The Road to Freedom: Economics and the Good Society
by Joseph E. Stiglitz
W.W. Norton, 2023; xxiv + 356 pp.
The economist Joseph Stiglitz is an enemy of the free market. To Stiglitz, his own doctoral advisor, Paul Samuelson, far from being the leading post–World War II American Keynesian, is a compromiser who watered down Keynes when he created the so-called neoclassical synthesis, and even Paul Krugman, despite his admiration for Stiglitz as a great economist, is insufficiently radical. Given his enmity for the free market, it is odd that Stiglitz directs many of his shafts at the partnership between the state and the large businesses that it privileges. Defenders of the free market also condemn “crony capitalism,” so why are the manifest failures and injustices of this form of social organization taken to be arguments against the free market?
Let’s look at two examples. Stiglitz criticizes the costly bailouts of large banks and corporations after the 2008 crash. If they did well, they could keep their profits, but if they failed, the government would cover their losses. He rightly objects to this: “With the 2008 financial crisis, government took center stage as it funded the largest bailout in history, courtesy of taxpayers. Bankers profited at the expense of the rest of society. In dollar terms, the cost to the rest of us exceeded the banks’ gains. Neoliberalism in practice was what can be described as ‘ersatz capitalism,’ in which losses are subsidized and gains privatized” (empahsis in original). What has any of this to do with the free market? In the free market, there are no government subsidies or taxes.
Stiglitz again fails to strike at the free market when he complains about intellectual property rights that enable large companies to obtain enormous profits, often at great cost to people’s lives and health: “During the AIDS epidemic, the constraining effects of intellectual property were strongly in evidence. These companies charged prices multiple times the costs for life-saving therapies. There were companies and countries able and willing to produce and sell drug therapies at affordable prices, but the patent holders said, in effect, our profits are more important than your lives. The inevitable result was that thousands died unnecessarily.” Why does Stiglitz think that a free market would include protection for intellectual property? Stephan Kinsella has argued powerfully in his book Against Intellectual Property that it would not; if Kinsella is right, as I think he is, Stiglitz has again confused a government-granted monopoly with the free market.
Stiglitz would meet this objection with a counterthrust: “Even if these examples don’t apply to the free market as you conceive it, you are still vulnerable to attack. A capitalist market completely free of government privileges would also not work.” Stiglitz maintains that studies in the economics of information have shown through advanced mathematics that the free market is practically always inefficient. Kenneth Arrow and Gérard Debreu proved that the market is efficient, but under conditions that are very difficult to meet. One of these conditions is that all parties have complete information about all transactions. Subsequent work, which Stiglitz’s well-known modesty does not prevent him from disclosing was in large part his own, has shown that when this condition fails to obtain, as it virtually always does, the market is inefficient. So much for the free market! Stiglitz puts his argument in this way: “The fact that the assumptions under which the economy was efficient were so distant from the real world meant that Arrow and Debreu (together with other economists who investigated each of the assumptions in more detail) had proved that markets were, in fact, not efficient, that is, when those unrealistic conditions are not satisfied, is inefficient. Indeed, matters that Debreu had totally ignored in his analysis turned out to be crucial. The results on the efficiency of the economy were destroyed even when there was just a little imperfection of information, just a small cost of search. In short, prices coordinate in competitive markets (say, between producers and consumers, so that what is produced is exactly what is consumed), but in ways that are not in general efficient” (emphasis in original).
Stiglitz’s case against the free market rests on an incorrect assumption. He thinks that supporters of the free market believe that a free market would closely approach the conditions for general equilibrium set forward by Léon Walras.
Austrian economics views the free market in an entirely different way. Entrepreneurs aim to satisfy the demand of consumers, expressed in their dollar votes, but general equilibrium, what Ludwig von Mises calls the evenly rotating economy, is never reached, and is not sought as a welfare ideal. For this reason, Austrians find the “economics of asymmetrical information,” as Stiglitz and his associates have developed it, to be beside the point.
Mises is quite clear on this in Human Action:
This state of equilibrium is a purely imaginary construction. In a changing world it can never be realized. It differs from today’s state as well as from any other realizable state of affairs.
In the market economy it is entrepreneurial action that again and again reshuffles exchange ratios and the allocation of the factors of production. An enterprising man discovers a discrepancy between the prices of the complementary factors of production and the future prices of the products as he anticipates them, and tries to take advantage of this discrepancy for his own profit. The future price which he has in mind is, to be sure, not the hypothetical equilibrium price. No actor has anything to do with equilibrium and equilibrium prices; these notions are foreign to real life and action; they are auxiliary tools of praxeological reasoning for which there is no mental means to conceive the ceaseless restlessness of action other than to contrast it with the notion of perfect quiet. For the theorists’ reasoning every change is a step forward on a road which, provided no further new data appear, finally leads to a state of equilibrium. Neither the theorists, nor the capitalists and entrepreneurs, nor the consumers, are in a position to form, on the ground of their familiarity with present conditions, an opinion about the height of such an equilibrium price. There is no need for such an opinion. What impels a man toward change and innovation is not the vision of equilibrium prices, but the anticipation of the height of the prices of a limited number of articles as they will prevail on the market on the date at which he plans to sell.
Stiglitz’s criticism of the market as inefficient has an odd feature. He claims that the market is nearly always inefficient, but he doesn’t himself accept efficiency as a goal. He isn’t saying, “My ‘progressive’ economy gets us closer to efficiency than the free market.” He thinks that in the system he favors, information asymmetries can be handled better than the market handles them, but this is true because his system gives more “market power” to groups he likes. Why, then, does he evoke inefficiency in his criticism of the market? He is most plausibly read as arguing that Hayek and Friedman did take efficiency to be a goal, but Hayek did not, and Mises, whom he doesn’t discuss, repudiated this goal.
As mentioned above, Mises appeals to the “dollar votes” cast by consumers, but Stiglitz rejects this argument as well. The problem he finds in it is that rich people get more votes: “In competitive markets, prices and wages are determined by the law of supply and demand. But that abstract statement misses a key observation; what is demanded in a market economy depends on who has income and wealth. In a world without inequality, there might be little demand for Gucci handbags or expensive perfumes. Money would be spent on more important things. But that’s not the world we live in.”
Stiglitz ignores a point Mises often emphasizes. Capitalism, he says in Human Action, is a system of “mass production for mass consumption.” Although a poor person has fewer dollars than a rich person, the dollar votes of the poor add up, and it is profitable for entrepreneurs to satisfy them. The rich can get their Gucci bags too, and this is what really bothers Stiglitz. As is frequently the case, concern for equality masks hatred and envy. Nietzsche would have had a field day with Stiglitz.
