Elitist’s thesis is flawed to the core

There follows my Fund Strategy review of Freefall by Joseph Stiglitz, one of several Nobel prize winning growth sceptics. For a contrasting review – although one I entirely agree with – see Sean Collins’ recent piece on spiked.

Joseph Stiglitz is a living paradox. A consummate economics insider who is also one of the most vociferous critics of free markets. On the one hand, he was the chair of President Bill Clinton’s Council of Economic Advisers, the chief economist at the World Bank and he was awarded the Nobel prize for economics in 2001. On the other hand, his works provide the intellectual framework for many critics of globalisation.

Both sides of his persona were on show on a recent visit to London to promote Freefall, his new book on the global economic crisis. Many hundreds of students from the London School of Economics (LSE) listened to him in awe while he railed against financiers and free market fundamentalists. But this was not a 1968-style revolutionary teach-in. Many of the audience from LSE’s international and largely wealthy student body are likely to end up as central bankers or Treasury officials.

The following evening he appeared on the BBC Newsnight programme to debate a real life fire-breathing speculator: Hugh Hendry of Eclectica Asset Management. Under Hendry’s verbal barrage the confident Stiglitz of the night before was strangely transformed into a mild-mannered academic. (Both events are available to watch on the internet).

A careful reading of Freefall reveals that Stiglitz is not as contradictory a figure as first appears. His target is market fundamentalism rather than the market system itself. In Stiglitz’s view it is financial institutions along with their ideological allies, free market economists, who were to blame for the economic crash of 2008. Their passion for deregulation combined with popular greed created the boom that turned into bust.

In contrast, the potential saviours are state functionaries as well as sensible professors such as himself. If only they had not caved in to demands for deregulation, such as the abolition of the American divide between commercial and investment banking, crisis could have been averted. In that sense Freefall is a programme for regulatory reform to help bolster the state in the future. Ultimately it is the role of the “left” (Stiglitz’s quote marks) to get the market to work better.

Unlike in a classical anti-capitalist conflict there is no room for popular participation. From Stiglitz’s perspective politics is an elite battle between the forces of the state and the forces of the market. The mass of the population plays little if any part in this process.

There are several fundamental flaws in Stiglitz’s argument. The first, which I have discussed many times in Fund Strategy, is the scapegoating of bankers for the financial crisis. For Stiglitz, as for many others, they represent caricature capitalists who can easily be blamed for the turmoil that manifested itself in near collapse of the financial system.

But this ignores the fact that the roots of the crisis lay in more fundamental economic weaknesses. The financial markets became swollen as a result of the atrophy of the real economy. Liquidity was channelled into all sorts of financial instruments and assets rather than being reinvested productively.

Stiglitz also hugely overestimates the influence of free market economics. This set of ideas is best referred to as what sociologists sometimes call a zombie category: one that is dead but somehow goes on living.

The popularity of free market ideas peaked in the early 1980s and they have lost ground ever since. Not many economists hold such views and those that do have little influence. In Britain state spending has just exceeded 50% of GDP for the first time on record and in America it is at about 40%. Neither is anywhere near compatible with the ideal of a minimal state beloved of such free market gurus as Milton Friedman (deceased). If the crash of 2008 represented the final stake through their heart they were already close to death in any case.

Finally, Freefall represents a call for austerity. Towards the end of the book Stiglitz argues that the American lifestyle is unsustainable for environmental reasons and Americans must face up to cuts in living standards. He has little or no faith in the ability of Americans to generate growth or use their ingenuity to overcome environmental problems.

It is hard to imagine a more conservative figure than this arch critic of financial speculators and market ­fundamentalism.