A report for the UN makes trenchant criticisms of the kind of economics espoused by the banker-driven economies of the west – but the Stiglitz Report is constrained by its desire to stay within capitalism and a system of private profit...

Against economic liberalism, but still in thrall to dogma

WORKERS, NOV 2013 ISSUE

The Stiglitz report: reforming the international monetary and financial systems in the wake of the global crisis, by Joseph E. Stiglitz and members of a UN Commission of financial experts, paperback, 204 pages, ISBN 9781595585202, The New Press, 2012, £12.99.

Too many governments are wedded to “market fundamentalism”, says the report.
Image: shutterstock.com

In 2008, the President of the UN General Assembly, Miguel d’Escoto Brockmann, convened an international committee of 20 financial experts, chaired by Joseph Stiglitz, to address the crisis and its impact on development. This is valuable because the General Assembly, the one inclusive international body, is far more democratic and representative than the G20 or the G8.

The Commission forecast, “those who have benefited from existing arrangements will resist fundamental reforms”. As Stiglitz notes in his January 2010 preface, “In most countries, the financial sector has successfully beaten back attempts at key regulatory and institutional reforms. The financial sector is more concentrated; the problems of moral hazard are worse. Global imbalances remain unabated.” Many financial institutions are still “too big to fail”. As the Commission observes, “In many countries, the financial system had grown too large; it had ceased to be a means to an end and had become an end in itself.”

The Commission remarks, “At the global level, some international institutions continue to recommend policies, such as financial sector deregulation and capital market liberalization, that are now recognized as having contributed to the creation and rapid diffusion of the crisis.”

Too many governments are still wedded to market fundamentalism, even though “cutbacks in investments in infrastructure, education, and technology will slow growth”. As the Commission points out, “the EU is imposing pro-cyclical policies on the enlargement countries, including wage and expenditure reductions in the public sector”.’

The Commission notes that the present system of flexible exchange rates “has proven to be unstable, incompatible with global full employment, and inequitable”. “Developing countries are, in effect, lending to developed countries large amounts at low interest rates – $3.7 trillion in 2007” – far more than the aid they get back.

It observes that “in some countries, there has been excessive focus on saving bankers, bank shareholders, and bondholders instead of on protecting taxpayers and greater focus on saving financial institutions than on resuming credit flows”. This has caused “a massive redistribution of wealth from ordinary taxpayers to those bailed out”.

As the Commission says, “Unregulated market forces have provided incentives not only for under-production of innovative financial products that support social goals but also for the creation of an abundance of financial products with little relevance to meeting social goals.” But regulation is not a sufficient remedy. As the Commission points out, “The incentives faced by public officials, regulators, and elected officials, and the role of money in politics are important antidotes to romantic notions of the efficacy of regulation to correct for market failures.”

The Commission rejects market fundamentalism, the assumption that the market is the solution to every problem, rather than the problem to every solution. Yet the Commission itself is still in thrall to all too many market dogmas. For example, it writes, “Had the financial sector in richer countries, such as the U.S., performed their critical function of allocating the ample supply of low cost funds to productive uses, the world economy might now be facing a boom rather than today’s economic crisis.” No, financial firms’ “critical function” is to maximise their shareholders’ profits, not to steer investment into production.

Again, the Commission refers to “the pervasive and persistent failure of financial institutions”, and to “market imperfections” and “market failures”. But the market worked: it made shareholders richer, as it is designed solely to do, so it succeeded.

The Commission points out that “in financial markets, private incentives, both at the level of the organization and the individual decision-maker, are often not aligned with social returns”. Why should private incentives be aligned with social returns? The market does not exist to serve society but to maximise private profit, whatever the social effects.

Mis-measuring our lives, why GDP doesn’t add up: the report by the Commission on the Measurement of Economic Performance and Social Progress, by Joseph Stiglitz, Amartya Sen and Jean-Paul Fitoussi, paperback, 137 pages, ISBN 978-1-59558-519-6, The New Press, 2010, $15.95.

This small book asks whether Gross Domestic Product (GDP), the most widely used measure of economic activity, is a reliable indicator of economic and social progress. “GDP mainly measures market production, though it has often been treated as if it were a measure of economic well-being,” the authors say. They urge “the time is ripe for our measurement system to shift emphasis from measuring economic production to measuring people’s well-being.” A fine idealist sentiment.

So they suggest looking at households’ incomes and consumption, and at the distribution of incomes and consumption; broaden income measures to non-market activities; and attend to subjective and objective dimensions of wellbeing.

The authors note that many of the services people once received from other family members are now commodities bought on the market. “This shift translates into a rise in income as measured in the national accounts and may give a false impression of a change in living standards, while it merely reflects a shift from non-market to market provision of services,” they say. At the same time, many services that households produce for themselves are not recognised in official income and production measures, yet they constitute an important aspect of economic activity.

They point out that there are many reasons why market values “cannot be trusted when addressing sustainability issues, and more specifically their environmental component”. They conclude that we do indeed need a monetary index of sustainability, as well as an assessment of the stocks of natural and human resources, so that we can check whether we are adding to or depleting them.

Not a hint, then, about different class interests, but the book does expose the fallacy of using the market as a yardstick of value. ■