the visible hand

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Stiglitz: A global lesson in market failure

Posted by ecoshift on July 9, 2008 A global lesson in market failure

A global lesson in market failure
From Tuesday’s Globe and Mail
July 7, 2008 at 6:44 PM EDT

The world has not been kind to neo-liberalism, that grab bag of ideas based on the fundamentalist notion that markets are self-correcting, allocate resources efficiently and serve the public interest well. It was this market fundamentalism that underlay Thatcherism, Reaganomics and the so-called “Washington Consensus” in favour of privatization, liberalization and independent central banks focusing single-mindedly on inflation.

For a quarter-century, there has been a contest among developing countries, and the losers are clear: Countries that pursued neo-liberal policies not only lost the growth sweepstakes; when they did grow, the benefits accrued disproportionately to those at the top.

Although neo-liberals do not want to admit it, their ideology also failed another test. No one can claim that financial markets did a stellar job in allocating resources in the late 1990s, with 97 per cent of investments in fibre optics taking years to see any light. But at least that mistake had an unintended benefit: As costs of communication were driven down, India and China became more integrated into the global economy.

But it is hard to see such benefits to the massive misallocation of resources to housing in the United States. The newly constructed homes built for families that could not afford them get trashed and gutted as millions of families are forced out of their homes. In some communities, government has finally stepped in – to remove the remains. In others, the blight spreads. So even those who have been model citizens, borrowing prudently and maintaining their homes, now find that markets have driven down the value of their homes beyond their worst nightmares.

To be sure, there were some short-term benefits from the excess investment in real estate: Some Americans (perhaps only for a few months) enjoyed the pleasures of home ownership and living in a bigger home than they otherwise would have. But at what a cost to themselves and the world economy! Millions will lose their life savings as they lose their homes. And the housing foreclosures have precipitated a global slowdown. There is an increasing consensus on the prognosis: This downturn will be prolonged and widespread.

Nor did markets prepare us well for soaring oil and food prices. Neither sector is an example of free-market economics, but that is partly the point: Free-market rhetoric has been used selectively – embraced when it serves special interests; discarded when it does not…

Simply put, in a world of plenty, millions in the developing world still cannot afford minimum nutritional requirements. In many countries, increases in food and energy prices will have a particularly devastating effect on the poor, because they constitute a larger share of their expenditures.

The anger around the world is palpable….

Neo-liberal market fundamentalism was always a political doctrine serving certain interests. It was never supported by economic theory. Nor, it should now be clear, is it supported by historical experience. Learning this lesson may be the silver lining in the cloud now hanging over the global economy.


4 Responses to “Stiglitz: A global lesson in market failure”

  1. Paul Psilos said

    This essay does an excellent job of exposing the neo-con free market rant as mere slogans hawked college debate-style by intellectually shallow boys with no notion of what policy is, never mind the ability to implement it.

  2. ecoshift said

    I agree. It is important that market failures to allocate resources efficiently be recognized for what they are. While I can’t imagine a better vehicle to guide the allocation of resources than well-functioning markets, deregulation alone is clearly prone to inefficient and expensive market excess and failure. Markets need guidance… Well-regulated markets increase overall economic efficiency…

  3. Publius said

    First of all, let’s please not confuse terms. Neocons refers to people who, though generally supportive of a somewhat-free market, still prefer some amount of government intervention. The free market is a market without any intervention AT ALL. So the free market is not to blame, the problem is still government intervention. Let’s look at the actual cause of the housing market crisis:
    Government-sponsored companies such as Freddie and Fannie were buying up loans from the banks, which passed any danger of bad loans from the bank to the government-sponsored company (who weren’t afraid of losing money). Banks were therefore encouraged to issue loans that they wouldn’t have issued under normal conditions. People who shouldn’t have received loans were given loans anyways, which meant more houses were needed than should have been. Because of this artificial stimulation, people invested in housing more than they should have. Eventually, all those bad loans caught up with us, and led the housing market crisis. At the heart of all of this was government-sponsored companies like Freddie and Fannie. So PLEASE don’t put the blame where it absolutely should NOT be.

    And Mr. Stiglitz, to say the laissez-faire policies are not based on economics is absolutely ignorant of the any economic laws. In fact, Keynesianism and socialism are the ones not based on economics. Please check out some true free market groups like the Foundation for Economics Education (FEE). The idea that government can solve our problems is insane. How would someone who’s never even met me (aka a politician) know what I want and need better than I myself know? He can’t, which is why I should be able to spend my money, open my own company, etc. on my own without someone else telling me what to do or how best to do it.

  4. said

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