Thursday, December 28, 2006

Galbraith and Stiglitz's Naive Belief in 'Santaa' Government

John Kenneth Galbraith understood capitalism as lived - not as theorized. He wasn't as celebrated as Milton Friedman, but he enhanced our grasp the nature of the market economy,” by Joseph E. Stiglitz, who writes:

What Galbraith understood, and what later researchers (including this author) have proved, is that Adam Smith's "invisible hand" - the notion that the individual pursuit of maximum profit guides capitalist markets to efficiency - is so invisible because, quite often, it's just not there. Unfettered markets often produce too much of some things, such as pollution, and too little of other things, such as basic research. As Bruce Greenwald and I have shown, whenever information is imperfect - that is, always - markets are inefficient; hence the need for government action
(in Christian Science Monitor (, Boston, Mass. (28 Dec). Read it at:

The ‘notion’ that Joseph Stiglitz castigates had nothing to do with Adam Smith; it had plenty to do with Milton Friedman and the Chicago School of which he was a prominent member. Stiglitz uses it to enhance Galbraith’s reputation and he repeats one-sided notions of how markets work.

For example, markets force firms to internalize costs that a country’s laws set for them, but, where the state does not compel them to do so, they externalize costs where they can. Hence, we have the problem of pollution unpaid for by those who create it. But this is not just a problem unique to markets.

The world’s worst polluters by far were the communist state governments of Soviet Russia and its allies, and today’s government in China, and if there is no other power operating to curb government pollution, as is the case in a socialist or Marxist state, the polluters in their industries, and in Soviet Union in their armed nuclear forces, are free to destroy anything they touch, making pollution a clear example of government failure.

The notion that governments are necessarily a solution to the externalities caused by industries unconstrained by laws, to say the least, is nonsense, and one would think, beyond the complicity of a Nobel Prize Winner such as Stiglitz to encourage. After all, given the number of Nobel Prize winners from the United States, I am less certain that the ‘lack of basic research’ is a problem of US capitalism.

Democratic societies have the means to curb governments; ‘socialist’ or ‘anti-capitalist’ governments favoured by Galbraith (and Chomsky) are beyond similar constraints. Whether particular democracies adopt policies that suit the times, is a problem of government, not of markets.

That there is no such thing as a theory of invisible hands guiding markets is, at least, something Stiglitz and I have in common, but having reached that conclusion, and the certain knowledge that Smith did not have in mind such a role for his metaphor (never his theory), unlike Stiglitz and Galbraith I have not skeltered off to the shelter of a naïve belief in governments as the solution.

History shows that in the 19th and 20th centuries people living in democracies have ground down, if not yet eliminated, many negative features of their societies (child labour in pits and mills, slavery, racism, numerous prejudices against minorities and women, pollution, and social waste of all kinds).

There is still a long way to go on these and many other issues in democracies but the furthest distance to travel on these issues is located in all dictatorships and in those countries in transit to markets.

Discounting Milton Friedman’s staunch defence of freedom, merely to replace it with Galbraith’s naïve belief in ‘Santa Government’, is not worthy of Joseph Stiglitz.


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