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Thursday, July 8, 2010

The Roaring Nineties: A New History of the World’s Most Prosperous Decade

Does Stiglitz Deserve Wide Acclaim?

In an earlier book, Globalization and Its Discontents, Joseph E. Stiglitz argued that globalization was the tool of moneyed interests and was promoted by free-market ideologues. He conjured up the International Monetary Fund (IMF) as a straw man for these interests on whose behalf it caused great suffering among the people of Indonesia, Thailand, and Latin America.

Portraying the IMF as a bastion of laissez-faire principles is usually the rant of people who have no understanding of markets. For my money, that is an apt depiction of Professor Stiglitz. A Clinton White House insider who was a member and then chairman of the President’s Council of Economic Advisers, he later became chief economist at the World Bank. After he resigned that post, he shared the Nobel Prize in economics with a pair of scholars. Their contributions related to their observations that the real world was different from the perfectly competitive model that specifies economic agents acting on perfect information. Their contention was that when information is imperfect, or “asymmetric”—that is, some people know more than others—markets may not function, especially if buyers don’t trust sellers.

While the efforts that led to the Nobel Prize may have been technically impressive, most problems in markets are caused by extensive intervention, often inspired by bright chaps like Stiglitz who lack sufficient humility to understand the damage they cause.

In this new book, which purports to be a history of the economy of the 1990s, the author broadens his identification of global villains and goes beyond the IMF to include Wall Street interests along with big business generally. Among their sins, Stiglitz lists the following: demanding deregulation of electricity, providing stock options, messing up on pensions, using bogus accounting, and an irrational mania for mergers. It’s all a thin conventional gruel from someone who is supposed to be a world-class economist. Stiglitz also ventures beyond the 1990s to excoriate President George W. Bush for the recent budget deficits, which were caused, of course, by tax cuts.

Stiglitz’s main conclusion is that the economic debacles of the 1990s arose from “misregulation” and “underregulation” of markets. In that regard, he seems to suffer from a “fatal conceit” (to borrow from Hayek) that blinds him to the same failings in himself that afflict mere mortals. In a way, Stiglitz is like Lord Keynes, a “rational constructivist” who believes he can bring about order from the “chaos” of messy markets. Stiglitz similarly overestimates the ability of government planners to direct markets efficiently, while at the same time overlooking the enormous inefficiencies they cause.

The only praise our author seems to offer is for himself, since all his would-be fellow travelers cannot hold steady. While he heaps scorn on Republicans, he deeply resents betrayal by Democrats who cave in to their own craven instincts or pressures from Wall Street. The narcissistic streak in the book is not appealing.

In one of many instances where he is right for the wrong reason, he points out that deficit reduction did not cause the boom of the 1990s. Although he does not seem to understand this, the 1990s were like almost all booms in history. There was an illusion of rising prosperity promoted by hyperactive monetary policy. However, the author’s description of the 1990s boom as “hyperactivity” caused by false hopes and lies shows his profound lack of understanding of the role of monetary policy in business cycles.

Stiglitz displays exceptional rhetorical skills, as well as an inclination toward character assassination. However, nothing in The Roaring Nineties demonstrates that he deserves the wide acclaim that identifies him as an outstanding economist. One might hope that he would turn to studying how markets work and thus become a better economist. But since that would require him to abandon his true comparative advantage and pleasure from engaging in political battles and mudslinging, that hope is probably forlorn.