Summary:
Joseph Stiglitz accuses neo-liberal market fundamentalism for present and past bubble in the last quarter century. Efficient allocation of resources is clearly a myth. See telecom and housing bubbles. Massive misallocation of capital. Food and energy prices not an example of free-market economics, illustrating fact that free-market rhetoric has been used selectively – embraced when it serves special interests and discarded when it does not. Mixture of free-market rhetoric and government intervention has been disasterous for developing economies. Speculators partly responsible for food being held of the market by farmers in expectation of price rises. Claims it is political doctrine serving certain interests only. There is a mismatch between social and private returns. Unless they are closely aligned, the market system cannot work well. Learning this lesson may be the silver lining in the cloud now hanging over the global economy. (Published: 07/07/08)
Notes:
- neo-liberalism
- grab-bag of ideas based on the fundamentalist notion that markets are self-correcting, allocate resources efficiently, and serve the public interest well
- ideology that underlay Thatcherism, Reaganomics and the Washington Consensus
- in favour of privatization, liberalization and independent central banks focusing single-mindedly on inflation
- developing countries
- countries that pursued neo-liberal policies
- lost the growth sweepstakes
- when they did grow, benefits accrued disproportionately to those at the top
- financial markets: failed the efficient allocation of resources test
- massive misallocation of resources
- telecoms bubble
- 97% of investments in fiber optics taking years to see any light
- unintended benefit of that mistake: as costs of communication were driven down, India and China became more integrated into the global economy
- housing bubble
- disasterous for all
- potentially only benefit: some Americans (perhaps only for a few months) enjoyed the pleasures of home ownership and living in a bigger home than they otherwise would have
- but at what a cost to themselves and the world economy
- millions will lose their life savings as they lose their homes
- food and energy
- neither sector an example of free-market economics
- is partly the point: free-market rhetoric has been used selectively – embraced when it serves special interests and discarded when it does not
- note: gap between rhetoric and reality is narrower under Bush than it was under Ronald Reagan
- For all Reagan’s free-trade rhetoric, he freely imposed trade restrictions, including the notorious “voluntary” export restraints on automobiles.
- mixture of free-market rhetoric and government intervention
- has worked particularly badly for developing countries
- were told to stop intervening in agriculture, thereby exposing their farmers to devastating competition from the United States and Europe
- their farmers might have been able to compete with American and European farmers, but they could not compete with US and European Union subsidies
- Not surprisingly, investments in agriculture in developing countries faded, and a food gap widened
- in a world of plenty, millions in the developing world still cannot afford the minimum nutritional requirements
- in many countries, increases in food and energy prices will have a particularly devastating effect on the poor
- because these items constitute a larger share of their expenditures
- anger around the world
- speculators
- have borne more a lot of the wrath
- speculators argue: we are not the cause of the problem; we are simply engaged in “price discovery”
- in other words, discovering that there is scarcity
- that answer is disingenuous:
- expectations of rising and volatile prices encourage hundreds of millions of farmers to take precautions
- they might make more money if they hoard a little of their grain today and sell it later;
- and if they do not, they won’t be able to afford it if next year’s crop is smaller than hoped
- a little grain taken off the market by hundreds of millions of farmers around the world adds up
- defenders of market fundamentalism want to shift the blame from market failure to government failure
- to some extent there is government failure
- but does not change the facts: US banks mismanaged risk on a colossal scale, with global consequences, while those running these institutions have walked away with billions of dollars in compensation
- today, there is a mismatch between social and private returns
- unless they are closely aligned, the market system cannot work well
- neo-liberal market fundamentalism was always a political doctrine serving certain interests
- was never supported by economic theory
- nor is it supported by historical experience
- learning this lesson may be the silver lining in the cloud now hanging over the global economy.
