Tuesday, April 03, 2012

What Has Joe StIglitz Learned?

Elena Callahan reports (2 April) on New Deal 2 (“a project of the Franklin and Eleanor Roosevelt Institute”) HERE

Stiglitz: The Invisible Hand is Invisible Because It Isn’t There”

In a keynote address, Roosevelt Institute Senior Fellow Joseph Stiglitz also argued that healthy societies have strong governments and that his research has shown that “the reason the invisible hand often was invisible was that it wasn’t there.”

“… Stiglitz says that “most Americans don’t realize that we are no longer the country of opportunity that we think of ourselves, that America today has less equality of opportunity than any of the other advanced industrial countries.” He points out how many like to say that our economy is doing well because GDP is growing, but that “if you’re going to be judging how well an economy is doing, clearly I think the key metric that one wants to focus on is what is happening to the living standards of most citizens.” He says that most Americans don’t realize how bad we’re doing, including the fact that “the median income of a full-time male worker today is the same as it was in 1968,” and “if you look at median household income it is the same today as it was a decade and a half ago.”

How did our society get to a place where government has taken a back seat and where people are wary of government control? Stiglitz thanks the conservatives who have successfully touted false ideology about markets over the past 40 years. While they like to blame the government for inequality, Stiglitz notes that not even Adam Smith thought markets were anything beyond efficient. “Nobody ever said that they were fair, that they would lead to a distribution of income that was socially acceptable.” Furthermore, he says, “many of the aspects of our inequality are a result of market failure. People who don’t have health insurance when they get sick wind up in extreme poverty and they can’t get health insurance because of a whole set of market failures.” He says it’s “striking that in spite of the fact that there is no intellectual basis for what you might call a ‘Smithian’ view that unfettered markets lead to efficiency,” conservatives have marched ahead with this idea.
So why was there so much economic growth after World War II? Stiglitz says one reason is “the legacy of the Roosevelts, the legacy that government made a difference.” In making the case for government he also points out that “government has played an important catalytic role in a whole variety of other areas. If you think about our modern economy, you think about Internet, you think about biotech, you think about telecommunications and all of these things rest on government-funded basic research.” He recalls a conversation with a Scandinavian finance minister who, when asked how his economy was so successful, answered “high taxes.” Stiglitz took away that “if you’re going to have a well-functioning economy… you have to pay for what you get. You need to have a well-functioning government that provides education, infrastructure, research, technology, all these things, and we have to pay for it.” Given that markets are not predictable nor interested in social problems, our government should stop bailing the financial institutions out and start investing in its people and the institutions that benefit them.”

Those of us who are suspicious of politicians in government and the Sir Humphrey's among civil servants, who administer legislation initiated by politicians and those who influence them, are frustrated by the analysis of the likes of left-of-centre, Joseph Stiglitz, that what governments ought to do, they should do more of, and critics of government policies from a right-of-centre perspective who say that whatever governments do now, they should do less of it. These views are matched by contrary views among left-socialist statists who say that governments should do everything and by anarcho-libertarians that governments should do practically nothing at all.

Both perspectives share the same fallacy about Adam Smith’s contributions to these debates. Stiglitz correctly states: there is no such thing an “an invisible hand”, but continues to believe in the ideas of neoclassical economics. Leftwing critics of the fallacy of the “invisible hand” also believe that it is an essential idea of neoclassical economics and attribute it to Adam Smith. For both sets of believers, the modern interpretation of the metaphor is attributed to Adam Smith, as it has been since the late 1940s, summarised (by Paul Samuelson) in the crude fantasy that Smith said that even “selfish” motivations lead unintentionally to social betterment, a wholly pernicious doctrine, about as alien to Adam Smith’s philosophy as one can get.

Interestingly, the Marxist economist, Oscar Lange, while at Chicago, from where Samuelson graduated, adopted from its oral tradition the importance of the role of the “invisible hand” to market economies, and in his plans for socialist economies envisaged the state taking over its role from the superior ability of the State planners to allocate resources “better” in place of the market’s “invisible hand”, amidst what Marx called the “anarchy of capitalist production”.

And the roots of the prevalent, but wholly misleading, belief in the “invisible hand” was a child of what became the Cold War, first in the perceived threat to market-based capitalism from the socialist economics of the Soviet planned economy, and later, from the mid-1940s, from the perceived military threat of an enlarged Soviet Union following its take-over of Eastern Europe and the post-war surge of mass communist parties in Western Europe, plus, of course, after 1949, the seizure of power by Mao’s Communist Party in China. There was also a perceived threat to capitalist hegemony in Western Democracies from social-democratic governments, and anti-colonial movements in what was known as the Third World. The myth of the “invisible hand” became a powerful ally of defenders of capitalism.

And its praises were sung in a increasingly loud voice as the 60s gave way to the decades after, which we can trace in the surge in mentions of its virtues from hardly next to no mentions of the role of Adam Smith’s so-called “invisible hand” from when he died in 1790 right through to 1875, and then only a trickle to the 1930s. Only after Paul Samuelson published his invention of the “selfish” invisible hand leading to public benefits from 1948 (‘Economics: an analytical introduction’, McGraw-Hill) did the modern myth acquire traction. Warren Samuels provided the astonishing data of public mentions of the invisible hand from the 1940s to the 1990s in stark contrast to the barren decades of no mentions at all to the 1870s (‘Erasing the Invisible Hand: essays on an elusive and misleading concept in economics’, 2011, Cambridge).

The old Cold War is over, and capitalist economies have lost their shine. Faith in the system-saving “invisible hand” is draining away. Stiglitz is an early manifestation of the beginning of the drain. But whether his proclaimed alternative to markets is sound, I have my doubts.

He writes:

our government should stop bailing the financial institutions out and start investing in its people and the institutions that benefit them.”

It sounds attractive as a one-liner, but has he really learned from the over-due demise of “invisible hand”? The current problem is government borrowing to fund bloated expenditures. The overhanging deficits have to be funded and repaid. They are so large that borrowing to spend more are acts of prodigality. Willing lenders do not match the appetites of clamouring borrowers, nor does the political will of legislators match the aspirations of restless (e.g., Bradford) electorates.

Not bailing out banks is an easy target. Cutting welfare spending is highly unpopular; it is even unpopular to cut welfare spending among the rich because of the clamour it causes at the margin. We are a long way from ‘death to the Kukaks’, but starting down that road is the sort of pass-the-buck politics where it paralyses action to change the arithmetic of the perceived spending disaster.

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