Joseph E. Stiglitz Quotes

The theory of market socialism, for the most part, was not based on an analysis of these market failures, and of the reasons why government might be able to resolve them, but rather on the naive comparison of the actual performance of market economies and the hypothesized performance of a market socialist economy with an idealized view of government. This idealization not only failed to take into account the political realities, but more important from the perspective of this chapter, failed to take into account essential economic realities.

It should be clear of course that for traders to have incentives to gather information required that information not be perfectly disseminated in the market. If, simply by looking at market prices, those who do not spend money to acquire information can glean all the information that the informed traders who have spent money to acquire information have, then the informed traders will not have any informational advantage; they will not be able to obtain any return to their expenditures on information acquisition. Accordingly, if there were a complete set of markets, information would be so well conveyed that investors would have no incentives to gather information. (Of course with all participants having the same [zero] information, incentives to trade would be greatly reduced.) To put the matter differently, the assumptions of "informed" markets and "a complete set of markets" may be mutually exclusive.

Advocates of the Austrian tradition often defend the lack of formal modeling and the corresponding absence of formal efficiency theorems: The market economy is an organic process, too complicated to be reduced to the simplistic formal models. The job of the economists is to describe this organic process and to see the kinds of impediments that the absence of a legal structure, on the one hand, or excessive government intervention, on the other, might impose for it. But while they may not resort to, or even like, the standard welfare criterion of Pareto optimality, there are strong normative overtones in their discussions. Darwin may have thought that he was simply describing the evolutionary process when he asserted that it resulted in the survival of the fittest, but such statements require a definition of the "fittest" and an analysis of the general equilibrium, dynamic properties of the system. Today we recognize that evolutionary processes, under a wide variety of circumstances, may not possess "efficiency" properties.

But while Keynes as well as the subsequent research in new Keynesian economics has provided an explanation for both unemployment and economic volatility while it has attempted to identify precisely what is wrong with the Arrow-Debreu model that can account for these observations there was another message of Keynes that was clearly heard: The macroeconomic ills of capitalism were curable. One didn't need to institute fundamental reforms in the economic system. One only needed selective government intervention. It is in this sense that Keynesian economics greatly weakened the case for market socialism.

Competition is limited by the scale of the market, and as the scale of the market has changed, so has the effectiveness of competition.

In short, whether for the obvious reason that in the absence of futures markets the price system cannot perform its essential coordinating role with respect to future-oriented activities, such as investments, or for the more subtle reasons just discussed, that in the absence of futures markets, extending infinitely far into the future, the market economy is likely to exhibit dynamic instabilities there is no reason to believe that even with rational expectations it will converge to the steady state; there is no presumption that markets, left to themselves, will be efficient. For advocates of market socialism, the implication of this analysis seems clear: There is a need for the kind of government control of the allocation of investment envisaged in market socialism.

At the core of the failure of the socialist experiment is not just the lack of property rights. Equally important were the problems arising from lack of incentives and competition, not only in the sphere of economics but also in politics. Even more important perhaps were problems of information. Hayek was right, of course, in emphasizing that the information problems facing a central planner were overwhelming. I am not sure that Hayek fully appreciated the range of information problems. If they were limited to the kinds of information problems that are at the center of the Arrow-Debreu model consumers conveying their preferences to firms, and scarcity values being communicated both to firms and consumers then market socialism would have worked. Lange would have been correct that by using prices, the socialist economy could "solve" the information problem just as well as the market could. But problems of information are broader.

At the core of the success of market economies are competition, markets, and decentralization. It is possible to have these, and for the government to still play a large role in the economy; indeed it may be necessary for the government to play a large role if competition is to be preserved. There has recently been extensive confusion over to what to attribute the East Asian miracle, the amazingly rapid growth in countries of this region during the past decade or two. Countries like Korea did make use of markets; they were very export oriented. And because markets played such an important role, some observers concluded that their success was convincing evidence of the power of markets alone. Yet in almost every case, government played a major role in these economies. While Wade may have put it too strongly when he entitled his book on the Taiwan success Governing the Market, there is little doubt that government intervened in the economy through the market.

The central economic issues go beyond the traditional three questions posed at the beginning of every introductory text: What is to be produced? How is it to be produced? And for whom is it to be produced? Among the broader set of questions are: How should these resource allocation decisions be made? Who should make these decisions? How can those who are responsible for making these decisions be induced to make the right decisions? How are they to know what and how much information to acquire before making the decisions? How can the separate decisions of the millions of actors decision makers in the economy be coordinated?

The neoclassical paradigm, through its incorrect characterization of the market economies and the central problems of resource allocation, provides a false sense of belief in the ability of market socialism to solve those resource allocation problems. To put it another way, if the neoclassical paradigm had provided a good description of the resource allocation problem and the market mechanism, then market socialism might well have been a success. The very criticisms of market socialism are themselves, to a large extent, criticisms of the neoclassical paradigm.

The Lange-Lerner-Taylor theorem, asserting the equivalence of market and market socialist economies, is based on a misguided view of the market, of the central problems of resource allocation, and (not surprisingly, given the first two failures) of how the market addresses those basic problems.

The standard neoclassical model the formal articulation of Adam Smith's invisible hand, the contention that market economies will ensure economic efficiency provides little guidance for the choice of economic systems, since once information imperfections (and the fact that markets are incomplete) are brought into the analysis, as surely they must be, there is no presumption that markets are efficient.

Today, as we face a retreat from the rules-based, liberal global order, with autocratic rulers and demagogues leading countries that contain well over half the world’s population, Fukuyama’s idea seems quaint and naive.

And it should be clear that, in spite of the increases in GDP, in spite of the 2008 crisis being well behind us, everything is not fine. We see this in the political discontent rippling through so many advanced countries; we see it in the widespread support of demagogues, whose successes depend on exploiting economic discontent; and we see it in the environment around us, where fires rage and floods and droughts occur at ever-increasing intervals.

The top 1 percent have the best houses, the best educations, the best doctors, and the best lifestyles, but there is one thing that money doesn’t seem to have bought: an understanding that their fate is bound up with how the other 99 percent live. Throughout history, this is something that the top 1 percent eventually do learn. Too late.