Wednesday, December 10, 2008

Stiglitz: Monday Morning Quarterback

Nobel Prize winning economist Joseph Stiglitz has written a critique of the financial crisis in Vanity Fair (see “Capitalist Fools”). But the critique is limited to an evaluation of where and how the “system” failed. And consequently any suggestions for avoiding future crises that he might have made or implied are limited to fixing his problems with the system – namely, elimination of the barriers between investment and commercial banking, non-existent or lax regulation, appointing as Chairman of the Fed, “a devotee of the objectivist philosopher and free-market zealot Ayn Rand” (a falsehood), tax cuts, opaque accounting practices, flawed incentive structures, and mismanagement of the bailouts. Having completed the critique, Stiglitz ends his piece with a conclusion that was not supported anywhere in his evaluation.

The truth is most of the individual mistakes boil down to just one: a belief that markets are self-adjusting and that the role of government should be minimal. Looking back at that belief during hearings this fall on Capitol Hill, Alan Greenspan said out loud, “I have found a flaw.” Congressman Henry Waxman pushed him, responding, “In other words, you found that your view of the world, your ideology, was not right; it was not working.” “Absolutely, precisely,” Greenspan said. The embrace by America—and much of the rest of the world—of this flawed economic philosophy made it inevitable that we would eventually arrive at the place we are today.

Ipse dixit.

A free market is self-adjusting. But when government interferes in the market to eliminate the incentives, whether positive or negative, the market’s adjustments become distorted. The market then becomes moved, not by the invisible hand, but by an iron fist.

Had Dr. Stiglitz critiqued free market economic philosophy in his article, we might have been able to identify some specific point to debate, but alas, Dr. Stiglitz provides no statement of economic philosophy except the bare assertion that markets are not self-adjusting and that the role of government should not be minimal.

Oh yes, he does make an ad hominem argument against capitalist “ideology” – “a flawed economic philosophy” – by playing the Ayn Rand card. Such sophistry is certainly not beneath the likes of Henry Waxman, but you would think that it should be beneath the intellectual stature of a Nobel Prize-winning economist.

I guess not.

Stiglitz wants to perfect a system that itself is flawed to the core and cannot be perfected. He could have addressed the problem at the core – that the century-long experiment in central planning (the Federal Reserve System) has reached its logical conclusion. He might have engaged in a constructive discussion about how to establish a medium of exchange that is not subject to the whim of politicians or the coercive monopoly of a cartel of banks that are insulated from risk and indulge in moral hazards. See "Credit Crisis and Moral Hazards."

Instead, Stiglitz has revealed himself to be just another second-rate Monday morning quarterback.

P.S. The "flaw" in Greenspan's thinking was that he was attempting to apply free market principles to a system based on government control. If he were a "devotee" of Ayn Rand, he would have recognized the contradiction immediately and understood that one of his premises was wrong.

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