Evaluating the free market by comparing it to the alternatives (We don't need more regulations, We don't need more price controls, No Socialism in the courtroom, Hey, White House, leave us all alone)
Thursday, May 9, 2024
Samuel Gregg on the problems with The Road to Freedom by Joseph Stiglitz
"It’s not often that a distinguished scholar advises his listeners to
be cautious before assigning excessive weight to his words. That,
however, is precisely what the economist F. A. Hayek did in his speech at the 1974 Nobel Prize banquet.
“The Nobel Prize,” Hayek informed his audience, “confers on an
individual an authority which in economics no man ought to possess.” He
then added: “There is no reason why a man who has made a distinctive
contribution to economic science should be omnicompetent on all problems
of society—as the press tends to treat him till in the end he may
himself be persuaded to believe.”
These words came to my mind recently while reading a new book by another Nobel Prize economist. In The Road to Freedom: Economics and the Good Society, Joseph E. Stiglitz, the 2001 Nobel Laureate and former World Bank chief economist, identifies Hayek and yet another Nobel economist, Milton Friedman,
as the primary intellectual purveyors of neoliberal policies that,
Stiglitz contends, have perverted the idea of freedom and generated deep
inequalities and a host of injustices.
The word “neoliberal” has its ownpedigree.
Today, however, it functions as an epithet used by the Left—and now the
New Right that populates many conservative institutions—to stigmatize
people and ideas. The use of epithets is common in polemics, and
polemics are not concerned with reasoned debate or discussion. Nor,
despite protestations to the contrary, is Stiglitz’s book. From
beginning to end, it trades in hyperbole.
The World According to Stiglitz
“Freedom,” Stiglitz states at the beginning “is in danger.” The
global decline of liberty reflected in the rise of authoritarian
regimes, he argues, has also manifested itself in liberal democratic
societies. By Stiglitz’s account, this reflects failures in economic
policies that mirror “the Right’s incorrect conception of freedom.”
“The Right” functions throughout this book as a catch-all phrase. It
embraces groups like the Republican Party and as unlikely bedfellows as
libertarians and Donald Trump. Important details, like Trump stating
that he is “not a conservative”
or the undeniable and deep split in the American conservative movement
between economic nationalists and free marketers, are obscured by
Stiglitz’s Manichean view of politics. Light is on the side of modern
liberals, neo-Keynesians, and social democrats. Darkness envelops
everything else.
Some of that darkness, according to Stiglitz, extends to the American
Founding. He holds, for example, that “the freedom the country’s
patriots championed was not freedom for all, but rather freedom for themselves.”
Stiglitz points to the post-independence maintenance of the institution
of slavery as proof for his claim that the Constitution was the product
of “the people who wrote it (overwhelmingly, rich white men, many of
them slaveholders).”
That assertion contradicts the evidence meticulously assembled by historians like Forrest McDonald in his We The People: The Economic Origins of the Constitution. This showed, contra Charles A. Beard
and his disciples, that most of those rich white men who drafted the
Constitution actually supported constitutional measures that did not
serve their personal interests. Nor does Stiglitz grasp that the seeds
of slavery’s downfall in America were laid by the Founding’s promise of
“liberty and justice for all.” Absent that inner and, for the time,
radical logic, it is harder to understand why furious disputations of
slavery’s basic legitimacy increasingly characterized American political
discourse from the 1770s onwards.
But the more immediate culprits for the miseries inflicted by
neoliberalism, Stiglitz argues, are free market economists like Hayek
and Friedman. Freedom, he says, depends upon rules and regulations that
preserve some degree of equality, promote social justice, and reflect
the reality of trade-offs in life. Such things have no place, Stiglitz
maintains, in Hayek and Friedman’s free-market nirvana. In Stiglitz’s
world, they “were the most notable mid-twentieth defenders of unfettered
capitalism,” and, as “the intellectual handmaidens of capitalists,” led
“a pack of conservative economists who have tried to preempt meaningful
discussions by the very vocabulary they use.” Their understanding of
“free markets,” Stiglitz believes, views “rules and regulation” as
resulting in “unfree markets” and thus vast inefficiencies.
Myths and Markets
At this point, I wondered how much Stiglitz has actually read of Hayek and Friedman. I know of no
text where they called for rule-free and regulation-free markets.
Significantly, there is just one reference in Stiglitz’s footnotes to
something authored by Hayek.
Yet one need only open books like The Constitution of Liberty
to find Hayek, for example, pointing out that “a functioning market
economy presupposes certain activities on the part of the state.” In The Road to Serfdom,
Hayek even says that the “wooden insistence on … the principles of
laissez-faire” did immense harm to the market liberal cause. So much,
then, for unfettered markets.
More generally, anyone who has read the corpus of Hayek’s work knows
that he wrote extensively about the laws and legislation best fitted for
societies that take justice and rule of law seriously. That is the
whole point of Hayek’s mammoth Law, Legislation, and Liberty. Stiglitz himself concedes that books like The Road to Serfdom
show that Hayek was “aware of externalities” and “the need for
government intervention when there are externalities.” But how can
Stiglitz square this concession with his declarations that Hayek was
committed to “unfettered markets”? The answer is: he can’t.
In fact, the debate between free marketers and interventionists is not about whether there should be regulation. The argument is really about what is the best way to regulate markets.
Is it through a combination of macroeconomic policies, specific
interventions into particular economic sectors, the application of
wide-ranging regulatory codes to economic transactions, and ongoing
wealth redistributions through large welfare states and progressive
taxation? Or: are markets better regulated through protections of
property rights, adherence to rule of law, contract enforcement,
commonsense health and safety regulations, a basic safety net, stable
money, and the dynamic competition that promotes consumer sovereignty
over and against vested interests like established businesses and their
political allies? This is a key dispute between dirigistes like Stiglitz
and those who believe in markets, and Stiglitz’s presentation of the
latter’s position is a caricature.
This, however, is dwarfed by Stiglitz’s astonishing claim that the
“free and unfettered markets advocated by Hayek and Friedman and so many
on the Right have set us on the road of fascism.” I find it hard to
believe that Stiglitz does not know that fascist regimes have
historically been characterized by widespread regulation, endless
interventionism, and corporatism: in short, the opposite of free market economies.
Like many of his
fellow-travelers on the Left and the New Right, Stiglitz doesn’t believe
that we can trust ordinary people operating within a context of rule of
law.
As the German market liberal economist Wilhelm Röpke demonstrated in his 1934 Economica article “Fascist Economics,”
the economies of actual fascist regimes like Mussolini’s Italy were
distinguished by a “monopolistic-interventionist system” enforced by
armies of uniformed bureaucrats. Stiglitz, however, claims that the
economic conditions preceding regimes like Nazi Germany were
characterized by too little intervention.
In fact, the economic history of Imperial Germany and Weimar Germany
is far more complicated. Imperial Germany was, after all, the birthplace
of the modern welfare state. By the 1890s, key sectors of the German
economy had become highly cartelized. Tariffs were also used to try and
protect particular industries like agriculture from foreign competition.
During World War I, that same economy was subject to massive planning.
As for Weimar Germany, Part 2, Section V of its Constitution
contained fourteen articles that identified many economic rights that
no one would describe as reflecting a classical liberal view of life.
Many such rights were given subsequent expression in policies ranging
from expansions of social security to legislating worker
co-determination arrangements.
To be sure, some German conservatives and liberals tried limiting the
scope of these measures. Nonetheless, “unfettered markets” never
reigned in Germany between 1870 and 1933. The truth is simply far more
complex than the portrait painted by Stiglitz.
Old Left Meets New Right
What, then, does Stiglitz want to substitute in neoliberalism’s
place? Here, Stiglitz is unambiguous. He wants “something along the
lines of a rejuvenated European social democracy or a new American
Progressive Capitalism, a twenty-first-century version of social
democracy or of the Scandinavian welfare state.” When we look, however,
at Stiglitz’s preferred measures, they are hard to distinguish from Old
Left propositions.
Stiglitz’s long list of “Progressive capitalism policies” includes
the following: “regulation,” “corrective taxation,” “government
investment,” “industrial policies,” “financial regulations, both macro .
. . and micro,” “public investments,” “disclosure requirements,”
“regulations (consumer, financial, labor),” “liability laws making firms
accountable,” “social insurance/protection,” “safety net programs,”
“unemployment insurance,” “retirement programs,” “health insurance,”
“income contingent loans,” “small business loans,” “green bank
financing,” “antitrust policies” that “restrict mergers,” “abusive
practices restrictions,” “minimum wages,” “supportive labor
legislation,” “redistribution through taxes,” and “public expenditure
programs” on things like education and health care. All these measures
are to be overlaid by fiscal and monetary policies designed to address
macroeconomic fluctuations.
Three ironies should be noted here. First, the US economy already has
almost all of these things, albeit to varying degrees. American
economic life is littered with the big government programs bequeathed by
progressives, New Dealers, and Great Society advocates, not to mention
the entrenched bureaucracies that administer them. Stiglitz may want
greater government resourcing and deeper legal codification of these
policies. Convinced interventionists generally do not believe that we
can have enough of such things. America is, however, far closer to
Stiglitz’s progressive capitalist model than he admits.
A second irony concerns Stiglitz’s repeated insistence that he wants a
more decentralized economy. All the policies listed above, however,
necessitate a large government constantly intervening in the economy and
crowding out the civil society associations that Stiglitz claims to
value.
The third irony is that many of Stiglitz’s progressive capitalism proposals mirror those
of prominent New Right thinkers. Not only do they support many of the
same policies; but they also echo Stiglitz’s anti-neoliberal rhetoric
and critical view of Hayek and Friedman. Therein lies a fracture that
increasingly characterizes American politics: one in which Stiglitz’s
Old Left economic preferences line up with those of some on the Right
against whom his book inveighs.
Freedom and Hubris
Notwithstanding these problems with Stiglitz’s book, there is one point where I agree with him. Liberty is in a fragile state. The real debate is about the nature of the threats.
Central to Stiglitz’s progressive capitalism is what he calls “its
focus on equality, social justice, and democracy.” These are all
understood by Stiglitz in unambiguously social democratic terms. Taken
together, he believes, they give people the freedom to realize their
potential.
The difficulty is that social democracy invariably undermines freedom
in important ways. Markets don’t facilitate intergenerational
welfare-dependency; extensive welfare programs do. Social democracy also
creates an enormous power differential between ordinary citizens and
those technocrats who administer a plethora of state programs and
regulations. And if there is anything that we have learned from the
relentless growth of the administrative, regulatory, and welfare state
in America, it is that such agencies are remarkably resistant to the
demands of democratic accountability and transparency.
Likewise, social democracy’s redistributionist conception of social
justice steadily corrodes some of freedom’s surest safeguards, most
notably private property. Just as significantly, it damages the rule of
law. As Hayek observed in TheRoad to Serfdom, “To
produce the same result for different people, it is necessary to treat
them differently.” If you use the state to pursue substantial equality,
you inevitably compromise rule of law because governments seeking to
achieve substantive equality necessarily forgo their position of
impartiality towards all citizens.
Above all, social democrats have often undermined the means by which
societies cultivate the moral habits needed to sustain what John Adams called
“virtuous liberty.” Throughout his book, Stiglitz regularly refers to
the importance of habits like honesty, trust, and other-regarding
behavior for social cooperation. He is right to do so. But social
democrats have traditionally looked to government to shape the social
order—not civil society. The associated growth of state power and
bureaucratization of society subverts the rich ecology of families and
bottom-up communities and associations in which such habits are best
taught and internalized.
Therein lies the deeper problem with Stiglitz’s book. Like many of
his fellow-travelers on the Left and the New Right, Stiglitz doesn’t
believe that we can trust ordinary people operating within a context of
rule of law, constitutionally limited government, proven norms, and a
rich civil society to make their own decisions as they see fit. For,
notwithstanding Stiglitz’s desire to carve out a new road to freedom,
the political agenda underlying this book is not one of renewal or
rejuvenation. Instead, it reflects an old-fashioned Keynesian faith in
the state: one that has always ill-fitted the American experiment in
liberty of which Stiglitz is plainly skeptical.
Yes, free people will make errors. But their mistakes will not be as
devastating to society as those made by dirigistes, ranging from Keynes
to Stiglitz, who believe that they can re-engineer a better world from
the top down and want the power to do so. Nor are such “men of system,”
as Adam Smith called them, inclined to admit the failure of their ideas
and policies, let alone correct them. Therein lies the eternal
significance of Hayek’s warning about the temptations associated with
accolades, even for truly outstanding work. They are the road to hubris,
and the consequences for liberty and justice of a lack of humility are
invariably dire."
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