A review of Joseph Stiglitz’ The Road to Freedom

The liberal leftist economist’s latest popular book targets the narrow ‘liberty’ of the political right and makes a positive case for a progressive capitalism which would promote the expanded freedoms of the many

Joseph Stiglitz is a prominent American economist and a winner of the Nobel Memorial Prize in Economic Sciences in 2001. His work classes him as a neoclassical thinker, broadly speaking belonging to the school of economic thought which dominates the mainstream, but he has been tireless in both academic and popular works in critiquing free market and neoliberal ideas from within the neoclassical approach.

The Road to Freedom (hereafter TRTF) is his latest popular book, and he has been working hard to promote it in recent weeks, popping up on various news and politics programmes here in the UK, and no doubt elsewhere. His previous book, People, Power and Profits, focussed on the US, calling for substantial reforms which he hoped would produce a fairer, more prosperous, productive and sustainable economy, society and politics. In that book, as in his latest, and in much of his life’s work, he has adopted a ‘market imperfectionist’ or ‘market failure’ approach to neoclassical economics, which argues that in the absence of sufficient regulation and intervention by the state, markets are inefficient and are unlikely to produce productive, socially just and environmentally sustainable outcomes. This leads him to state that free markets are almost universally inefficient, hence the call for much greater policy intervention to improve matters. He also emphasises the key role of politics in influencing economic outcomes, and the need to change it in order to enact and sustain the policies that he favours for the long term.

Quote of the week: Ha-Joon Chang on Marx’s economics

“This is obviously a massive simplification, but I think Marx is arguably the economist who understood capitalism in the most sophisticated way. He was the first one who systematically introduced innovation and technological progress (although he did not use those terms) into economic analysis. He understood that different factions of capital (industrial, merchant, finance) are often in conflict with each other and that the balance of power between them determines the path of economic development as well as income distribution. He was the first economist who understood the importance of the role of the state in the economy, not simply as an entity that fills the gaps left by the market (the “market failure” approach of neoclassical economics) but as an entity that creates and shapes markets by influencing property rights, capital-labor relations, and the conflicts between different factions of capital. He was one of the few economists who first pointed out the importance of the firm as an institution (in contrast to many other schools of economics, including the neoclassical one, which focus on markets). He is the first one who understood the power of limited liability companies (or joint stock companies, as they were called in his days), which until then, the free-market economists, including Adam Smith, denounced for their ability to create “moral hazard” (in modern terms) by allowing professional managers to take risks with “other people’s money” (Smith’s expression). Marx also put emphasis on labor issues, which get almost totally ignored by other schools – working hours, working conditions, trade unions, and most importantly the key role of work in shaping human beings.

Of course, Marx had this teleological view that capitalism will collapse under its own weight, hastened by the increasingly class-conscious working-class movement, so some of his analyses – and those of his followers – were often seeing things that are not there – the imminent collapse of the world capitalist system, the inevitable advent of workers’ revolution, and the scientific inevitability of all these, proven by Marxist economics.

Also, Marx’s view of socialism was, at best, sketchy, and the subsequent developments of the theory and the practice of socialism were too much influenced by the difficulties of developing a sophisticated planned economy in the Soviet Union, which was economically very backward at the time, on the one hand, and influenced by the political dogmatism of the Stalinist era, on the other hand.

The most regrettable thing about Marxist economics is that, despite some notable exceptions (such as Bob Rowthorn, Andrew Glyn, Geoff Hodgson, and Harry Braverman, to name a few), it did not develop very much the most original elements in Marxist theory that I mentioned above (regarding institutions, the firm, technology, labor) and got stuck in the more esoteric aspects of the labor theory of value and crisis theory, making it far less relevant for the analysis of real-world problems than it could have been.”

Ha-Joon Chang (2021), “Ha-Joon Chang” in C.J. Polychroniou (ed.), Economics and the Left: Interviews with Progressive Economists, London: Verso, p.66-8.

Notes on the US economy and the fiscal deficit

An increasing number of commentators are calling for the US government to reduce its substantial fiscal deficit, which is at a historically high level outside of recession or war. The US economy is growing briskly, at least relative to its rich country peers, while inflation, though moderate, remains sticky and above the 2% target of the Federal Reserve. Interest rates are less likely to be cut if inflation does remain above target. Some argue that the fiscal deficit is putting overall government debt on an unsustainable path unless interest rates fall substantially thereby reducing longer term servicing costs.

So what could, or should, the US government do when it comes to managing the gap between tax revenue and public spending? Much depends on what happens to factors such as growth and employment, inflation, interest rates, the dollar and public and private sector debt.

This post is rather speculative but it lays out some of the potential economic outcomes which could follow changes in US fiscal policy.

Quote of the week: Joe Studwell on how political power always shapes markets

“Neo-classical economists do not like political intervention in markets. They claim that markets are inherently efficient. But history shows that markets  – with the primordial exception of what the institutional economist Ronald Coase dismissed as ‘individuals exchanging nuts for berries on the edge of the forest’ – are created. Which is to say that in a functioning society markets are shaped and re-shaped by political power. Without the dispossession of landlords in Japan, Korea, Taiwan and China there would have been no increased agricultural surplus to prime industrialisation. Without the focus on manufacturing for export, there would have been no way to engage tens of millions of former farmers in the modern economy. And without financial repression, it would not have been possible to pay for an accelerated economic learning process. In all of the above, markets and competition were made to serve development.”

Joe Studwell (2014), How Asia Works: Success and Failure in the World’s Most Dynamic Region, London: Profile Books Ltd., p.223.

South Korea’s economic miracle: the past, present and future of development

After decades of rapid expansion, South Korea’s economic miracle years are over. Slowing trend growth highlights the need for sustained reform of its development model, which may not be straightforward.

Today’s post is a return to the roots of this blog, taking a recent Financial Times ‘Big Read’ article as its point of departure. The article was titled ‘Is South Korea’s economic miracle over?’, pointing to forecasts of a continued slowdown in the country’s growth rate after decades of good performance “as the country struggles to reform its model and reduce its dependence on manufacturing”.

My blog takes its title from the SOAS degree course of the same name. My studies there greatly inspired me to read and write on economic development, employing non-mainstream and interdisciplinary approaches to the subject, which are a characteristic of the economics department at SOAS.

South Korea is one of the few really successful ‘latecomer’ economies which have managed to grow rapidly from a situation of ‘underdevelopment’ following the Korean war of the 1950s, to advanced country status in modern times. Living standards there overtook Japan’s in 2018, in part due to the latter’s continued economic stagnation, but this remains a remarkable achievement.

A capitalist ‘miracle’

Korea’s success has taken place under capitalism, but has been far from reliant on ‘free’ markets. Growth and development tends to be an uneven process, involving structural change and creative destruction as resources in the form of land, labour and capital shift from lower to higher productivity uses and faster growing firms and sectors. Those economies which have managed to grow fast enough for long enough to ‘catch up’ with the richest countries have been somewhat ‘lucky’ when it comes to both domestic and external factors. The Japanese colonial legacy meant that prior to Korea’s ‘take-off’ it already had some capability in both agriculture and industry from Japanese investment and land reform which created the ‘right kind’ of agriculture conducive to productivity growth. It also had a structure of political power which favoured state-led industrial policy without the kind of resistance from organised groups in society which has historically plagued countries such as India. Cold War aid flows from the US provided additional support as part of the latter’s anti-communist policy.

Quote of the week: Steve Keen on the major ‘bads’ of the neoclassical dominance of economics

“[T]he bad is that the neoclassical dominance is so complete. In fact, the uselessness of economics is a major defence in its favour, because you don’t use economics to build a bridge. If you did, the bridges would all fall down, there would be complaints and you’d get a reform of the discipline fairly rapidly. In economics, they can get away with saying, ‘Oh, the global financial crisis wasn’t our problem’, and you can’t say ‘But, but, but’, to them, because they’ll say, ‘Do you want me to predict next week’s Lotto results?’ or something inane like that. Then they continue teaching the students the same crap, unchallenged thus far in the real world. So far, that’s the major problem we face.

Another problem with this neoclassical dominance is that most economists have been trained by neoclassicals; they don’t know that there are alternative ways of thinking about the economy even though they know the neoclassical is wrong. Most economists look into difference equations for doing mathematical modelling, for example, because that’s all they’ve been taught, whereas if you do a mathematics degree, you learn that difference equations are very limited in their scope of application and they certainly shouldn’t be used to model something like the economy. Those are the two major constraints that I see getting in the way.

You also have the political and ideological factors – neoclassical theories employ an ideological defence of capitalism – it’s a completely inappropriate defence. If you want an appropriate defence of capitalism, talk about its role in sponsoring innovation and change, that’s what it does. To say it gives you equilibrium is total nonsense, but that’s what they do. When you then have businesses wanting to fight with trade unions or environmental activists and so on they’ll dive in and give the ideological defence that neoclassical economics has given them. Now, if you come out and say you’re going to take those defences away then you face a push-back from the business community – whereas it’s quite possible that the business community could say, ‘In fact, you guys mischaracterise us; we don’t want your defence’, if only they knew that their mischaracterisation was so extreme. So, that tells me that they get the support from the business community even though a lot of what they do is antithetical to business. Those are the major limitations.”

Steve Keen (2020), ‘Professor Steve Keen’, in Phil Armstrong (ed.), Can Heterodox Economics Make a Difference? Conversations With Key Thinkers, Cheltenham, UK: Edward Elgar, p.367-8.

What I am reading right now. And why.

There is so much going on in the global political economy at the moment, for good or ill, providing potential for blogging, that it is sometimes difficult to know what to focus on. War, climate change, inflation, growth and stagnation, technological evolution, and so on. I always find that I need to be doing some serious reading in order to be inspired to post, whether that is my regular ‘quote of the week’ or a longer discussion or review. My reading has shifted somewhat in the last couple of months, towards ‘green’, ecological and environmental economics. While I have posted on these issues before, they have tended to be only a momentary focus.

Back in 2010, I took a standalone module in Sustainable Development via distance learning. It really opened my eyes to a field which includes economics, but incorporates ideas from many other subjects, such as politics and ecology. While definitions of SD can be vague, advancing its study surely remains important to the future progress of humanity.

Quote of the week: Paul Ormerod on the limited vision of individuals in standard economics

“It seems to me that the most restrictive assumptions of orthodoxy – restrictive in that it severely limits its capacity to illuminate many real world problems – is the assumption that the tastes and preferences of agents are fixed. Individuals and firms in standard economic theory can process huge amounts of information in exceptionally complicated ways, but the one thing they are not allowed to do is to alter their behavior in the light of what others are doing. They respond to the decisions of others only in so far as these affect the prices of the goods and services that the individual buys and/or sells. They do not want a Teletubbie, say, or a hula hoop or, much more seriously, a 30-year US government bond rather than a French one, simply because other people do. But in the real world this sort of behavior is pervasive. From fashion markets to financial markets to the degree of optimism or pessimism that firms feel about the future, the opinions and behavior of others affects directly how individuals behave.”

Paul Ormerod (2003), “Beyond criticism” in E. Fullbrook (ed.), The Crisis in Economics. London, UK: Routledge, p.141.

If public debt is a problem, solving it requires a reduction in inequality

The Economist magazine and Martin Wolf, the Financial Times’ chief economics commentator, have in recent days penned articles calling out the current trajectory of public debt in a number of major economies as unsustainable. The US, for example, is forecast to run a deficit of 7% of GDP this year, “a level unheard of outside recession and wartime”. In a period of falling inflation and higher interest rates, they argue, something will ultimately have to give. Deficits rose substantially across the world during the pandemic to support economies, and while they have since fallen, goes the story, they have not fallen far enough. The US economy itself is not doing too badly, with reasonable growth rates and job creation holding up well. So if the economy is doing ok, what need is there for such a level of stimulus created by government borrowing?

Not all economies are doing as well as the US. Europe’s recovery has been weaker, while the UK has been through a small recession, and is largely stagnant. A traditional Keynesian policy response is to enact policies which boost spending during a downturn and, at least in theory, to retrench when growth recovers, in order to reduce the ups and downs of the business cycle and to keep unemployment as low as possible without igniting inflation.

There are arguments that now is a time for governments to boost public investment substantially to fund the ‘green transition’ to a low carbon economy dominated by clean energy, with the latter used much more efficiently. If this is funded by greater borrowing and leads to interest rates remaining higher for longer, yes, it could crowd out private investment, but if it leads in the longer term to a more productive and sustainable economy then it could more than pay for itself and reduce any prospective debt ‘burden’ if the economy grows faster than the level of public debt. It could also prove beneficial if it ‘crowds in’ private investment in new industries.

Quote of the week: financial speculation as a dangerous addiction

“Although speculation is a major preoccupation in the financial world, and market numbers are quoted ceaselessly in news reports, the actual intention of speculation is scarcely mentioned. It is as if it has become accepted yet remains a taboo subject or secret. Symptomatically, this appears as denial, in the sense that financial speculation is a huge and constant preoccupation yet is rarely mentioned as a legitimate function. Perhaps there is also a general assumption that we should not be allowing this, but do it anyway – which is classic addictive behavior. When major crises erupt, which they always do under rampant speculation, they are treated as surprisingly aberrant or anomalous events, rarely as systemic.”

Joel Magnuson (2017), From Greed to Wellbeing, Bristol, UK: Policy Press, p.114-5.