Stiglitz: When Good Minds Seek Fools’ Favor

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Joseph E. Stiglitz, Nobel prize in economics, at the École Polytechnique. 2019

To be free, I must be able to make and keep voluntary agreements. The central problem with the Hobbesian “state of nature” is precisely that each person has “too much liberty,” precisely because no contract, promise, or right to property can be relied on. Such “enforcement” of agreements is not coercive, but is literally required for the liberty to engage in commerce and division of labor.

Likewise, people living in society need to be able to make and keep voluntary collective agreements, at scale, and at low cost. We’ll drive on the right, we’ll have a speed limit of 45 mph on this road, and 70 mph on that road. To provide for local defense and security we’ll have a police force, with a rule for contributions to finance the employees. These agents of ours are literally called a “force,” because the use of force is consented for, and contracted by, the citizens.

Further, to provide for reliable and disinterested resolution of disputes over contracts, torts, and rule violations, we’ll have a court system; the judges’ pay will be independent of their findings in the cases they hear and decide.

All of these things are obviously necessary for anything remotely approaching “freedom” to be enjoyed by citizens. The rights and the public services do not originate with “the state,” but are the product of the recognition of citizens that order and predictability, including the right to consent to be subject to “force” if the rules are violated, are necessary for a republic to function and thrive.

This notion of “emergent order,” or “spontaneous order,” with its web of binding agreements and organized social structures, lies at the very heart of the argument for capitalism. The need for such order has been recognized since (at least) the Scottish Enlightenment, when David Hume, Adam Smith, Adam Ferguson, and Dugald Stewart laid out the intellectual foundations of a system of propriety and property rights that create a context where commercial activity creates wealth and elaborates the division of labor.

What does any of this have to do with Joseph Stiglitz’s book, The Road to Freedom? Almost nothing, it seems, and that’s a big problem. Stiglitz wants to argue — actually, it’s simply an unsupported assertion — that no one who advocates for commerce and markets ever thought about the problem of rules.

Such a claim would hardly be surprising among the superficial polemicists — Naomi Klein, Zephyr Teachout, or Thomas Friedman, for example — who make no pretense of being intellectually serious. When otherwise competent and able scholars ignore the tradition of emergent order, however, it is harder to explain. I am thinking, in particular, of two Nobel prize-winning economists, Joseph Stiglitz (2001 prize), and Paul Krugman (2008). Let me be clear at the outset: both Stiglitz and Krugman far exceed me in intellect, and in ability as economists. When I read their work as professionals, I am consistently impressed, and informed. Stiglitz’s work on public finance and asymmetric information, and Krugman’s work on international trade and regulation, are insightful and of considerable importance in the discipline.

Neither Krugman nor Stiglitz is doing this for the money, at this point in their careers; instead, they are proving Adam Smith’s famous claim that celebrities, once they have tasted fame, become addicted and are willing to commit increasingly egregious intellectual indignities to retain the favor of the frivolous.

Smith describes the problem clearly, in The Theory of Moral Sentiments, Book I, Chapter 3:

In the middling and inferior stations of life, the road to virtue and that to fortune, to such fortune, at least, as men in such stations can reasonably expect to acquire, are, happily in most cases, very nearly the same. In all the middling and inferior professions, real and solid professional abilities, joined to prudent, just, firm, and temperate conduct, can very seldom fail of success…

In the superior stations of life the case is unhappily not always the same. In the courts of princes, in the drawing-rooms of the great, where success and preferment depend, not upon the esteem of intelligent and well-informed equals, but upon the fanciful and foolish favour of ignorant, presumptuous, and proud superiors; flattery and falsehood too often prevail over merit and abilities. In such societies the abilities to please, are more regarded than the abilities to serve.

Let there be no doubt. Joseph Stiglitz rose through genuine achievement. But that makes the psychological need to stay “at the top” almost more tragic. The need to be seen as a policy shaman by the politically powerful can overwhelm even the wise.

Still, after allowing for the seductions of fame, it is hard to explain The Road to Freedom. The book reads more like extended performance art than an academic work, or even a serious trade book. At the outset, in the Preface, we are told that “The Right in the United States seized on the rhetoric of freedom several decades ago, claiming it as their own just as they claimed patriotism and the American flag as their own” (emphasis added).  

One might answer, of course, that patriotism and the American flag were hidden well back in the Left’s closet, unused, so the Right’s “seizing” of them was uncontested. But is it remotely plausible to believe that the Right seized only the rhetoric of freedom, and that this innovation was only “several decades ago”?

It is the nature of conservatism to seek to conserve, focusing especially on traditions and customs, as well as the rule of law and order. Conservatism in the US has a very different tradition to “conserve,” compared to the Right in Europe or South America. Whereas conservatives in other countries see themselves as stewards of religious tradition, or nationalism, or a sense of racial and cultural unity with the past, conservatives in the US center the Founding: the creation of doctrines and norms that erect a constitutional scaffolding to support liberalism. More simply, America is the only nation with a classical liberal tradition to conserve; for that reason, conservatives in the US have deployed the “rhetoric of liberty” to defend actual liberty. And they have been offering up that defense for something closer to several centuries than “several decades.”

Now, Stiglitz does give examples of “great thinkers” on the right who fit his story. These include George W. Bush, Rick Santorum, and Ted Cruz. I’m not making that up, friends: Joseph Stiglitz wants us to abandon property rights and commerce because Bush, Santorum, and Cruz were unable to offer coherent defenses of capitalism.

Eventually, Stiglitz does get around to considering the more serious arguments of actual intellectuals, the first team of the defenders of classical liberalism.  But here is an example of the level of his consideration: “Hayek and Friedman were the most notable mid-twentieth-century defenders of unfettered capitalism” (emphasis added).

I hope the reader can now forgive the extended introduction, describing the emergent order of a society in which commerce is embedded. Calling this “unfettered” is simply inaccurate, conceptually. It is also grossly inaccurate empirically, in the sense that the phrase “unfettered capitalism” literally never appeared, not once, in the writing of either Hayek or Friedman. No one argues for unfettered capitalism, because “fetters” are necessary for commercial transactions to be possible. I need the liberty to make a credible commitment, metaphorically binding myself to the mast much as Odysseus bid his men bind him to the mast in a physical sense. The ability to fetter ourselves is in fact the essence of living in society.

As early as 1944, in The Road to Serfdom — the book Stiglitz presumably believes he is demolishing with his current polemic — Hayek laid out the general rules, the social “fetters” that make a liberal order possible. He is clear about this at several points, but it is impossible to read pages 85-88, in particular, and think that Hayek advocated for anything remotely like “unfettered” anything. A liberal order requires, and at same time supports, the “Rule of Law,” the core goal of a liberal society. Hayek is not even advocating for capitalism per se, but is trying to argue for a liberal society, of which (in his view) capitalism is an important component.

Later, in The Constitution of Liberty, Hayek was quite clear about the need for guard rails and rules to guide commercial activity:

It is the character rather than the volume of government activity that is important. A functioning market economy presupposes certain activities on the part of the state; there are some other such activities by which its functioning will be assisted; and it can tolerate many more, provided that they are of the kind which are compatible with a functioning market. But there are those which run counter to the very principle on which a free system rests and which must therefore be altogether excluded if such a system is to work.

This is the heart of the matter, the point on which the argument turns. In my view, it is the point on which Hayek wins, and Stiglitz loses, but I may have that wrong. Still, this question of “the character rather than the volume of government activity” is the core aspect of the disagreement.

For Stiglitz, and for the Cambridges (both the one in the UK and the one in Massachusetts), “regulation” is a homogeneous commodity, a “good” in economic terms. It is optimized by passing through the political process where it is vetted by a priestly class of shamans, the smartest people in the world (those turn out to be Stiglitz, and the people from the Cambridges; who would have expected that?). More regulation is always better; it then follows that opposition to any new or existing regulation must be bad, simply by definition.

Opposed to this view are Hayek and Friedman, and classical liberals like me. We favor the rule of law, general principles that limit what the state can do, even if in a utilitarian sense it is “for the common good,” as conceived by the self-appointed genius-shamans. An implication is that regulation is far from homogeneous, and must be considered on a case-by-case basis. Any regulation that violates property rights, or distorts price signals, should be questioned, and if on examination it is found wanting that regulation must be removed. As Hayek said, “It is the character rather than the volume of government activity that is important.”

And that is the implication that threatens the foundation of the entire Stiglitzian enterprise. No one is arguing for unfettered capitalism. Arguments for deregulation are based on the specific claim that a rule or regulation is blocking mutually beneficial exchanges, or distorting the information signals in prices, and so that particular regulation should be removed.

It is Stiglitz and his apostles who want an unfettering…of the state apparatus of coercion! Rule of law, property rights, and a presumption in favor of consumer welfare in antitrust are all impediments to the shamans leading us to a better world. The constitution must be suspended; the ability of corporations to defend themselves using campaign spending must be curtailed, and information that contradicts the “scientific” claims of the shamans must be censored, again for the common good. All of the constitutional fetters that prevent the expansion of regulations, and the powers of the administrative state, must be swept away.

After achieving what he calls “progressive capitalism” revolution in which the state is unfettered, Stiglitz imagines that prosperity will be restored, on a broad scale. To be clear, he himself defines “progressive capitalism” as “rejuvenated social democracy,” a breathtaking change in direction from commercial society to a system where decisions of allocation and income are made by political majorities, filtered through an unelected elite. The road to this new system has three animating factors: the refocusing on a “liberal education,” the unfettering of the power of majorities to redistribute income and property, and the abandonment of the myth of “American exceptionalism.”

It is important to give some flavor of the tone of Stiglitz’s analysis here. He believes “education” should be explicitly designed to attack property rights and to weaken the sense of American exceptionalism, the tradition of classical liberalism embodied in the founding documents. He concludes:

This is why people in favor of continuing current norms (such as restricted gender roles or primacy of markets) regardless of the merits fight so strongly against a liberal education. 

After reading that sentence, I had to put the book down and go for a walk for a few minutes. Throughout my career in academia, teaching at Dartmouth, University of Texas, University of North Carolina, and now nearly three decades at Duke, I have always advocated for liberal arts education. I have been called a conservative, a right-winger, and much worse things, precisely because I advocate for the liberal arts to give students an appreciation of commerce, and a skepticism about a naïve faith in the coercive powers of the state.

But for Stiglitz, there is only one, homogeneous, unwashed and uneducated “The Right,” and it makes sense to lump together the opposition to education, the support of gender segregation, and a rock-ribbed advocacy of commerce. It is hard to take seriously such a superficial and tendentious screed.