Stiglitz: "The End of Neo-Liberalism?"

Posted on by

Nobel Prize winning economist Joseph Stiglitz tells us that neo-liberalism, witch is a catch phrase for policies that favor domestic deregulation and dismantling trade barriers internationally, has failed.

The problem that Stiglitz fails to acknowledge is that despite the questionable record of these practices, they still hold considerable sway in the media and in the popular imagination. Twenty-five years of repetition have created an almost Pavlovian reflex that equates “free markets” with “good” Willem Buiter might call it “cognitive capture.” I think of it as closer to brainwashing. And the romantic appeal of the neo-liberal model has impeded moving beyond it.

The evidence, at least in the US, is despite growing public anger about regulatory lapses and policies that favored the top echelon at the expense of everyone else, is that politicians still seem loath to impose more regulation even in the area where lapses have been considerable. There is still too much respect for the palaver of “not impeding financial innovation.” In an environment of shrinking capital bases at banks and brokerage firms, increasing interest rates (certainly on the long end) and high volatility, there will be just about nada appetite for fancy financial footwork. This is the perfect environment to road test some new rules and hire experienced people as Wall Street hemmorrhages employees, provided changes are in a thoughtful, integrated fashion and include mechanisms to allow for tweaking and adaptation as regulators gain courage and experience.

From Project Syndicate (hat tip Mark Thoma):

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 favor 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.

Though 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 1990’s, with 97% of investments in fiber 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. 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. Of course, 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 and discarded when it does not.

Perhaps one of the few virtues of George W. Bush’s administration is that the gap between rhetoric and reality is narrower than it was under Ronald Reagan. For all Reagan’s free-trade rhetoric, he freely imposed trade restrictions, including the notorious “voluntary” export restraints on automobiles.

Bush’s policies have been worse, but the extent to which he has openly served America’s military-industrial complex has been more naked. The only time that the Bush administration turned green was when it came to ethanol subsidies, whose environmental benefits are dubious. Distortions in the energy market (especially through the tax system) continue, and if Bush could have gotten away with it, matters would have been worse.

This mixture of free-market rhetoric and government intervention has worked particularly badly for developing countries. They were told to stop intervening in agriculture, thereby exposing their farmers to devastating competition from the United States and Europe. Their farmers might have been able to compete with American and European farmers, but they could not compete with US and European Union subsidies. Not surprisingly, investments in agriculture in developing countries faded, and a food gap widened.

Those who promulgated this mistaken advice do not have to worry about carrying malpractice insurance. The costs will be borne by those in developing countries, especially the poor. This year will see a large rise in poverty, especially if we measure it correctly.

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

The anger around the world is palpable. Speculators, not surprisingly, have borne more than a little of the wrath. The speculators argue: we are not the cause of the problem; we are simply engaged in “price discovery” – in other words, discovering – a little late to do much about the problem this year – that there is scarcity.

But that answer is disingenuous. Expectations of rising and volatile prices encourage hundreds of millions of farmers to take precautions. They might make more money if they hoard a little of their grain today and sell it later; and if they do not, they won’t be able to afford it if next year’s crop is smaller than hoped. A little grain taken off the market by hundreds of millions of farmers around the world adds up.

Defenders of market fundamentalism want to shift the blame from market failure to government failure. One senior Chinese official was quoted as saying that the problem was that the US government should have done more to help low-income Americans with their housing. I agree. But that does not change the facts: US banks mismanaged risk on a colossal scale, with global consequences, while those running these institutions have walked away with billions of dollars in compensation.

Today, there is a mismatch between social and private returns. Unless they are closely aligned, the market system cannot work well.

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.

Print Friendly, PDF & Email


  1. Anonymous

    Um, isn’t the problem that what currently masquerades as “free market” and “trade liberalisation” is in fact nothing of the sort?

    We’ve not had a test of free markets in the past 30 years precisely because we’ve never had free markets in the period. We instead had a hybrid of mercantalism overseas mixed with a weird mix of socialism and free markets domestically.

    It has served the opinion leaders well to call this “free markets” but it was nothing of the sort.

    The parts of the economy which had the free market have delivered – witness how much choice, quality and cost reductions we’ve seen on things like TVs and apparel. The socialist parts have either failed completely (healthcare, education) or been partial successes (food has been cheap and plentiful for the West but the subsidies have hurt efficiencies and caused chaos in the third world).

    I think until we tackle the major ideological distortion of the age – that what we have right now deserves to be called a “free market” – we can’t talk meaningfully about whether the theory is still any good.


  2. Anonymous

    I agree with Nick. How can you say the problem is the market is free and deregulated when it’s neither, and not even remotely so.

    Everything has the fingerprints of the government on it. The ratings agencies, the GSEs the insurance companies, the Federal Reserve and its job bailing out banks and distorting interest rates.

    This is NOT capitalism. It’s corporatism.

    In corporatism the companies run the government. In socialism the government runs the companies. They’re just two sides of the same coin.

    Whatever happened to real freedom?

    It’s so frustrating reading otherwise intelligent bloggers and authors make the ridiculous claim that we’re operating in any kind of “free” market.

  3. Yves Smith

    With all due respetc, free markets are an internally contradictory idea. They posit that you can have commerce without having rules, or rather, that in transactions two parties will meet and negotiate.

    That simply does not work. How do you as the buyer verify that the seller is telling you the truth about his merchandise? Unless you are dealing in very simple goods or have expertise in them, you will need to have an expert evaluate them. Would you buy a PC or any goods if you thought you wouldn’t get your money back if the product was a dud? Pray tell, how do you get your money back in a free market fantasy?

    You wind up having enormous contracting costs every time you buy anything other than very familiar items you can inspect, like apples.

    Milton Friedman wanted a world with no Food and Drug Administration. They are a favorite scapegoat these days, but their problems are much more the function of lack of budget for enforcement than overzealousness. Would you want to live in a world circa 1900, when adulterated meat was the norm? Or worry about heparin in your drugs? Or die an excruciating death, as some, including a New York millionaire, did around 1930, from tonics that had radium as a major ingredient? It actually perks you up quite a lot before the rampant cancers set in.

    Friedman, by the way, saw litigation as the way to keep bad businessmen in line. So pick your poison. Would you rather have regulators or have everyone have to hire attorneys to solve problems with vendors? And that also implies that con artists would be even more likely to target the poor and middle class, who might lack the resources to file suit.

    I could go on, but having arm’s length commerce between anonymous buyers and sellers requires regulation. Amar Bhide has written about it a Harvard Business Review article, “Efficient Markets, Deficient Governance.” I suggest you read it.

  4. Anonymous

    This makes as much sense as claiming that the end of the biofuels wickedness is a sign of the failure of environmentalism.

    It is not. It is the failure of something which only idiots ever called environmentalism.

    Similarly, what is now failing is government created credit bubbles. To think that the inevitable collapse of government sponsored credit bubbles is actually a problem with markets is just idiotic. Its a problem with governments, and their endless willingness to create credit bubbles once every two or three generations.

    We do need regulation for companies and markets. What we do not however need is for governments to wreck economies by courting short term gain at the expense of longer term disaster, and then when disaster strikes, blame the victims for the results of what they themselves have done.

  5. Yves Smith

    Kenneth Rogoff and Carmine Reinhart studied the last 800 years of financial booms and busts. They result from high levels of international capital flows, which is one of the result of more open trade, an outcome advocated by free market proponents. Some illustrative sections from a VoxEU post by Reinhart on their research:

    In a recent paper co-authored with Kenneth Rogoff, we introduce a comprehensive new historical database for studying debt and banking crises, inflation, currency crashes and debasements.3 The database covers sixty-six countries across all regions. The range of variables encompasses external and domestic debt, trade, GNP, inflation, exchange rates, interest rates, and commodity prices. The coverage spans eight centuries, going back to the date of independence or well into the colonial period for some countries….

    Figure 1 plots for the years 1800 to 2006 the percentage of all independent countries in a state of default or restructuring during any given year. Aside from the current lull, one element that jumps out from the figure is the long periods where a high percentage of all countries are in a state of default or restructuring. Indeed, there are five pronounced peaks or default cycles in the figure. The first is during the Napoleonic War while the most recent cycle encompasses the emerging market debt crises of the 1980s and 1990s.

    Serial default on external debt—that is, repeated sovereign default—is the norm throughout nearly every region in the world, including Asia and Europe…

    Another regularity found in the literature on modern financial crises is that countries experiencing large capital inflows are at high risk of having a debt crisis. Default is likely to be accompanied by a currency crash and a spurt of inflation. The evidence here suggests the same to be true over a much broader sweep of history, with surges in capital inflows often preceding external debt crises at the country, regional, and global level since 1800, if not before.

    Also consonant with the modern theory of crises is the striking correlation between freer capital mobility and the incidence of banking crises, as shown in Figure 2. Periods of high international capital mobility have repeatedly produced international banking crises, not only famously as they did in the 1990s, but historically.

    The disheartening message is that instability, not stability, is the norm, and that large international trade flows (which will lead to large international capital flows) are destabilizing.

    Plua the US fits the profile of a country about to hit the wall.

  6. Anonymous

    Wow, unless you guys promoting free markets are in the top 1% of income, you are arguing against your own financial interests, Which I am sure delights the plutocrats.

    Real free markets are a brawl. Power and money go to the most powerful and ruthless. Look at the history of robber barons or Cecil Rhodes. It isn’t too much of a stretch to say England outsourced the exploitation of Africa to him, Sweet, no? Corporatism, or whatever you want to call the rich having de facto control of the government, is what you get with no or weak checks and balances on private sector power.

    The average Joe did best in the 1950s and 1960s. Overall growth was higher, average worker incomes grew faster than now, and there was no wave of innovation to drive growth.

  7. Anonymous

    “That simply does not work. How do you as the buyer verify that the seller is telling you the truth about his merchandise? Unless you are dealing in very simple goods or have expertise in them, you will need to have an expert evaluate them. Would you buy a PC or any goods if you thought you wouldn’t get your money back if the product was a dud? Pray tell, how do you get your money back in a free market fantasy?”
    Never been to Sears or any other retailer in the US? I have never in my life had a retailer refuse to give me a refund, as well as the fact that many give me extra to make up for the bad product.

    George Orwell,”There are some things only an intellectual could believe, for no common man could be so stupid.”

    All societies have laws that set rules on behavior, including trade – so no intelligent person’s arguement confuses free markets with anarchy. Most of our problems are due to our regulatory agencies lack of disgression (low interest rates forever!!! – just plain bad judgement)

  8. Anonymous

    Stigliz is right in that neo-liberalism selectively granted “free” reign to some (banks) and “regulated others” (Iraq, Afghanistan…)

    However his aim is off (admittedly he is short-sighted so we should cut him some slack).

    Markets work. If markets were truly free I could be paid in gold and silver. In other words, the most important “market measure” (currency) would also be free. I could be paid in euros, gold, silver or shells if I wanted. And I can’t. You know why? Because FDR confiscated gold holdings and outlawed gold as a currency for public use.

    Ever since, the rhetoric on “free markets” has been so much hot air.

    It’s as simple, and as obvious as that.

    We have been living in debt and currency slavery ever since. Is it surprising that the whole game has blown up in our faces when we’ve been talking “free” but walking “commie”?

  9. PureGuesswork

    The notion that any problems with the free market system is caused by the imperfections of the politicians who have over-regulated it is an ironic echo of something that was often said about communism in years gone by. One would hear that, “There is nothing really bad about the ‘system’ itself, it is full of well-meaning and brilliant ideas–it is just that in Russia it was put into practice by bad people. That’s why you have all the gulags, the starving peasants, etc..”
    If our free markets are “over-regulated,” it is because market forces (lobbying, etc.) forced them to be so.

  10. Anonymous

    Perhaps we are arguing at cross purposes but for me free markets require regulation.

    I think of it like a soccer game. The government should set the rules (like FIFA), and provide the referees and linesmen. Then we see which team wins the match, and ultimately the league.

    The problem comes when the referees doesn’t just award penalty kicks but insists on taking them. Or when the government fields its own team and refuses to award penalty kicks against it.

    BTW, I love the blog and read it several times a week.


  11. gronk

    Free market-followers look an awful lot like those who try to ‘cure’ cancer with praying: If your illness doesn’t go away, you haven’t prayed hard enough. Or your SO, your neighbour should also pray for you. And you should donate more to the church. Whatever.

  12. Kien

    Hello Yves Smith – thank you for your blog which I like to read.

    While I sympathise with Stigliz’s critique of neo-liberalism, I am not sure how one can take a position on this matter without stating clearly what the “real-world” alternative to neo-liberalism is. If neo-liberalism has “failed”, what has it failed relative to? Japan is perhaps an example of a country that is arguably not neo-liberal and yet successful (at least in some respects). Is Japan really the relevant counter-factual? I struggle to think of a country that is not neo-liberal but would be a model I want to follow.

    That said, I’m not dismissing the critique. I would just like to hear more about what you think is the alternative to a neo-liberal system. I look forward to future posts on this subject.

    Best, Kien

  13. burnside

    We’ll get some idea of re-regulation and what form it will take eventually – a recurring feature in the aftermath of economic disruption.

    Rogoff/Reinhart is an excellent resource.

    Public perception may take a while, but it has always come ’round to anti-globalism.

  14. Scott

    Not sure I buy Nick’s analogy – or at least his dystopian vision of it. Far as I can tell, government isn’t fielding its own team as much as it is allowing/directing the refs to favor one or a couple teams over all others.

  15. Anonymous

    “Free market-followers look an awful lot like those who try to ‘cure’ cancer with praying”

    Maybe you’re being lighthearted, but this is clearly wrong. Free market followers outline a very clear mechanism by which the sum of many self-interested transactions can produce a close-to-optimal (or at least better-than-government) aggregate outcome.

    So far as I know faith-healer types never provide any such mechanism, and no testable hypothesis.


  16. Anonymous

    In the abstract, this isn’t a very interesting debate. So new regulations are needed. What are they? Specifics are required.

    And the debate isn’t about whether businesses are perfect. They clearly aren’t. It’s about whether governments and regulators can improve the situation. I think there is well-founded, cross-ideological doubts about whether they can. Framing this issue is oh so important.

  17. Richard Kline

    Any definition of neo-liberalism which includes Reaganomics and Thatcherism is too loose by a large measure, but that’s talking about the past. Stiglitz’s closing remark that neo-liberalism is a political program, nay an ideology of a kind, is near to the mark as I see it, but also it has never been a coherent program as he also states.

    Deregulation, however, has been a bosom creed in this perspective, that is undoubted—and has failed, abjectly and without reservation. Yes, deregulation got us some things like the AT & T breakup. It also got us uncooperative, minimally regulated cellular phone companies in the US which cannot settle on a common transmission standard and are collectively despised by their consumers for poor quality coverage and awful customer service. Deregulation has killed the airlines, or more accurately allowed them to kill themselves; we will be bailing them out sometime next year, another cost of deregulation. Deregulation was intrinsic to the credit bubbles in the financial industry, and the universal adoption of the disastrous originate-to-distribute fee-based model. Deregulation put some utilities out of business a few years back, and has cost most of the remainder big bucks; their whole interest in dereg was to find a way to raise fees for the same services, which hasn’t really happened so they are squeezed from both sides.

    I’m not even going to get into the idea of unfettered ‘free trade’ in this comment beyond noting that the US has resoundingly lost that game since we never developed a policy or plan on how we were even going to stay in it, let alone win. Neo-liberalism has been a chicken in every pot kind of fantasy: we all got dunned for the bird, but the money went for marketing, so to speak.

    Markets have their uses. When regulated to stem their abuses. Even then, malinvestment is rampant. Democratic socialism is no panacea but it can mitigate the worst excesses. Market mavens hate that, but ask yourself this: what have they done for you lately besides bankrupt your bank and zoom your debt burden? Bye now.

  18. Francois

    “With all due respect, free markets are an internally contradictory idea. They posit that you can have commerce without having rules, or rather, that in transactions two parties will meet and negotiate.”


    Investor’s Business Daily wrote a great article precisely on this topic several years ago. (Alas, i do not have a link)
    The gist of it was that Third World Economies cannot develop properly because they’re no formal rule of law (and yes! accompanying regulations) and therefore, their contraction costs were enormous.

    One can savor the irony of IBD writing such an article when they always scream murder whenever US gov wants to tuch regulations in this country.

    Moral hypocrisy, “quand tu nous tiens”!

  19. Anonymous

    “Democratic socialism is no panacea but it can mitigate the worst excesses”….

    …. by replacing them with a whole new set of problems and excesses.

    There’s also a real problem inherent in putting the words democratic and socialism together. Put bluntly, you can’t have freedom AND equality. Either give people the freedom to succeed or fail, or else confiscate from the successful to give to the unsuccessful. Seeing as the latter option would never ever be freely accepted by the people suffering the confiscation it must be done by force, hence the incompatibility of equality with freedom.

    Sure, you can argue which you prefer. But you can’t have both. Free market theory very clearly believes freedom is the more important of the two.


  20. Anonymous

    ^ The problem with that Nick is everyone should have equal freedom, which in my opinion does not exist currently.

  21. David

    Again, great comments, Yves. Not sure if Stiglitz has been ‘marginalized’ yet or not..but I am sure conservatives are working on it. He seems to be an intellectual hero….but doing criticism while in the high income brackets doesn’t require too much bravery….just a chance of social ostricization (sp?). Now, for us more common folk it can get riskier to defend equality and democracy with ‘socialist’ face or whatever. Stiglitz is just pointing out the ideology of conservatives has been dominating so much that it’s consequences are now coming to feast upon the carcasses of the declining ‘middle (income) class’.

    Anyway, I’d debate nick if I had time…but I think it’s not a question of either/or about equality and freedom. Equality of rights for example is implicit in the growth of the capitalist class in the past. Even the business suit is an example of ‘equality’ within the alleged ‘freedom’ of ‘free markets’. Businessman wore suits to hide various infirmities, inequalities, with basic black to also give a conformity to social regulation. Much of the growth of govt. is due to the demands of business for regulation to make the playing field ‘equitable’ and ‘fair’. Indeed, Freedom and Equality are companionable and in fact necessary for society to function well. So please don’t make them exclusive.

  22. Anonymous

    This is a follow-on to my comment at 10:20.

    For everyone to have equal freedom would mean everyone has the same opportunity to fail as an example. That’s not the case. Also, everyone would have no chance to tilt the market in their favor or buy off politicians. But that’s also not true, because the larger and more successful a company is, the more money it has, and the more it can get the rules designed to benefit them by giving money to politicians.

    In other words, I’m coming more and more toward the conclusion that free markets are incompatible with democracy.

  23. Marcus Aurelius

    “Neo-liberalism” and “neo-conservatism” are confusing labels – and designed to be so. It seems that the political right wing is both at once.

    there is nothing more liberal than the deregulation of banking and finance, yet it was the “conservatives” who took us down that path.


  24. Anonymous

    It’s actually kind of funny seeing corporate scum apologists like Nick defend the indefensible. This Libertarianism gibberish has never worked and never will.

    I’ll take socialism every day if I get health care instead of the wack job platitudes defending the ‘free market’ health care system.

    The good news is that Shrub and his gang of crooks has so tarnished conservatism that it will be generations before people believe that crap again.


  25. Anonymous

    you charlatan, why don’t you mention what “state fundamentalism” by way of central bank intervention has done to markets. What a quack! You and your statis crowd should be in Venezuela or Cuba. You would love the wonders that state fundamentalism does to the economy. Try it. I’ll be glad to pay for it.

  26. Anonymous

    Be clear I’m talking about the theories, not the complex mis-mash currently operating in the world. So when I say the free market theory puts freedom above equality, I don’t imply the current markets are very good at doing it as they exist.

    10:24 – “I’m coming more and more toward the conclusion that free markets are incompatible with democracy.” When you treat democracy as a proposition to be analysed rather than a prejudice to espouse, you might find its not a good thing. For example the USA was founded as a constitutional republic, NOT a democracy. My own opinion is that democracy wrecks nations by imposing a tyranny of the stupid onto the people who create the high standard of living, and it also quickly bankrupts the public purse. ALL of recorded history shows that democracy leads to deficits then bankruptcy, then collapse.

    Weinerdog. You’re an idiot. You say it yourself “I’ll take socialism every day if I get health care”. That’s exposing the central socialist conceit – that it’s just a pay claim against the actual wealth creators. Have you ever asked who is going to pay for that healthcare? A right to a service is also an obligation on someone else to provide it. Socialism = totalitarianism. It could never be otherwise.

    Yves, if you think we’re getting too far OT let us know.


  27. gronk

    Nick: my point is that Libertarianism has an awful lot in common faith-healing, or even better, communism; ‘if it doesn’t work, it isn’t because communism or faith-healing doesn’t work, it is because libertarianism doesn’t work because there were no true free markets, communism only works when the whole world is communist, or you faith isn’t good enough.’

    See: There’s always an excuse, using external circumstances for an ideology breaking up. Instead of acknowledging that it uses wrong premises, or that it simly doesn’t work in the real world.

  28. mittelwerk

    it still amazes me how irrationally people react to the idea of a “free market.” as if there’s something morally wrong about creating a protected civil space where a buyer and a seller can decide the value of a good without interference. and then to “prove” their position, free-market detractors point the finger at our current economy — as if the unholy collusion between central bankers, IBs, federally-sponsored credit agencies, federal mortgage subsidization, and a cultural environment of overweening moral hazard had nothing to do with it. give me a friggin break.

    some of yves’s comments above are surprisingly facile. how do you judge the veracity of a seller? uh, i don’t know — how are eBay and amazon doing it?

  29. Anonymous

    “uh, i don’t know — how are eBay and amazon doing it?”

    eBay has become terrible because they can’t verify buyers are not scammers. There’s a good article on the internet of this guy that tried to sell his laptop on eBay four separate times, and how every time he got a Nigerian.

  30. mittelwerk

    anon, what percentage of ebay users are dissatisfied with the experience? how many people as a percentage get ripped off? i’m sure the numbers match up or are improvements on physical buying/selling.

    in any case, free markets are about information access — and you, in ten seconds, have just alerted me to possible fraudulent buyers based in nigeria, so i would be careful. and isn’t this what paypal made its owners billions for?

  31. mittelwerk

    another thing about free markets. calling them “internally contradictory” is sophistry, because by definition they are also theoretical: they are supposed to be contradictory — so that contradictions can be resolved. one should think in terms of markets that are more free or less free.

    for instance, the popularity of this blog is a function of the increased democratization of financial markets resulting from digitization and the growth of the internet. the information you get here used to be highly regulated and embedded in cost-prohibitive, hierarchical institutions.

  32. Anonymous

    I like the sports analogies. They communicate the essence of how competition functions best. Specifically, they illustrate the absolute need for a certain framework of rules and regulations, within which competition takes place. How viable would a hockey league be if there were no rules? You’ve probably seen many instances where rough and illegal play can get quickly out of hand (can’t have a league if most of the players get maimed or killed in the process). It also means that there has to be a group of officials who understand and enforce the rules.

    I believe it’s Jim Collins who says, at the organizational level, the most successful organizations are those that delegate freedom and responsibility within a framework. In Collins’ case he’s talking about an organization’s mission and core values. He, along with Stephen Covey propose that the best organizations are those who can articulate a simple straight forward mission statement and a minimum number of core values that are critical to long term success. They also speak in different ways about the importance of accountability. Their focus is to preserve the core and stimulate progress. BTW, wouldn’t referees be more effective and efficient if rules are kept to a minimum?

    Connecting the analogy to the real world- let’s talk about income taxes. We supposedly have a “voluntary” income tax system. Trust me, the level of overall voluntarism is directly proportional to level of fear that people have of the IRS. If you remember, during the mid to late 90’s, there was a perception within Congress that the IRS was not as sensitive to taxpayer needs as was necessary. Of course Congress went on to influence the IRS to become more customer friendly. IRS complied with Congressional wishes and invested more of its resources on the customer service side. Not surprisingly, results of surveys, conducted over the next few years, showed a significant increase in taxpayer satisfaction with IRS.

    But of course there was a cost. In order to direct resources towards customer service, IRS reduced the resources allocated to compliance (audit staff). Audit rates declined significantly during the same years as customer satisfaction improved. Accordingly, taxpayer compliance also declined, based upon anecdotal evidence of our firm and those of some colleagues. We had opportunities with potential new clients if we looked the other way. We declined these situations. The positions we were asked to support had no basis in law whatsoever. These guys were taking positions where they wee so far out on the limb, that if the IRS came knocking, they’re already sprawled out on the ground in the midst of a pile of broken branches. Our relationship with these folks would not be sustainable over the long term.

    But other “professionals” took them on because the general perception was that there was a low risk of getting caught. Congress finally awoke to this perception and have started to encourage IRS (via higher budgets) to increase its compliance efforts, which it has since done. Enforcement, in this arena, is the main driver of accountability. In this case, the lack of rules wasn’t the problem but rather a conscious choice by the refs to reduce their level of enforcement. I think the same principles would apply to just about any market.

    A few final comments about when tax law is most efficient. It has to be kept as simple as possible- which goes against the basic premise of the progressive mentality – we should try to help certain people(helping low income folks, helping business with accelerated depreciation deductions, helping the oil, gas and timber industries with their tax credits, etc). It’s all of these “helpful ideas”, that when enacted into laws, which makes the tax system so complex. It also implies that government is smarter and more ethical than the rest of us and will only enact the fairest and most efficient and effective laws- yeah right.

    Conclusion: I’m on the fence about neo-liberal market fundamentalism. What I think we should do is focus on accountability – make sure that regulators monitor and enforce existing laws more intently. Go after the due diligence firms who were supposedly reviewing the viability of the CDO concoctions. However, there are also times when the framework should be modified. It’s obvious that regulation of the ratings agencies is an absolute necessity. I think the focus of the argument should not just be on writing more laws but rather it should also be on finding ways to increase the effectiveness of the referees.

  33. Juan

    Let’s see, an actually free market would also be a freely competitive market. What happens under such circumstance? The processes of concentration and centralization of capital, which take place in any event, run easily. The free market becomes dominated by oligopoly and monopoly; it is self-negating. Its rhetoric is mere ideology. Its practice is an (unconscious) struggle to achieve stagnation.

  34. mittelwerk

    right, juan, and marxism is an (un[con]scious) desire to mast(ur)bate in public.

    but, of course, you have some examples of an “actual” “free market” degenerating into “oligopoly”?

  35. Anonymous

    Follow up to anon 1:15pm

    The refs have refs. Think of how embarrassing it is for an NFL ref to see an obvious bad call put up on the field screen in front of 100,000 people. Think this motivates them to do a good job? We need to find self regulating systems that can embarrass The SEC when it’s not doing its job. Active state Attorney Generals seem sometimes to act in this capacity but we need to come up with a better way.

  36. Tom Lindmark

    Conclusion: I’m on the fence about neo-liberal market fundamentalism. What I think we should do is focus on accountability – make sure that regulators monitor and enforce existing laws more intently. Go after the due diligence firms who were supposedly reviewing the viability of the CDO concoctions. However, there are also times when the framework should be modified. It’s obvious that regulation of the ratings agencies is an absolute necessity. I think the focus of the argument should not just be on writing more laws but rather it should also be on finding ways to increase the effectiveness of the referees.

    July 8, 2008 1:15 PM

    The conclusion drawn by Anonymous is perhaps the most reasonable among all of the commentators.

    These are times that make it easy to criticize free market theory and the author is well within his rights to do so. However, at some point in time he and others who are lobbying for more regulation have to step up and propose concrete alternatives with defensible arguments as to how those alternatives will improve the general welfare.

  37. DownSouth

    How far back would the free-market fundamentalists carry us in their quest for their Darwinian paradise? Would they carry us all the way back to the Dark Ages? William Manchester in A World Lit Only by Fire gives us a flavor of what it was like:

    “The interregnum was the worse of times for the imaginative, the cerebral, and the unfortunate, but the stong, the healthy, the shrewd, the handsome, the beautiful–and the lucky–flourished.”

    “Blacks and Jews sufferd most, but any minority was considered fair game for tyrants… Any nonconformity, any weakness, was despised; the handicapped were given not compassion, but terror and pain, as prescribed in Malleus maleficarum, a handbook by the inquisitors Johann Sprenger and Heinrich Kraemer, which justified the shackling and burning of, among others, the mentally ill.”

    Of course, in the beginning at least, it was a meritocracy. As Manchester goes on to describe:

    “Because the first medieval rulers had been barbarians, most of what followed derived from their customs. Chieftains like Erinanaric, Alaric, Attilla, and Clovis rose as successful battlefield leaders whose fighting skills promised still more triumphs to come. Each had been chosen by his warriors, who, after raising him on their shields, had carried him to a pagan temple or a sacred stone and acclaimed him there.”

    Hereditary monarchy, like hereditary nobility, was a medieval innovation. But it came later. The early “chieftains had been chosen for merit, and early kings wore crowns only ad vitam aut culpan–for life or until removed for fault.”

    It is on this issue of merit where the advocates of free market fundamentalism become totally detached from reality. Take Nick’s comment concerning “the actual wealth creators,” for instance. Who do you suppose he is talking about? Is he talking about George Bush, the three-time loser in the oil business, repeatedly bailed out by his father and his wealthy friends, who used his father’s political conections to finally claim his ultimate prize–a government funded stadium for his employer, a professional ball club? Or is he talking about Dick Cheney, who practically drove Halliburton into bankrupcy, only to revive it with no-bid government contracts?

    Rousseau believed that what was preferable when society and property have become established and the inequality of talents is revealed, is that ability should be rewarded for the advantage of the community. This stage, Rousseau says, is the happiest and most lasting in the history of mankind. He goes on to say that when in time wealth and rank no longer correspond to merit, the dispaity becomes an injustice and leads to instability.

    Some of the founders of the school of liberal economics later broke with it. Simonde de Sismondi was to become the first heretic. In an article on political economy for the Encyclopedia Britannica, he called for factual observation. Further thought and documentation led him to question the validity of liberal economics. Sismondi had visited England and had been struck by the misery that ensued from the application of liberal economics theory. John Stuart Mill was another founder who eventually broke with the school by asserting that the distribution of the national product could be redirected at will and that it should be so ordered for the general welfare.

    Walter Bagehot is another that challenged liberal economics. In Physics and Politics he begins by showing “Natural Selection” in the early stages of the march to civilization–the better organized, more coopertive groups conquer the less unified. But then more and more other qualities, initiatives, and ideas–liberty, free discussion, written law, habits of calm reflection, of tolerance and generosity–conduce to survival, because they make for an ever higher degree of cohestion.

    These underlying ideas eventually evolved into socialism which ultimately triumphed in the West, taking the twin form of Communism and the Welfare State, either under the dictatorship of a party and it leader or under the rule of a democratic parliament and bureaucracy.

  38. Anonymous

    “Free market-followers look an awful lot like those who try to ‘cure’ cancer with praying”

    No, try again. One thing free-marketers DON’T do is limit their choices.

  39. Russ

    Unless you are dealing in very simple goods or have expertise in them, you will need to have an expert evaluate them.

    You are trying to argue against free markets yet your solution requires the exact thing you are arguing against.

    Why should I trust a middleman that forces himself into a transaction? And if the product is so complicated, I then have to conrtact the services of an “expert” even though I have no way of evaluating whether he’s really expert or not.

  40. Anonymous

    Drug dealing is a free market. Let’s see, you have concentration among sellers, rampant fraud (I’ve heard of people dying from ground glass being cut into their cocaine, plus more general problems of purity/quality), violence used to gain market share and enforce payment and innocents regularly getting killed from stray bullets, mistaken identity, or being related to the wrong person.

    I think I’ll take regulation.

  41. Anonymous


    Wouldn’t Moodys and S&P be good example of how government can make the expert problem worse not better.


  42. mittelwerk

    drug dealing is a “free market?” are you on fucking drugs? are you insane?

    it is ILLEGAL! the federally subsidized “war” on it costs hundred of BILLIONS of dollars a year in direct and indirect costs (like incarceration)!

  43. Anonymous

    russ, you make Yves’ point. The idea collapses under its own absurdity. You haven’t found a solution in your paradigm that answers Yves’ question: how do you buy anything you can’t evaluate if you don’t have consumer protection regulations (truth in advertising, etc) to keep you from getting a bad product?

    Google Akerlof and “market for lemons”. Everything would become a market for lemons.

  44. mittelwerk

    … and, i should add, regarding the war on drugs, it CREATES the problem it professes to solve!

    i couldn’t think of a better argument for free markets in the world than to to decriminalize drug use! society would be transformed for the better overnight.

    but that, of course, means real freedom and responsibility in our society — and most of you clowns are simply not ready for that.

  45. mmm

    The drug dealing comparison works for me. Buyers and sellers contract freely outside any system of regulation.

    And despite America’s supposed “war”, it looks like the market for illegal substances has pretty much the same characteristics over the world, regardless of pretenses at enforcement. I only know what I read/see here, which is no doubt filtered through a biased media, so I’d be curious to hear if there are any places in the world which are not on the Holland model that have a different result.

  46. mittelwerk

    how someone can be speaking of a “free market” in illegal substances is beyond me.

    you are idiots. bye.

  47. Anonymous


    Decriminalizing is not the same as deregulating. They are indeed deregulated now ;-)

  48. mittelwerk

    out of retirement:

    illegality is basically the highest form of regulation.

    also, the assertion that the underworld does not regulate drug traffic is laughable. why don’t you test out your assertion: go walk into a project courtyard and try to sell some crack.

  49. Anonymous


    Oh, so free marketers assume a world with no underworld? This is the WHOLE POINT of what everyone has been arguing. Remove government from the picture and other powerful interests form or move in, usually uglier than the government everyone likes to deride.

    Nature abhors a vacuum.

  50. Juan

    mittelwerk; ‘you have some examples of an “actual” “free market” degenerating into “oligopoly”?’

    Suggest you read Hilferding’s Finance Capital which contains various turn of last century examples. Or in the present, you might wonder how many firms dominate world production of iron ore (3). Or you might even look into how what was called “the international petroleum cartel” came into existence (and how it ended)…many many others.

    Do you actually believe that competition is simply for competition’s sake rather than a struggle by each firm to maximize by putting end to competition; have you ever noticed waves of mergers and acquisitions which seem more than a bit related to firms’ attempts to offset a falling rate of profit by increasing firm size and mass of profit?

    The free market which you desire has little to do with the real motion of the capital system and lots to do with both vulgar theory and ideology for/of a particular class.

    Closest thing to a modern free market might be intrafirm transfers; oh, right, those are internalizations so not really markets (but do, nevertheless, represent a large portion of total world ‘trade’).

  51. Anonymous

    “This mixture of free-market rhetoric and government intervention has worked particularly badly for developing countries.” — Joe Stiglitz

    “Developing countries,” hell! How ’bout the DEVELOPED ones, Joe?

    For instance, prior to the Fed’s founding in 1913, financial crises produced spikes in overnight call money rates (e.g., the Panic of 1907). Since then, Fed intervention SLASHES short rates during crises. A recent example was Magoo’s “one percent forever” rate blowout during 2003/4.

    The ‘free-market’ actors who Stiglitz decries certainly did their part in flogging teaser-rate ARMs and packaging them into toxic-waste securities. But the government-regulator sector to which Stiglitz belongs was responsible for artificially depressing short rates, which helped fuel the Bubble. And Magoo praised the jakeleg “AAA-rated” securities as “welcome financial innovation.”

    Bottom line, Stiglitz has spent his distinguished career presiding over a democratic-socialist mixed economy which reached its apogee of prosperity decades ago. Since then, under Federal Reserve and Treasury tutelege, it has escalated its levels of borrowing, debt service, malinvestment, and negative net worth. Artificial capital injections from the foreign official sector needed to support the dollar’s anachronistic role as reserve currency have given the U.S. the profile that Rogoff and Reinhart attribute to crisis-prone developing countries.

    With this dismal track record, Stiglitz taunting the neoliberal crowd about not having malpractice insurance is a travesty. Government-lover Stiglitz has been at least as culpable as the greedy neoliberals in engineering our now-headlong national decline.

    Joe’s an elite hack, a belaureled ideologue; a mean misleader. No neoliberal is going to sell him malpractice insurance after the fact; though such festering moral hazard has been practically the linchpin of ruinous democratic-socialist policy.

  52. Anonymous

    “25 years of repetition have created al almost Pavlovian reflex that “free market” equates “good” William Buiter might call it “cognitive Capture” I think of it as brainwashing…”

    Concern about the environment has been similarly equated with erroneous poorly defined concepts.
    Concern about the environment is transformed into ‘environmentalism =radical tree huggers or conspiracy to hamper ‘free trade’.

    I live in a drought stricken area of the southwest. Why should the local population have to rely on reconstituted sewage for consumption and hygene so a mining company can be licensed to deplete the groundwater?

    I agree with Juan, poorly defined ‘capitalism’ is also elevated on a pedestal as the end all…. yet when capital is concentrated we have monompolies and cartels…who can compete…we become serfs in a feudal system.

  53. jandre

    As someone said: corporatism is the companies owning the government, and socialism is the government owning the companies.

    The problem in the US is that the government and the companies represent the same player: their interests.
    Certainly companies add value to the society but it is the government, by the FED, that creates the money to buy the products. So you see we have a problem of interests. The result is inflation, unjust redistribution of wealth and crisis.
    To solve this you must control the money inflow to the market, and the markets should have a tight regulation.
    Please do not be afraid of socialism… USSR was communist. The goal should be freedom with justice (social, financial, etc.).


  54. Anonymous

    In a recent article Columbia University’s Nobel Prize-winning economist Dr. Stiglitz notes that the world has not been kind to free market ideas. I agree. But that is not news. Why? Because the world is run by elites. The history of the world is a history of tyranny interrupted by brief periods of economic liberalizations. In those rare cases where bureaucracy has been pushed off the back of the entrepreneurial, there has always been a sharp increase in living standards, a process which disproportionately benefits those at the bottom.

    It makes no sense for those at the top to embrace philosophies, which threaten their privileged position in society. If laisez-faire policies had the tendency to redistribute wealth to the rich, such policies would have been used by the Caesars, the Hapsburgs, the Bourbons, and the Romanovs. But historical experience teaches that when the rich had all the political power they suppressed economic freedoms in favor of government regulations. They still do – rationally or instinctively.

    Is it fair to blame misallocation of resources on neo-liberal policies? In this case Dr. Stiglitz mixes facts with fiction as skillfully as a trained neo-Marxist. There is no starker example of selective blindness and a gap between rhetoric and reality than starting with a heartbreaking description of American families kicked out of their homes and the world’s hungry, then jumping to conclusions against the market.

    It is academic dishonesty to reveal only part of the truth about the companies responsible for the current mortgage crisis. Created by Uncle Sam and subsidized by Joe Taxpayer, Fannie Mae and Freddie Mac have never felt the pressure of the free market forces. Hence their irresponsible behavior. The same applies to some US and EU farmers, oil cartels, public education unions, healthcare monopolists, etc.

    There is a silver lining in the cloudy analysis of Dr. Stiglitz. It is the lesson that we pay too much for tolerating the alliance of special economic interest with political elites. The interventionist fundamentalism is masking itself as pleas for protecting the national interests, the environment, or the least among us. It touts about the immediate private returns of government programs, disregarding their repercussions throughout the economy, and paying no attention to the long-term social costs. Interventionism has been tested many times, in various environments, under different technological and cultural circumstances. Unlike free market ideas, it has failed as a theory in the face of historical experience of repeated government failures.

    Dr. A.Tokarev, The King’s College

Comments are closed.