Wednesday, February 24, 2010

Freefall: America, Free Markets, and the Sinking of the World Economy

Joseph Stiglitz is one of the few professional economists who has not left the bonds of sanity. This evening, one of the "rescued" diaries on DailyKos was a review of Stiglitz's new book, Freefall: America, Free Markets, and the Sinking of the World Economy. The reviewer also performs an inestimable service by focusing on Stiglitz's differences from Chicago School economics, also called neoclassical, neoliberal, or free market economics, but which used to be known as laissez faire, which was specifically rejected by the first adminstration of George Washington, and did not really achieve complete policy dominance in the United States until the 1980 election of Ronald Reagan.

Joseph Stiglitz’s recent book, Freefall [Stiglitz, Joseph E. (2010). Freefall: America, Free Markets, and the Sinking of the World Economy. New York: W. W. Norton. ISBN: 9780-0-393-07596-0], describes the factors leading to the current Great Recession. In addition, I read a pair of articles appearing in the fall 2003 and spring 2004 issues of The American Economist (subscription required but probably could be obtained through a local or academic library). These articles describe the work that earned Stiglitz the Nobel Prize in Economics in relatively nontechnical terms. Follow me below the fold to learn about Stiglitz's perspective on the current economic crisis and the theory that earned him the Nobel Prize.

Chicago School (Neoclassical, neoliberal, free market) Economics

The story begins with the Chicago school of economics. The essential belief of the Chicago School, "free market," theory is that only a completely "free" market will reach full employment equilibrium and efficient resource allocation. It is the modern version of Adam Smith’s invisible hand. The invisible hand of supply and demand creates a perfect balance and every asset is fairly priced including labor. This means that restraints on the "free" market such as unions and government intervention must be eliminated in order for the "free" markets to work. Hence the "shock therapy" that Naomi Klein so graphically describes in The Shock Doctrine. The purpose of economic shock therapy is to eliminate restraints on free markets so they will reach equilibrium of full employment. In this view, the Great Recession is nothing to worry about because "it was simply the efficient adjustment of the economy to shocks" (p. 258). Government regulation, taxes, unions, social services, Social Security, Medicare, the social "safety net," and regulation of all kinds are considered hindrances to the operation of free markets. When Chicago School economists are in charge of economic interventions, all of these aspects of the economy are attacked. However, the result is not a transition to full employment and a productive society. Instead, a massive transfer of wealth from those who need it the most to those who need it the least occurs.
Stiglitz on his new book

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