Tuesday, December 31, 2013

Joseph Stiglitz on Thin Ice?


A reader send me this piece: “In No One We Trust” by Joseph Stiglitz in the New York Times (21 Dec) HERE 
"The undervaluing of trust has its roots in our most popular economic traditions. Adam Smith argued forcefully that we would do better to trust in the pursuit of self-interest than in the good intentions of those who pursue the general interest. If everyone looked out for just himself, we would reach an equilibrium that was not just comfortable but also productive, in which the economy was fully efficient. To the morally uninspired, it’s an appealing idea: selfishness as the ultimate form of selflessness. (Elsewhere, in particular in his “Theory of Moral Sentiments,” Smith took a much more balanced view, though most of his latter-day adherents have not followed suit.)"
"...If any of them thought about the social implications of their activities, whether it was predatory lending, abusive credit card practices, or market manipulation, they might have taken comfort that, in accordance with Adam Smith’s dictum, their swelling bank accounts implied that they must be boosting social welfare."
And finally:
“I suspect there is only one way to really get trust back. We need to pass strong regulations, embodying norms of good behavior, and appoint bold regulators to enforce them. We did just that after the roaring ’20s crashed; our efforts since 2007 have been sputtering and incomplete. Firms also need to do better than skirt the edges of regulations. We need higher norms for what constitutes acceptable behavior, like those embodied in the United Nations’ Guiding Principles on Business and Human Rights. But we also need regulations to enforce these norms — a new version of trust but verify. No rules will be strong enough to prevent every abuse, yet good, strong regulations can stop the worst of it.
Comment
I find Joseph Stiglitz an untrustworthy authority on Adam Smith’s Works and ideas.
Now if his remedy for lack of trust in society were to be applied to his “lack of trust” when attributing ideas to Adam Smith, we should “pass strong regulations, embodying norms of good behavior, and appoint bold regulators to enforce them”. We “also need regulations to enforce these norms — a new version of trust but verify. No rules will be strong enough to prevent every abuse, yet good, strong regulations can stop the worst of it.”
Yes, you can imagine the impossibility, this side of dictatorship, of first passing the necessary legislation through parliament, and second, devising a safe system of regulation that actually worked.   And Stiglitz wants to apply such a system to the supervision of every act that assures anybody trusting anybody else is worthy of their trust right across a complex society’s economy!  Gives us a break, Joseph!  And this suggestion appears in the New York Times from a distinguished Nobel Prize winner? 
Surely something is wrong with Joseph’s thinking here? 
Although he correctly writes: “Adam Smith argued forcefully that we would do better to trust in the pursuit of self-interest than in the good intentions of those who pursue the general interest”, Smith also observed that there were occasions when individuals acted in furtherance of their (hidden) motives, which he described in a “more striking and interesting manner” (Lectures on Rhetoric) by using a popular metaphor of them being “led by an invisible hand”, which had “unintended consequences”.
Now this did not mean that Smith equated “self interest” with “selfishness” nor that “If everyone looked out for just himself, we would reach an equilibrium that was not just comfortable but also productive, in which the economy was fully efficient.”   Such a conclusion is absurd and was invented by modern economists (Paul Samueson, etc.).
Why? Well each individual is dependent on the self-interest of others and therefore cannot look out “just for himself”, because he must take account of and mediate his “self-interest” with respect those others.  What is true for one individual is true for others.  No individual lives on an island of egoism in a sea of indifference to the egos of others: to receive what he wants from the “butcher, brewer, and baker” he must address – serve, contribute to - by curbing his own “self love” to persuade others to serve him in return.  Smith called this exchange “bargaining”.
As for “Adam Smith’s dictum, their swelling bank accounts implied that they must be boosting social welfare” I do not recognize the reference to this as a “dictum” of Adam Smith’s.
Stiglitz in these examples does Smith and himself a disservice and feeds the “greed is good” school of scriptwriter’s one-liners. 
As for his remedy to lack of “trust”, I consider it worse than the problem is supposedly addresses.  Trust cannot be imposed or monitored by parliaments across the globe, nor can relationships between billions – even millions, or even thousands – regulated by the boldest of “regulators”, necessarily deputised across an economy, even across a family.  In certain dictatorships people are closely monitored against harbouring disloyal thoughts against the regime. while sharing them is death sentence.   Surely Joseph is not suggesting that?

3 Comments:

Blogger Roger said...

I'm very grateful to have stumbled across this blog and thank you for writing it. I expect to be spending time going through your archives.

That said, I certainly agree that Mr. Stiglitz is unreliable as a source of what Adam Smith wrote. I think you are misinterpreting his call for "strong regulations... and bold regulators..." Professor Bill Black has been pointing out for several years that during the S&L crisis back in the 80s and 90s over 1,000 executives of S&Ls were convicted of fraud and sent to prison. Since 2007, although many instances of seeming fraud and violation of regulations have been reported, not one executive of a large financial institution has been prosecuted. Part of that is that the laws and regulations were changed so that, as President Obama put it, "A lot of what went on was not illegal." Another point was that since the Presidency of Ronald Reagan there has been an accelerating tendency of Presidents to appoint as regulators people who are clearly intent on dismantling the institution they are are being appointed to. This was especially noticeable under President George W. Bush, but has continued apace under President Obama. I don't think Stiglitz was thinking in terms of preventing people from thinking about committing fraud, I think he had in mind making the commission of fraud riskier than it is now. Why on earth should a prosecutor have to prove criminal intent, anyway, if the actions were clearly fraudulent? Why should accountants who certify fraudulent financial statements be protected by the first amendment for only providing an "opinion?"

8:03 am  
Blogger Gavin Kennedy said...

Hi Roger
Thank you for your comments.
I should make clear that I am not against laws on fraud, etc., and the legal punishment for breaches of such defined laws. Nor am I opposed to extending such laws.
I am, however, very sceptical of defining "trust". It's too wooly a charge. We know what it means but writing a regulation, let alone a law, to punish transgressions that would stand up in a court, and administering trust inspectors is something else.
Your account of the follies of recent years and the politics is fair enough.
Being opposed to breaches of trust is commonly shared but once we go down the Stiglitz route, especially in countries where the political regimes are themselves riddled with endemic corruption, or in other countries where the history of inefficient public administration is discouraging to say the least, I think is Stiglitz's mistake.
How many tens of thousands of trust inspectors and their administration would it take at what levels of intrusion to slow down a modern country that might afford them, let alone a poor country that can't?
Gavin
PS I looked at your Blog. It has excellent content and deserves a wider audience. I hope Lost Legacy readers follow your link.
Thanks.

12:01 pm  
Blogger Number31 said...

I do recall a frantic Adam Smith destroying almost half his possessions when he was going over a list of british contraband regulations. Afterwards he went out to inform all his fellow countrymen of the things they shouldn't have but do. He was an odd but honest chap.

5:30 am  

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