"Wall Street’s Toxic Message"

Vanity Fair illustration by Edward Sorel.

Joseph Stiglitz has an article in Vanity Fair with the following summary:

When the current crisis is over, the reputation of American-style capitalism will have taken a beating—not least because of the gap between what Washington practices and what it preaches. Disillusioned developing nations may well turn their backs on the free market, warns Nobel laureate Joseph E. Stiglitz, posing new threats to global stability and U.S. security.

In the article he writes:

In many parts of the world, global institutions such as the International Monetary Fund and the World Bank came to be seen as instruments of post-colonial control. These institutions pushed market fundamentalism (“neoliberalism,” it was often called), a notion idealized by Americans as “free and unfettered markets.” They pressed for financial-sector deregulation, privatization, and trade liberalization.

Not surprisingly, people in developing countries became less and less convinced that Western help was motivated by altruism. They suspected that the free-market rhetoric—“the Washington consensus,” as it is known in shorthand—was just a cover for the old commercial interests.

I continue to be surprised by Prof. Stiglitz' condemnation of the World Bank policies, since he was once the Chief Economist of that institution.

The article suggests, as I understand it, that the best economy is a properly regulated free market economy, with the private sector and the government in balance, each playing its appropriate role. Stiglitz hopes that the disillusionment with American economic problems will not cause other countries to reject market economies.

It seems silly for me to take on a great economist, but I do wonder about this position. The United States and other countries greatly revised their economic institutions to deal with the great depression and its causes, and are likely to revise those institutions again as a result of the current crisis. Moreover, there are many differences in the economic institutions of different developed nations, such as the the degree to which government centralizes health and education services and the extent of the social safety net. It seems to me that countries are continually evolving and adjusting their economic institutions. While all dresses are dresses, there is a huge variety among them; while all free market economies are free market economies, so too there can be variety among them.

I wonder, incidentally, how good a job we are doing in identifying the problems that led to the current crisis. Ex post facto explanations in so complex a system as the global economy seem prone to many errors.

Thanks Emily for pointing out the article to me!