Top economist is no rebel

This is my latest comment from Fund Strategy.

Imagine if Sir Alex Ferguson had the gall to present himself as a marginal figure in world football. Despite managing Manchester United, winning the European Champions’ league twice, the Premier League numerous times, he claimed to have little influence on the game. Such a suggestion would, quite rightly, be ­dismissed as preposterous.

Yet Joseph Stiglitz’s frequent portrayal of himself as an economic rebel is equally absurd. The Columbia University professor is a Nobel laureate, former chairman of President Bill Clinton’s Council of Economic Advisers and chief economist at the World Bank. His full 57-page CV, which details many more honours, is available on the internet.

The thrust of Stiglitz’s argument, restated in the Financial Times (FT) last week, is that the economics profession bears much of the blame for the recent recession. Its flawed models led regulators and policymakers to assume that markets were efficient and self-regulating. Central bankers paid too much attention to consumer price inflation rather than the dangers of asset price bubbles. Policymakers failed to predict the crisis, and when it hit they were too sanguine about its consequences.

There are several problems with Stiglitz’s argument. First, it underestimates the influence of alternative approaches to economics. For instance, many recent Nobel laureates reject the free market model. In addition to Stiglitz these include George Akerlof, Daniel Kahneman, Paul Krugman, Amartya Sen, Michael Spence and Vernon Smith.

Second, it overestimates the influence of economic theory on policy. Central bankers and policy­makers primarily reacted to events rather than attempting to shape them. Indeed their indecisive response had more to do with a lack of guiding principles than blind faith in flawed ideas.

Third, it underestimates the importance of structural economic factors. Rather than focus on the weaknesses of regulators, Stiglitz would do better to examine weaknesses in the global economies.

Finally, he exaggerates the novelty of his ideas. Although he wants to move away from assumptions such as perfect rationality, his alternative economics is not as different as he would like us to believe.

Stiglitz ended his FT article by suggesting a new economic paradigm is needed. He used the analogy of the shift during the Renaissance to seeing the sun rather than the earth as the centre of the solar system.

He appears to forget that Galileo Galilei was found guilty of heresy for promoting such a view. It seems safe to assume that, despite his subversive pretensions, Stiglitz will not suffer a similar fate.