Joseph Stiglitz’s Globalisation and its discontents will not be remembered for its prose, which though readable is journalistic in style, and rather hurried. Nor will it be remembered for what it says, because plenty of other people have been saying much the same things for years. It will be remembered, and it should be read, because of who Joe Stiglitz is: a leading economist when economics above all else has driven the globalization agenda, and a one-time insider to the institutions of globalization. It’s one thing for anarchists and amateur intellectuals to lambast the IMF and economic theory: it’s quite another for an insider and an academic giant to blow the whistle.
I have to admire Stiglitz, not only for his personal courage in “coming out” in this book, but also for the sense of humanity which pervades it. There is palpable compassion for Moroccan villagers whose fledgling chicken industry was derailed by the IMF’s insistence on privatization; clear moral outrage at the complicity of IMF bureaucrats in the criminalisation of commerce in Russia. These and many other examples give well-informed ammunition for those who believe that financial deregulation is dangerous, that privatization is bad, or that too rapid trade liberalisation is dangerous. On the latter for example, Stiglitz comments that
‘Trade liberalization is supposed to enhance a country’s income by as economists would say, utilizing comparative advantage. But moving resources from low-productivity uses to zero productivity uses does not enrich a country, and this is what happened all too often under IMF programs. It is easy to destroy jobs, and this is often the immediate impact of trade liberalization, as inefficient industries close down under pressure from international competition”
None of this would be remarkable, except that the person who is saying it is a Nobel Prize winner in economics.
And here lies the rub in Stiglitz’s book. While he criticises the application of simplistic economic theories, he is not aware of the extent to which economic theory itself—simplistic or not—is to blame. His lament throughout is that the Washington Consensus does not reflect the most sophisticated economic theories: if only the IMF understood economics as well as Joseph Stiglitz, then it would never have forced Kenya to open its finance sector to competition, or forced high interest rates on Indonesia, or pushed Russia to introduce free market prices overnight.
But how many bureaucrats can understand economic theory as well as a Nobel Prize winner? Stiglitz says as much in his conclusion, when he observes that
In economics, no prescription is followed precisely, and policies (and advice) must be predicated on the fact that fallible individuals working in complex political processes will implement them. If the IMF failed to recognize this, that itself is a serious indictment.’
Of course! But this is an inherent problem with mainstream economic theory. The simple stuff—the propositions you can find in any undergraduate textbooks, including that written by Stiglitz himself—preach that markets are always and everywhere the best way to do everything. But more sophisticated theories can lead to diametrically opposite conclusions. For example, simple supply and demand theory asserts that the world would be a better place if both monopolies and trade unions were abolished. But what is known as the “theory of the second best” establishes that if you have monopolies, you should also have trade unions—abolishing one without abolishing the other will make things worse, not better.
Stiglitz gives plenty of examples of this dilemma, and the irony is that most of the time the policies that he argues worked best followed the simple rule of “ask an economist what to do, and then do the opposite”. So Malaysia survived the Asian Crisis better than any other victim by increasing the regulation of its finance sector and temporarily ending the convertibility of its currency. China has prospered by slowly introducing market systems, and only slowly unwinding public ownership of land.
What to do? With “high” and “low” economics pointing in contradictory directions, either you have to have the wisdom of Solomon (or Stiglitz) to decide what to do, or you follow the stuff you have the capacity to understand. Stiglitz wants IMF bureaucrats and proponents of corporate globalization to live up to the former standard, but in general they only have the capacity for the latter.
Stiglitz’s narrative thus has something in common with Mary Shelley’s Frankenstein, except that at least Shelley’s Frankenstein realised that he had created a monster. Stiglitz seems to believe that the monsters in his tale—the IMF, the “Washington Consensus” and what he calls “market fundamentalism”—exist simply because of an inadequate education in economics. But he doesn’t consider where that both economics and economic education might be to blame.
Imagine what would happen if an undergraduate degree in engineering produced engineers whose bridges collapsed, whereas those designed by PhD students remained standing. No one would be allowed to work as an engineer without completing a PhD. But equally, we might ask whether there’s something wrong with basic engineering theory if an understanding of it makes you a bad engineer.
This is the question Stiglitz never asks, though occasionally he skirts around it. When criticising the “shock therapy” approach to Russia’s transition to a market economy, he notes that
“Economic theory, which focuses on equilibrium and idealized models, has less to say about dynamics, the order, timing and pacing of reforms than one would like—though IMF economists often tried to convince client countries otherwise.”
Rather than having serious things to say about timing, Stiglitz says that economists belonging to both the “make haste” camp that he rightly criticises, and “do it gradually” school to which Stiglitz himself belonged, were reduced to arguing against each other using crude analogies:
‘The rapid reformers said “You can’t cross a chasm in two leaps”, while the gradualists argued that it took nine months to make a baby, and talked about crossing the river by feeling the stones.’
This might sound bizarre, but it’s quite true. My favourite such homily was delivered by Jeffrey Sachs, who is these days trying to distance himself from complicity with the disasters in Russia and elsewhere. Putting the case for a rapid transition in an academic paper in 1992, Sach gave the analogy that
“if the British were to shift from left-hand-side drive to right-hand-side drive, should they do it gradually … say, by just shifting the trucks over to the other side of the road in the first round?”
Those seeking wisdom from economists should rightly expect better than childish parables from so-called scientists.
This is the real problem, not just with the simplistic economics that Stiglitz criticises the IMF for believing, but also with the so-called advanced theory to which Stiglitz has contributed. The theories assume that markets operate in equilibrium, whereas real markets are always out of equilibrium. Even at the simplest, undergraduate level, economic theories should be based upon the actual conditions in which markets operate—dynamic conditions where economic variables will always be above or below any hypothesised ideal level. If that were the understanding that an undergraduate education in economics conveyed, then the problems that inspired Stiglitz to write Globalization and its discontents might not exist. But for that education to be a possibility, economic theory itself has to change, and not just at the undergraduate level.
Will Stiglitz come to appreciate this himself? It’s hard to say; though his realism was sufficient for him to oppose the simplistic policies that exacerbated the Asian Crisis, the Russian crisis and so on, he still has a degree of naivety that marks him as essentially a believer in the market fundamentalist gospel—he just isn’t a fanatic. When he refers to the “new economy”, he uses capital letters rather than inverted commas—in a book completed in early 2002 when the Nasdaq, the “new economy” index, had already fallen 60 per cent from its peak. Despite being a critic of globalization as practised, he believes that globalization “is here to stay”. Despite giving an anecdote which shows the power of bureaucrats over the governors of the IMF, his remedies for globalization’s ills all focus on governance, rather than the training and selection of staff.
Globalization and its discontents is thus a flawed book, but in the end that is part of its appeal and part of its importance. His book points out that the wholesale rewriting of economic rules that the current corporate approach to globalization entails can only be entrusted to Nobel Laureates and Saints; he establishes that the responsible bodies certainly aren’t staffed by Nobel Laureates; and with the one conspiracy theory he is willing to entertain, that they see themselves as servants of Wall Street, they certainly aren’t staffed by Saints either—and yet he still believes in corporate globalization.
If someone as bright as Stiglitz can see only some of the problems with globalization, then there is little hope that it will ever have the outcomes that Stiglitz in the end still hopes for. Rather than being a means to improve the human condition, in the hands of inadequate and sometimes venal real people, it is likely to be what a prominent physicist turned economist recently warned:
“an enormous, tradition-blind, uncontrolled experiment where no one knows the outcome.”