The Wrong Road to Freedom

A Book Review of The Road to Freedom: Economics and the Good Society, by Joseph E. Stiglitz

By David R. Henderson. 

"Introduction

Columbia University economics professor Joseph E. Stiglitz has recently published a book titled The Road to Freedom: Economics and the Good Society. In it, Stiglitz, who shared the 2001 Nobel Prize in economics with George Akerlof and Michael Spence, criticizes what he calls “neoliberalism” and singles out Milton Friedman and Friedrich Hayek as two prominent neoliberals.

Stiglitz argues that Friedman, Hayek, and others failed to recognize the importance of market failure and were too optimistic about how competitive an economy would be without government intervention. Whereas Friedman argued that economic freedom is a necessary, though not sufficient, condition for political freedom, Stiglitz turns the argument on its head. In his view, the kind of economic freedom that Friedman advocated would lead to less political freedom. Interestingly, though, Stiglitz himself advocates less freedom of speech for people with certain views and he claims that it was good for governments to have suppressed what he thinks of as misleading speech about the COVID-19 pandemic and masks.

Throughout the book, Stiglitz makes strong assertions with little or no evidence. Although the book is heavily footnoted, the footnotes are mainly to explain some of his ideas further or to reference other books or articles, disproportionately written by Stiglitz. There are few hard numbers, and he makes little attempt to cite writings by those he criticizes. He also shows a stunning ignorance of economic history and, in discussing price gouging, shows no awareness of the downside of price controls. His criticism of communism doesn’t even mention the millions of deaths it led to. At times, as when he discusses climate change, he is completely one-sided and seems completely unaware that he is. Moreover, Stiglitz is not shy about engaging in stunning personal attacks on Friedman and Hayek. The result is a book that preaches only to people who (1) already agree with him and (2) don’t need to see good evidence or arguments to support their views.

Neoliberalism and Trickle-Down Economics

In his Preface, Stiglitz defines neoliberalism as “the belief in unregulated, unfettered markets.” In a footnote he promises to provide a “more extensive definition” in the first chapter, but a careful reading of that chapter shows no such attempt.

Stiglitz, like many other critics of free-market economists, uses a term to describe them that almost none of them uses. The only economist I know who calls himself a neoliberal is EconLog co-blogger Scott Sumner. And the only evidence of Milton Friedman mentioning the word “neoliberal” was in a 1951 essay in a Norwegian magazine. Even there, Friedman didn’t claim the label for himself. In none of his subsequent non-academic writing—and I have read virtually all of it—did Friedman call himself a neoliberal.

Similarly, Stiglitz refers to people on the “Right” (he capitalizes the word) as advocates of “trickle-down economics.” They argue, he says, that “if we made the economic pie larger, all would eventually be better off.” (italics in original) Yet, I’ve never been able to find people on the “Right,” whether classical liberal, conservative, or libertarian, using the term “trickle-down economics” to refer to what they believe in. When someone uses terms to describe people’s beliefs, terms that those people never use to describe their own beliefs, we should be suspicious.

While we’re discussing it, though, it’s important to point out that the last two centuries of economic growth completely justify the idea that steady economic growth in a society does make virtually everyone better off. J. Bradford DeLong, an economist at the University of California, Berkeley—and certainly no one whom Stiglitz would regard as a “neoliberal”—beautifully documented that fact in a 2000 National Bureau of Economic Research study aptly titled “Cornucopia: The Pace of Economic Growth in the Twentieth Century.” This isn’t trickle-down economics; it’s gush-down economics.

Economic Concentration and the 19th Century Trusts

In criticizing Hayek and Friedman, Stiglitz claims that they thought that markets on their own would remain competitive without government intervention and forgot or ignored “the experiences of monopolization and concentration of economic power that led to competition laws” in the late 19th and early 20th century. There are two problems with this claim. First, both Hayek and Friedman did favor some version of antitrust. In his 1962 classic, Capitalism and Freedom, Friedman wrote, “The Sherman antitrust laws, with all their problems of detailed administration, have by their very existence fostered competition.” And in his 1979 volume 3 of his Law, Legislation, and Liberty, Hayek wrote that monopolists’ ability to price discriminate “ought to be curbed by appropriate rules of conduct” in cases where “market power consists in a power of preventing others from serving the customer better.” It’s not clear that Hayek had in mind antitrust statutes, He more likely was thinking of common law rules against monopolistic private-market actions. I don’t completely defend Friedman’s and Hayek’s views. I simply defend them from Stiglitz’s false charge.

Second and more important, Stiglitz shows his own ignorance of how competitive the “trusts” of the late 19th century were. In a pathbreaking study that Stiglitz doesn’t mention, economist Thomas DiLorenzo showed that in the six “trusts” he examined, between 1880 and 1890 real output increased by 175 percent at a time when the trusts were gaining market share and the economy’s overall output increased by only 24 percent. In his article, “The Origins of Antitrust: An Interest-Group Perspective,” published in the International Review of Law and Economics, DiLorenzo found that real prices in these industries were falling. Although the consumer price index fell 7 percent in that decade, the price of steel fell 53 percent, refined sugar 22 percent, lead 12 percent, and zinc 20 percent. The only price that fell less than 7 percent in the allegedly monopolized industries was that of coal.

What about oil, which was produced by that famous trust, Standard Oil of New Jersey? In his 1987 book, A Theory of Efficient Cooperation and Competition, Lester Telser, a University of Chicago economist, noted that during that same decade (1880-1890), the output of petroleum products rose 393 by percent and the price fell 61 percent. The only conclusion consistent with those facts are these two sentences from Telser: “The oil trust did not charge high prices because it had 90 percent of the market. It got 90 percent of the refined oil market by charging low prices.” But you won’t find any mention of this in Stiglitz’s book.

Stiglitz’s Personal Attacks

While we’re on the issue of false, or at least specious, charges, it’s worth pointing out Stiglitz’s personal attacks on Friedman and Hayek. In his Chapter One, Stiglitz writes, “Friedman and Hayek, like many other conservatives, have an unfailingly dismal view of human nature. It may have been because of deep introspection that they arrived at their extreme views about individual selfishness, which they the generalized to everyone.” I can’t speak for Hayek. I spent about a week at a conference with him in June 1975 and didn’t get to know him well, but I certainly didn’t observe an obviously selfish person. The main thing I observed was his utter delight in finding young economists who were more free-market-oriented than he was.

I did know Milton Friedman well, though, having interacted with him on numerous occasions between 1970 and the early 2000s. What I observed was a man with a large generosity of spirit. That simply doesn’t fit Stiglitz’s image of someone generalizing from his own selfishness to that of people in general.

On a related note, Stiglitz accuses Friedman of having been “a key adviser to the notorious Chilean military dictator Augusto Pinochet.” This claim has been refuted countless times. Friedman himself noted—and no one contradicted his claim—that Friedman spent about 45 minutes talking to Pinochet. Does that constitute key advice? And what is one to say about Stiglitz’s own close consulting relationship with Venezuelan strongman Hugo Chavez?

Price Gouging

One thing that tends to separate economists from non-economists is the economists’ understanding of the positive effects of allowing so-called “price gouging.” For purposes of this discussion, I’ll define price gouging as raising a good’s price quickly and substantially when the demand for the good suddenly rises or the supply suddenly falls. A 2012 poll of prominent economists found that only 8 percent agreed or strongly agreed with the idea of passing a law preventing price gouging during “a severe weather event or emergency” while 51 percent disagreed or strongly disagreed.[1] Weighted by confidence in their views, the results were even more lopsided. Only 7 precent agreed or strongly agreed while 77 percent disagreed or strongly disagreed.

Why do so many economists think that allowing price gouging is a good idea? For three main reasons. First, even if higher prices don’t elicit higher output, they do cause the suddenly scarcer good to be sold to those who value it most. We measure value by willingness to pay. That may sound problematic, but it’s not always true that the wealthier people are the ones who are willing to pay more. During a hurricane, for example, although the wealthier person will certainly get plywood to cover up the windows of his mansion, the person who lives in a trailer might outbid the wealthier person for plywood for his trailer so that the wealthier person doesn’t get the plywood for his tool shed.

Second, if suppliers know that they can raise prices when there’s a sudden increase in demand or decrease in supply, they are more likely to stockpile goods than if they know they won’t be able to raise prices.

Third, outside suppliers, if they can charge unusually high prices, will be motivated to ship goods into the area where there is a sudden scarcity. There are actual cases of lumber sellers in Georgia getting ready to ship lumber to Florida if they’re assured of being able to get high prices.

Where does Stiglitz stand? He’s in the 7 or 8 percent. In addressing the issue of umbrella prices during rainstorms, he advocates a “simple coercive rule—no price gouging when it rains.” His argument for that rule is that it will cause people not to invest in information about the weather. He thinks that’s good. But he doesn’t even bother addressing the issues I discussed above: the allocation of a given number of umbrellas, the incentive to stockpile, and the shipment of umbrellas from other areas. (This last, admittedly, is probably not important for sudden rainstorms.)

Climate Change

Stiglitz calls climate change “an existential threat.” He writes:

Climate change is about more than the heating of the planet a few degrees; it is about the increase in extreme weather events. More droughts, more floods, more hurricanes, more extreme heat and more extreme cold spells, rising sea levels and increasing ocean acidity, and all the dire consequences that will ensue, from dying seas to forest fires to the loss of life and property.

Such strong empirical claims cry out for strong empirical support. Stiglitz gives none. Yet physicist Steven Koonin, in his 2021 book, Unsettled: What Climate Science Tells Us, What it Doesn’t, and Why it Matters, presents solid data, much of it from the federal government’s National Climate Assessment that undercuts claims like those quoted above. I discuss a number of these in my 2022 review of Unsettled.[2]

COVID, Masks, Censorship, and Communism

This same confidence without evidence infuses Stiglitz’s discussion of the efficacy of wearing masks during COVID. He claims that “[S]cientists found that, holding all else constant, masking and social distancing make a difference.” The good news is that he footnotes this claim; the bad news is that the footnote doesn’t give evidence for the claim.

More ominously, Stiglitz comes out strongly for censoring people whose views on COVID differ from his. He writes:

When individuals believe wrong information—when there is a demonstrable inability of many to identify laws and false information—there may have to be restrictions on its dissemination. We did that during the pandemic; it would have been foolish—socially harmful—if we had not.

That raises other issues. People acting on Marxist ideas, which were clearly wrong, put into power governments into power that murdered tens of millions of people. Would Stiglitz have censored Karl Marx?

I would bet that he would answer “No” and that part of the reason is that he doesn’t feel strongly about Communism. Here’s his summary statement about the downsides of Communism:

Communism succeeded in generating greater equality and more security in material goods but failed on other counts, including low economic growth, an absence of freedom in all dimensions, a concentration of power, and a greater inequality in standards of living than Communist rulers would admit.

Put aside the fact that there were great inequalities under Communism. As my co-authors and I pointed out in our article “The Hidden Inequality in Socialism,” Leonid Brezhnev, general secretary of the Soviet Communist Party and president of the USSR, “had Rolls Royce, Mercedes, Cadillac, Lincoln Continental, Monte Carlo, Matra, and Lancia Beta automobiles.”[3] Much more important, what’s missing? How about Joseph Stalin’s purposeful starving of millions of Ukrainians in the early 1930s. Has Stiglitz, a smart man, never heard of the Holodomor?

Getting Coase Wrong

One of the major players among free-market economists in the last century was the late Ronald Coase, who was even a player into the 21st century. Coase famously established that lighthouses in Britain, which so many economists—famously including Stiglitz’s own teacher, Paul Samuelson—assumed had to be provided by government, were actually provided privately. Coase never argued, though, that private producers could feasibly provide all public goods. Yet in a table summarizing various “neoliberal” views, Stiglitz writes, “[The] Coase theorem says that market will efficiently solve public goods problems.” Has he read Coase?

Is there anything to like?

There are so many other parts of the book to criticize. They include Stiglitz’s idea that the U.S. economy has deindustrialized—it hasn’t; an attack on Republicans for gerrymandering even though Democrats do so also; and a criticism of the idea of letting people sell their body parts in which he forgets to argue why they shouldn’t be so allowed. That is by far from a complete list of remaining weaknesses in the book.

I’ve been more critical of Stiglitz’s book than I normally am of other books by economists who are left of center. That raises a question: is there anything valuable in his book? Yes. There are two main things.

First, on immigration, Stiglitz criticizes the media for showing “waves of refugees trying to cross the border.” He claims that this occurs “relatively rarely.” I’m not sure he’s right. But I do agree that the showings on media probably exaggerate the problem. Even on immigration, though, Stiglitz misses an opportunity to make a bigger point. He writes:

The libertarian claims [about people deserving their incomes] are even weaker once we think about what their incomes would have been had they been born in a poor country, without the rule of law or the institutions, infrastructure, and human capital that make the economies of advanced countries work so well. It is not enough to have assets such as entrepreneurial talents. If you are born into the wrong environment, those assets mean nothing.

The way I’ve summed up that point in speaking to American audiences is to tell them that for most of them, the most valuable asset they have is their American citizenship.

But there’s a straightforward solution, one that many libertarians advocate but Stiglitz fails to: let more people immigrate. Throughout the book, Stiglitz expresses concern for people in poor countries. The quote above shows that he understands how to help millions of them. But he doesn’t bother to say so.

The other area in which he expresses some good thoughts is on trade policy. Stiglitz writes, “The US [government] talks about the international rule of law in trade, but nothing is done when Trump or Biden violate these rules, whether by imposing unjustified tariffs, by subsidizing its chip industry, or by passing Buy America provisions.”

But those are two rare points of light. Stiglitz’s book is, in short, full of important errors and deeply unsatisfying."