on 21 March 1999
Joseph Stiglitz makes a powerful argument that neither capitalism nor socialism can achieve the economically efficient outcome suggested by the neo-classical model. Neither markets nor central planners can optimally direct resources to their most productive uses. The information required to do so is simply not available.
The neo-classical model suggests that the forces of supply and demand result in equilibrium, market clearing prices - a single price for each commodity. We see all around us evidence that real world processes to not achieve this optimal end. The same items sell for different prices at different stores; it is possible for significant numbers of workers to remain unemployed for long periods of time. Stiglitz explains that this outcome reflects informational imperfections in market generated prices. It is costly for shoppers to compare prices in every store before they make purchases. Employers may pay employees higher than market clearing wages to increase worker productivity, resulting in prolonged unemployment. If market generated prices and wages were as informationally efficient as the neo-classical model suggests, Stiglitz argues that market socialism could be just as efficient as free market capitalism. Markets could be permitted to function to the degree necessary to generate prices, which central planners could use to direct the economy. Stiglitz further argues that the most critical information planners need, to plan large scale investments, are not generated by markets anyway, because the appropriate futures markets (where investors could insure against bad investments) can not exist.
Stiglitz's explanation of how the neo-classical model of constrained optimization cannot describe real world phenomena is compelling, as is his argument that both market socialism and market capitalism face problems of information and incentives. Where Stiglitz is weakest is when he casually asserts, as he often does in this book, that government intervention could resolve some of these problems under either system. He routinely asserts that government intervention could address, for instance, problems of externalities through the application of Pigouvian taxes. He does not, however, discuss how government might determine the proper tax,(in the absence of a market in the externality), or how it might insure its application in the face of special interest political pressure. In his calls for government intervention, government is treated as benevolent, omnipotent and omniscient.
Stiglitz presents a coherent argument of why market socialism failed in the real world, and further, why market capitalism, as we see it practiced around us, does not live up to the promise of the neo-classical model.
on 18 June 2009
The American economist Joseph Stiglitz argues that the neoclassical model (`the competitive paradigm') propped up the idea of market socialism, so the failure of market socialism also refutes the neoclassical model.
In market socialism, governments use prices, just like market economies do, to allocate resources. But as Stiglitz points out, in the real world of imperfect information and incomplete markets, "there is no presumption that markets are efficient." He concludes, "the first fundamental theorem of welfare economics - asserting the efficiency of competitive economies - is fundamentally flawed."
The second fundamental theorem - that market mechanisms allocate resources efficiently - is also flawed. He writes, "Quite to the contrary of the contention of the market paradigm, reliance on the stock market may actually result in a distortion of the allocation of resources. ... The stock market ... does not provide the information required to make rational investment decisions."
In fact, "Information acquisition activities relating to the stock market are basically rent-seeking activities." Early information gets the rent, as when the Rothschilds made millions from being first to hear the result of the Battle of Waterloo.
Stiglitz writes naively, "the takeover movement itself seems somewhat of a puzzle since the firms taking over seem to gain little if anything." It is not a puzzle if you check who gains from these dodgy deals - top executives (primed by bribes, bonuses and share options) and those who take the fees and commissions. As management guru Peter Drucker commented mordantly, "Dealmaking beats working."
Stiglitz shows, "We cannot, in general, be assured that private production is necessarily `better' than public production." "There are some free marketeers who say that the first step to success is to privatize the state enterprises. ... They have no scientific basis for that conclusion." More recent research by Massimo Florio (in The great divestiture, 2006) found that Britain's privatisations did not improve efficiency and had a net social cost. The only gainers were the top managers.
He observes, "perhaps no myth in economics has held such sway as that which I will refer to as the property myth. This myth holds that all that one has to do is correctly assign property rights, and economic efficiency is assured." But as he points out, China's growth shows that well-defined property rights are neither necessary nor sufficient for success.
on 26 January 1999
The author of this book has shown that market socialism would go to the dead end. China and Vietnam are not exceptional cases. Furthermore, by the approach of imperfect information, the arguments of the author against neoclassical and property theories are strongly persuadable to me.However, some political economy approach has not been mentioned in this book. I think this appproach is also useful to analyze the constraints on market socialism.