Joseph Stiglitz, formerly Chief Economist at the World Bank, Nobel Laureate (2001), and the author of such widely read books as Globalization and Its Discontent and Making Globalization Work is recognised as one of the world's leading economic thinkers. This book gives a cogent and lucid account of the contemporary global financial and economic crisis, “Made in America” and almost instantly exported to the rest of the world. It traces the origin of the crisis, its rapid acceleration, the sudden collapse, and the continuing recession. Though it is a “Tract for the Times” meant for Americans, I strongly recommend it to all, especially those in the finance and banking sectors, and teachers and students of economics. The ups and downs in the American economy over the past two decades, the housing boom of the early part of the present century, the encouragement that the banks and the government gave to housing loans, sub-prime lending, America's “new financial architecture,” derivatives, securitisation, investment banking, and much more are explained in simple language situating each in its real life context.
Equally commendable is the way Stiglitz deals with the technical aspects of economic theory. The agency problem, externalities, information asymmetry, and moral hazard are dealt with in such a way that even those who do not have a background in economics will be able to follow. While concentrating on th United States, he also discusses the global dimensions of the crisis. The empirical and the theoretical have been woven together with enviable clarity.
In Stiglitz's view, the freefall is basically due to “market fundamentalism”, the principle that had been dominating the American financial sector, the economy, and even the entire society in recent decades. So entrenched it is that he chooses to call it “the gospel that America lives by.” During the Cold War, from the early 1950s to the end of 1980s, the teaching of economics in America was dominated by market triumphalism, the view that the market does its job well in the U.S. (and wherever it is allowed to) while the state in the Soviet Union could not deliver what it had claimed. But the collapse of the Soviet Union and the socialist regimes in Europe — symbolised by the fall of the Berlin Wall in 1989 and celebrated by Fukuyama's “end of history” thesis — converted ‘market triumphalism' into ‘market fundamentalism'. Its main thrust was on a roll back of the state, manifesting itself initially as Reaganomics. In the realm of finance, the corresponding thrust was on dismantling, or at least ignoring, the regulatory regimes under which banks and other financial institutions were operating.
Alan Greenspan, for long the Chairman of the Federal Reserve System, was its chief spokesperson, and George Bush, as President, the major executive. The withdrawal of the state from the economy, according to Stiglitz, is the underlying cause of the meltdown and the recession.
Stiglitz writes with great moral indignation: “We have gone down the path creating a society in which materialism dominates moral commitment, in which the rapid growth that we have achieved is not sustainable environmentally or socially, in which we do not act together as a community to address our common needs, partly because rugged individualism and market fundamentalism have eroded any sense of community… There has been an erosion of trust… It is too late to close these fissures.”
Role for state
I go along with Stiglitz in his diagnosis. But I must record my disappointment that it is not deep enough, and consequently the remedies he suggests are not adequate. There are two chapters in the book I turned to with great expectations — “A New Capitalist Order” and “Reforming Economics.” Since, early on in the book, he found fault with Barack Obama for not offering “an alternative vision of capitalism,” I had expected something really new in the chapter on “a new capitalist order.” But all that Stiglitz advocates is a greater role for the state in raising taxes. He wants the state to become more active in matters relating to the environment, health, education, and social security, and more strict in regulating the financial sector — just a 21st century version of the welfare state of the past century. There is absolutely no critical examination of the basic premises of the capitalist order or its innate propensity to protect the interest of capital at the expense of human welfare.
“Reforming economics” is even more disappointing. The critique of economic theories is good, especially of the neo-classical theory, the great champion of markets. But after complaining that “economics had moved from being a scientific discipline into becoming free market capitalism's biggest cheer leader,” Stiglitz does not have even a pointer on how to move forward. Isn't it ironic that when the financial wizard, Geroge Soros, in his The Crash of 2008 and What it Means, had a ‘Theory of Reflexivity' to ponder over, Joseph Stiglitz, the Nobel Laureate in economics, has only a litany of criticisms?