Joseph Stiglitz’s new book, The Road to Freedom, joins a queue arguing that capitalism is based on exploiting the weak and wreaking havoc on workers, the environment and our ethical system. Remarkably the problems of Western liberal democracies’ are said to stem from the ideas of F.A. Hayek and Milton Friedman, “the most notable mid-twentieth-century defenders of unfettered capitalism […] without rules and regulations”. Their liberal ideology is lumped together with those labelled ‘the Right’, neoliberals, market fundamentalists, libertarians, and conservatives. According to Stiglitz, all of them claim that markets are self-regulating, offering the best protection to consumers and workers, and maximising per capita economic growth. The reality, says Stiglitz, is the opposite – their ideology has legitimatised freedom for the few at the expense of the many, based on myths which Stiglitz has mathematically proven through his academic articles to be ‘simply wrong’ – most markets are inefficient, exploit workers and customers, and are based on property laws that favour Big business.

Despite Stiglitz’s eminence as an economist, his attack on liberalism is overblown and ill-informed and his proposal for a new era of ‘progressive capitalism’ is unoriginal and unconvincing.

Let me begin by addressing Stiglitz’s assertions that F.A. Hayek bears the blame for capitalism’s woes. The title of Stiglitz’s book The Road to Freedom pays homage to Hayek’s influential book The Road to Serfdom published 80 years ago, just before Stiglitz was born. Stiglitz says that Hayek’s “ideological” claim that unfettered markets preserve political and economic freedoms is a deception – they undermine those freedoms, and this “puts us on the road to twenty-first-century fascism”. For those who know anything about Hayek, this is an outrageous personal and intellectual insult in the book peppered with similar ungracious rhetoric.

It is embarrassingly clear that Stiglitz has not read much of Hayek. The claim that Hayek based his political economy on perfect competition among rational humans assumed to know everything about anything is nonsense. Hayek won the Nobel Prize in economics for showing the opposite – that markets worked best when these assumptions do not hold. Hayek’s liberalism is based on the “irremediable ignorance” of individuals and their limited cognitive capacity to deal with a complex world. Even Stiglitz’s fashionable reference to behavioural economics as a criticism of Hayek’s liberalism fails to appreciate that Hayek got there first making early original contributions to the theory of the mind (cognitive science).

Then comes Stiglitz’s claim that Hayek advocated lawless markets and small government. This is laughably absurd.  Hayek’s liberalism is distinguished by its focus on the legal framework necessary to ensure that competitive markets work well. Contrary to Stiglitz’s statements Hayek spent the last forty years of his life setting out the legal foundations of a liberal society. You don’t believe in lawless markets if you spend a decade writing a major work with the title Law, Legislation and Liberty as Hayek did. Hayek’s ‘competitive liberalism’ grew, among other things, out of a critique of laissez-faire capitalism.  The irony is that many of the criticisms that Stiglitz makes of laissez-faire capitalism are ones that Hayek made more elegantly decades ago.

Hayek never said that the market solves everything. In The Road to Serfdom (1944), he set out the liberal case for the rule of law (something not mentioned by Stiglitz), and a strong and active government that could legitimately impose taxes to fund an extensive range of public goods, guaranteed minimum income and social insurance schemes, health and safety regulation, crises management and more. Hayek, like Stiglitz, attacked the patent system and corporate law for fostering monopolies. So, the claim that Hayek was an anarcho-libertarian, assumed that markets exist without laws, and was oblivious to the need to deal with the inequalities is simply an egregious misrepresentation which should not have been committed by a scholar of Stiglitz’s repute.

This is not to disagree with some, perhaps many, of Stiglitz’s criticisms of capitalism.  However, criticism of American capitalism is not a criticism of liberalism. Nor does the phrase “unfettered markets” come anywhere close to describing present capitalist systems. All Western democracies have big governments, high taxes, large public debts, and extensive regulation, and they have been turning away from markets adopting industrial, protectionist, climate change and social policies. We can agree that the market has flaws but Stiglitz’s analysis and criticisms are one-sided even if valid. Many of the same and even harsher criticisms can be made of other economic systems and governments. Stiglitz says he is not naïve, and that he knows that governments fail and can do great harm, but he says next to nothing about governments’ contribution to the alleged ills of capitalism or how much his Big Government policies would cost. Critically, Stiglitz does not set out any counterfactuals that could serve as a practical benchmark against which today’s policies, or his proposed alternatives, can be compared and evaluated.

What, then, is Stiglitz’s alternative? It is called ‘progressive capitalism’. It would be fairer, protect the poor, nurture positive economic freedoms and control corporate power.  It would be based on a new “social contract” drawing on John Rawls’s A Theory of Justice (1971). Economic justice would be determined by what people would agree under the ‘veil of ignorance’ where they are assumed to have no past and no idea of what the future holds. Stiglitz assumes that they would opt for some sort of equality.  Yet the morality and practicality of this Rawlsian approach, only discussed in several paragraphs, is left hanging in the air without explanation or application to Stiglitz’s proposed policies. It is window dressing. Nonetheless, I can’t resist pointing out that while ignorance in the market undermines capitalism, it appears essential in Stiglitz’s political marketplace.

When Stiglitz is not attacking “the Right” and business, he sets down an agenda for his progressive capitalism. This would address the ills of neoliberalism. He wants more collective action, cooperation and decentralisation, an effective competition policy, a better patent system, policies that deal with the social costs of externalities such as climate change, more industrial policies and better public policies. That is more government and regulation. Stiglitz says all actions have trade-offs, yet he says little about the costs of the trade-offs that his progressive capitalism would have to make.

Stiglitz is angry about the world in which he lives. His core proposition that a few now-dead political economists have caused the mayhem he sees around him is as improbable as it is fantastical.  Yes, a liberal order was created out of the chaos of WWII, and yes liberalism has waned, but these cycles are political reactions to the perceived economic and political failures that have more complex origins. For me The Road to Freedom’s diagnosis of these developments and its proposed solutions is unconvincing.

 

Cento Veljanovski is the Managing Partner and founder of Case Associates, and Fellow in Law & Economics at the Institute of Economic Affairs