on his book.

    Patrick Brennan in National Review
    :

    Paul Krugman gets a lot of flak from the right, and it is sometimes justified, especially when it comes to the eagerness with which many of his readers accept his arguments on the grounds of authority, without really understanding his point. Here Krugman’s argument is quite sound, and Stiglitz is the one trading on his economic qualifications to advance a meritless argument. I will admit I am receptive to Krugman’s point here, having written about what I think is a tendency to overstate the economic effects of inequality, and emphasize policy prescriptions to reduce inequality as if they were wholly justified on economic grounds, merely because they don’t like inequality. Krugman obviously still believes its effects are a lot more significant than I do, but it is good see him reining in his comrades who have clearly traded their economic rigor for political sympathies.

  26. This is totally irrelevant to the subject, but I thought I would address the comments made.

    Thanks Gab. Short of tissues being doing too much sobbing lately – no, that was laughing.

    Pedro,I appreciate the logic of what you are saying. Still, if it is true that people are not gifted intellectually, and the implication is such persons are not worthy of full respect as human beings. Potentially, that can damage that person.

    I am not sure why, Whalehunt Fun, you would seek to offend people, or to convey they are worthless as a “useful fact”. I suppose this is a question of values which could be further unpacked.

    I suggest you give more thought to subject of violence and how it addresses. For both perpetrators and victims victim is a real human problem, and typically many do not have a clue as where it begins and how to stop it. Of course, there has been, and is, a huge and continuing problem of inter-group and international violence, despite the lessons of history, such as, for example,the effects of scapegoating.

    The experience of defamation is problematic, and perhaps similar laws may be as well. However, I am persuaded that if we engage in a democratic dialogue the results will be positive on balance and often offer a win/win outcome.

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