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Weekend read – A STIGLITZ ERROR?

From Peter Radford You can’t fight a war without understanding your enemy.  That’s an adage as old as war itself.  Which means it’s very old. Joe Stiglitz doesn’t understand his enemy. Now, that’s an odd thing to say bout someone who’s worldview is hardly a secret.  Stiglitz has given it his best shot for decades.  He’s one of the few big name economists worth reading on a regular basis.  But that doesn’t mean he always says things that add up. He’s a roll lately and his latest book is attracting a lot of attention. So it should because it is an attempt to undo some of the immense damage economists have done to society over the past few decades.  In particular it is an attempt to reframe the notion of “freedom”. Let’s set the stage:  In a recent article in Project Syndicate Stiglitz

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from Peter Radford

You can’t fight a war without understanding your enemy.  That’s an adage as old as war itself.  Which means it’s very old.

Joe Stiglitz doesn’t understand his enemy.

Now, that’s an odd thing to say bout someone who’s worldview is hardly a secret.  Stiglitz has given it his best shot for decades.  He’s one of the few big name economists worth reading on a regular basis.  But that doesn’t mean he always says things that add up.

He’s a roll lately and his latest book is attracting a lot of attention. So it should because it is an attempt to undo some of the immense damage economists have done to society over the past few decades.  In particular it is an attempt to reframe the notion of “freedom”.

Let’s set the stage:  In a recent article in Project Syndicate Stiglitz begins thus:

“Around the world, populist nationalism is on the rise, often shepherding to power authoritarian leaders. And yet the neoliberal orthodoxy – government downsizing, tax cuts, deregulation – that took hold some 40 years ago in the West was supposed to strengthen democracy, not weaken it. What went wrong?

Part of the answer is economic: neoliberalism simply did not deliver what it promised. In the United States and other advanced economies that embraced it, per capita real (inflation-adjusted) income growth between 1980 and the COVID-19 pandemic was 40% lower than in the preceding 30 years. Worse, incomes at the bottom and in the middle largely stagnated while those at the very top increased, and the deliberate weakening of social protections has produced greater financial and economic insecurity.”

What’s wrong with this? 


First up is the notion that neoliberalism was supposed to “strengthen democracy, not weaken it”.  This is not true.  The proponents of neoliberalism might have encouraged us too think that it was meant to bolster democracy, but nothing could have been further from the truth.  Many of the most vocal neoliberals were very weakly attached to democracy, if not openly hostile to it.  Democracy was, to most of them, a likely intrusion into the freedom supposedly found only in the marketplace.  If society became too democratic — gasp — people might vote to legislate all sorts of market limiting  things.  Worse, they might vote to make corrections to the more unfortunate market outcomes such as radical inequality of incomes or economic insecurity that pure market activity inevitably create.

For those of you now coughing angrily into your coffee, let me repeat — inevitably create.

Power matters.  Economies are expressions of underlying social power structures.  They are not perfectly smoothly operating systems suspended in midair.  They sit firmly on the ground.  Social ground.  And all social ground is littered with the hills and valleys of power relationships.

Economists, in their quest for scientific purity, have sought to minimize the impact power has.  They go to great lengths to sanitize their models of the muddling effect power implies.  Which is why their models most often fail to track reality very well.

So.  No.  Neoliberalism was never, ever, about strengthening democracy.  It was about something else.  It was about the capture, or more correctly, the recapture of power, by an elite that resented the social consequences of the policies put in place to rebuild society after the collapse of older versions of capitalism in the Great Depression.  Those policies had both corroded the power and diluted the wealth of the old elite.  So a counter attack was conceived.

Nowhere was this reactionary movement more obvious than in the rhetoric of Margaret Thatcher and her infamous attitude towards “society”.  Society does not exist.  And absent society, conveniently for the advocates of neoliberalism, that means nor do any of society’s attributes, such as citizenship or, more largely, democracy.  Both of which require an underlying conception of society in order to make sense or have coherence.

The neoliberals, of course, wanted to attack citizenship precisely because it accorded both rights and responsibilities.  Amongst those rights we might find the right for a social safety net funded by taxation on the wealthy.  Therefore, such a right had to go.  Since the purpose of neoliberalism was to re-establish an older wealthy elite anything that smacked of democratic redistribution had to be attacked and denigrated.  The word “entitlement” became a slur rather than description of a social right.

More significantly, the word “freedom” had to be narrowed and squeezed into a mere adjunct of market economics — the only freedom permitted by neoliberals was that to participate in market-based activity.

In this sense the new Stiglitz book is on the right track.  It is time to reclaim the concept of freedom from the economists who have debased it and made it into a caricature.

The attack on a broad and more socially oriented definition of freedom was the intent of the early pioneers of neoliberalism who, we find all exhibited a healthy disregard for the ability of their fellow citizens to understand the great virtues of markets.  Especially the pursuit of supposed efficiency which mostly became the sacrifice of wages and personal economic security to bolster profits and the salaries of high paid consultants.

Citizens who experienced such consequences of their newfound economic freedom could not be trusted to accept them idly.  They might express displeasure at the ballot box.  So democracy was demeaned as being a potential source of resistance.  It was, thus, devalued.

Because the neoliberal definition of freedom was confined to the marketplace anything that interfered with the market was equally a source of oppression.  To build the case against interference, mainstream economists emphasized the “natural” outcomes of the laws they identified.  Interference could then be described as “unnatural”, or even hopeless.  Fighting against nature, whilst it might appear noble, was cast as inevitably counterproductive.  Consequently, definitions of freedom that implied adjustments to market outcomes were all criticized as attempts to  fend off the natural, and thus “correct”, results of the optimizing genius of the marketplace.

Pretty much everything in modern textbook economics is based upon that optimizing genius.  It goes unquestioned even though all economists continually discuss the everyday and ubiquitous failures of the markets we observe all around us.  This limitation is why economists have such an apparently poor comprehension of actual economies.  Their belief in the efficacy of their utopian hypothesis leads them not to adjust their theories upon the evidence of reality, but to attempt to alter reality to mimic their theories.  That is an act of politics.  Not science.

And it is this contradiction between what economists hypothesize and what they observe and discuss — the difference between the utopian and the real — that sometimes leads them into the error Stiglitz makes.

By ignoring power, and by becoming performative in their advocacy of their utopian vision, market-addled economists became the useful idiots for the recapture of power by the wealthy.  That most mainstream market advocating economists ignored the accumulating evidence of their theoretical failures leading to and including the collapse of 2007/2008, and the continuing failure subsequently to make wholesale adjustments remains a story to be written fully.  Perhaps a few were innocent of the complicity in the power shift, but then those voices need not just claim innocence but attest to the guilty.

The evidence against market-centric freedom is not exactly thin.

The added dimension differentiating the newly resurgent elite from its predecessors is its close alliance with commerce, especially the large corporations responding to the Powell memorandum of 1971. It is no wonder that the legislative priorities of the American state shifted dramatically post-Reagan. Nor is it any wonder that wages stagnated whilst the share of national income going to capital broke free from its historic norms.

Useful idiots indeed.

Or perhaps not. When you look closely at the careers of the original neoliberals and their immediate successors at the colleges suitably funded by wealthy donors, it is difficult to separate whether they were useful idiots or willing accomplices. Either way economics was reconstructed to defend freedom as being something only found in markets. The state, in contrast, because of its ability to limit the market was re- conceived as the enemy of freedom. After all, social action was now recapitulated as the road to serfdom.

It is this capture of economics by the interests of commerce and the wealthy that makes any phrase that generalizes across economics confusing. The reader needs to know what kind of economist is being referenced. Simply saying that “economists think …” is misleading. There are economists to defend pretty much any political perspective. The problem being that the voices of those expressing skepticism — should I say realism? — of markets were almost completely sidelined subsequent to the neoliberal surge to power.

So this is the context in which we need to read Stiglitz. Especially when he goes on to say that neoliberalism “simply did not deliver what it promised”. This is utterly wrong. To those in power, neoliberalism has been a resounding success.  They are immune to the insecurity foisted on the average citizen.  Their wealth allows them to control the political agenda to their own advantage.  They use their dollar based muscle to intrude into every nook and cranny of society.  They pour money into universities and then exert power over their administration.  They pour money into elections to purchase influence.  They lobby, and they control the media.

Free markets, it turns out, are very useful places to acquire power.

In the name of a defense of market-centric freedom all manner of social policies have been diluted or reversed. Entitlements have been belittled and reduced. Ordinary people have been thrown into the marketplace to go toe to toe with major corporations and their legions or lawyers. Retirement programs have been subverted to divert funds to shareholders.

The Freedom to Choose became the Freedom to Lose. Deliberately and methodically so.

And in the thick of this great risk shift — to use Jacob Hacker’s excellent phrase — we find economics beavering away to discover, articulate, and refine ever more market spaces in which commercial interests can trample on unwary, but presumably free, individuals.

In its support of neoliberalism, the goal of mainstream economics became to make everything a market. Everything had to be subject to the “discipline” of the transactional logic that economists defined as the ultimate expression of freedom. Individuals were theorized as free within the constraints of natural laws — an alluring illusion at odds with reality.

The naive and self-sustaining vision of an individual central to economic theorizing is only a feint shadow of the real world individual whose existence consists of a series of connections spreading out deeply into the complexity of a society radically intertwined and interconnected.  The modern world is not that in which many of the core ideas of economics were conceived.  The notion of “the individual” is one that needs re-conception.

In any case, setting people free for the profit of commerce was the over-arching intent of neoliberalism. It had nothing, by definition, to do with democracy. Indeed it required precisely the dereliction of democracy that Stiglitz decries.

As for economics — well what can we say?

It shifts and sways in the wind as ever.

One of its more well known current experts is Larry Summers who recently said:

“Economic theories are not like physics theories … they fit for a period. So, I wasn’t contradicting myself when I went from worrying about secular stagnation to worrying about fiscal policy. I was responding to a radically changed world.”

What more can we say? Economics is contextual. It might have a few laws and so on, but with regard to policy it is more ad hoc than most economist would care to admit. And the laws that are accepted across the board are usually so benign or irrelevant to policy as to be of value only in entry level textbooks proselytizing market ideology. Any more advanced thought leads immediately to all the so-called “failures” that then lead to the intellectual chaos preventing the emergence of a single economics suitable for all occasions.

Summers wasn’t being self-contradictory after all. What he asserted with utter authority one moment was inappropriate in another moment. When, presumably, he argued something entirely different, also with utter authority. As someone once said: “when the facts change …”.  But that was before the fall. The problem with Summers’ admission is that it negates the existence of timeless laws. Or, at least, it seems to. Either that or the so-called timeless laws must be so anodyne that they are rendered irrelevant in any serious current policy context.

Another way of putting this would be that economists only agree when they are discussing ideas that are of little to no practical importance. Which is what, I think, Alan Blinder was alluding to when he said this 1987:

“Economists have the least influence on policy where they know the most and are most agreed; they have the most influence on policy where they know the least and disagree most vehemently”

What are we supposed to make of this?

That the most interesting economics is tethered to the most controversial politics? Is that why we are still discussing the failures of neoliberalism and its enabling economics? One thing I do know is that we need to wrest control of the notion of freedom” away from those who obsess about markets. Because markets aren’t free.

They are centers of power.

And power matters.

As Stiglitz knows.

Peter Radford
Peter Radford is publisher of The Radford Free Press, worked as an analyst for banks over fifteen years and has degrees from the London School of Economics and Harvard Business School.

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