Stiglitz on Freedom in Economics

“Neoliberal economists constructed a theory to support their views, not surprisingly called neoclassical economics.  The name evoked nineteenth-century classical economics, with the ‘neo’ emphasizing it had been put on firmer foundations, which in practice meant putting it into mathematical scribbles.  Some neoclassical economists were slightly schizophrenic, recognizing that markets often don’t generate full employment on their own, so Keynesian policies are sometimes required; but once the economy is restored to full employment, classical economics prevails.  This idea, pushed by my teacher Paul Samuelson, was called the neoclassical synthesis.  It was a highly influential assertion, with no basis in either theory or empirics.”

This is drawn from early on in Joe Stiglitz’s latest book, “The Road to Freedom”.

Mathematical scribbles?

No basis in either theory or empirics?

Tell me,  Joe, What do you think?

Yes, it’s disappointing for us to hear an established figure, late in life, unload on the discipline he has built a career within.  Rebelling should be done early, not late.  But, let’s not complain too much.  Stiglitz is giving us license to call economics to account.

What right, I wonder, does a discipline that lauds price gouging, calls all unemployment voluntary, and generally defends capital whenever it is in dispute with labor, have to provide advice to us as we navigate our way through the shoals of economic activity?  Why should economists, who have such shallow intellectual roots, dictate policies that have the potential to ruin lives? 

None.

The key to the corruption — let’s go all in with Joe — is that postwar economics was constructed precisely to defend an ideological perspective.  It was not built to study economies as they actually are, grow, or affect real people.   Neoclassical economics is, essentially, an apology for the re-assertion of corporate and wealthy individual power in the era that began with the election of politicians like Reagan and Thatcher.  It succeeded brilliantly as a tool in that struggle.  Inequality shot upwards.  Wages stagnated.  Profits surged.  The middle class, that scourge of wealth, subsided from its postwar apogee.  Order was restored.  And all along economics provided the intellectual firepower needed to win the battles.

This profound disavowal of science and its replacement by solidly politically motivated reasoning has been the undoing of economics.

And, please, do not try to evade this by listing all the economists who labor away in the shadows trying to create an alternative.  Their efforts have been fruitless.  They never had the capacity within the guild we know as academic economics to counter the effect of the funding and the influence that corporate and wealthy individual giving had on the development of the subject.  

The good news is that economics has a declining reputation.  It is in disrepair.  Its reaction to its failure back in 2007/2008 has been a pathetic mixture of complaining that some economists did, indeed, have a clue about the impending financial collapse, and simply pretending nothing happened.  

As an example, just remember how healthy and wonderful price gouging is for us all.  Down the price theory rabbit hole, where everything is two dimensional, nothing exists but efficiency and optimizing allocations.  Life is not part of the analysis.  Price gouging is wonderful for those who disregard a need for stability or for those who ignore the value of some certainties amidst the uncertainties of daily economic encounters.  For regular folks, it sucks. 

Let’s no belabor things.  Economists are struggling.  They are stuck with an outmoded method and an increasing separation from reality.  The more strident their commitment to the past, the more obvious their failure.  To employ David Colander’s imagery: economists are stuck up a fitness peak and now look around to realize that there are other taller peaks they could be climbing.  Yet they have no way of going back and starting over.  They are so path dependent that they just keep re-packaging and re-working what they have.  The kluges pile up.  The escape clauses allow wiggle room.  Exceptions, exogenous shocks, imperfections, and failures litter the literature.  All by way of an attempt to explain the inability of economics to engage reality, to predict anything with a semblance of accuracy, or even to be much other than applied mathematics.

It has endurance, however, where it matters: it justifies capitalism.  It provides a definition of ‘freedom’ that sits comfortably with wealth.  It suggests property is the epicenter of liberty.  No, it suggests property is coterminous with liberty whilst demeaning definitions of freedom that are not property based — hence its aversion to the question of distribution.  For economics, freedom is the right to truck and barter property without fear of capricious involvement or restrictions imposed by those without property or those wanting a greater share in whatever property exists.  

This stunted vision of freedom is the inheritance economists have from the discipline’s origins.  After all, economics began its life as an explanation for the benefits of allowing the rising commercial class to enter the social elite alongside landowners, aristocrats, and all the other well established power brokers of pre-modern society.  The key to that explanation was something that became know as ‘the market’, which is simply code for letting people with property do whatever they want they want, whenever they want, and with whomever they want.   

Those with little to no property had to wait for freedom to extend down the social scale to them.  Their problem being that with freedom so closely associated with property any extension of it to those without represented a threat to those above.  This is why economics in its most stringently neoclassical version is determinedly anti-social and anti-democratic.  Democracy is, you see, a counter weight.  It cares little about efficiency, optimization, or any other of those concepts carefully crafted to defend the free allocation of property.  It cares about things that are less easily enumerated or calculated.  Things like fairness or justice.  Both of which do not exist within the limits of economics as it exists in its primary forms.

Stiglitz says so.  He says this:

“Over time, democratic political systems had identified areas in which markets were not delivering what societies wanted and needed, like retirement benefits … “

Markets are not delivering what societies want.

That’s the point.  Of course they aren’t.  They are delivering what property owners want.  More to the point, they are delivering what large scale property owners want.  The more property the louder the voice in the allocative process.  

The confounded thing for economists is that society encloses the economy.  Not the other way round.  So the failure of markets to deliver things like retirement benefits or universal health care gives society license to interfere.  Indeed, it impels them to interfere.  Even if that imposes a cost on property owners.  Even if it transgresses sound economic theory.  

Because there is more than one definition of freedom.  Which is the point Stiglitz is making.  And it is the point that undermines economics as we know it.