Stiglitz lights them up

The World Bank economist comes to town to say the bank was wrong

by Kevin Potvin <kpotvin@republic-news.org>

Ever since he broke ranks with the globalized elite, Joseph Stiglitz, Nobel laureate in economics, former chief economist at the World Bank, and chair of former US President Bill Clinton’s Council of Economic Advisors, has been feted by the left. Statements such as the following have made him a famous critic of globalization: “ When a nation is down and out, the IMF takes advantage and squeezes the last pound of blood out of them. They turn up the heat until, finally, the whole cauldron blows up. It has condemned people to death. They don't care if people live or die. The policies undermine democracy." The only surprise in his visit to Vancouver June 27 was that the Playhouse Theatre, the venue for his talk, was not completely jammed with this city’s legions of globalization’s dissenters. As it was, an impressive crowd was on hand.

Summing up the work that won him the Nobel Prize in 2001, and at the same time illustrating why he’s a hot ticket on the lecture circuit, was his succinct dismissal of 200 years of economic scholasticism in one blazingly obvious gem of a line: “One of the reasons why the invisible hand is invisible,” he tossed off, “is because it isn’t there.” The market, Stiglitz made clear, could be counted on to provide an efficient venue for the exchange of goods, but as a generator of social goods or a guarantor of civil rights, it showed no particular aptitude or any great interest at all.

That statement carries far heavier implications than what at first might appear to be the case. The capacity of the unfettered market to produce social goods and civil rights has been an article of unquestioned faith among the entire political class of the West for half a century. That creed culminated in the so-called Washington Consensus formed in 1989 by leading officials of the US Treasury, the International Monetary Fund, and the World Bank.

This set of policy recommendations issued to impoverished countries by the powers that controlled the purse strings for all loans and aid were widely implemented throughout the vast third world. The chief reforms imposed on faltering nations to gain loans and aid from the IMF and World Bank were to privatize state enterprises, open the borders to direct foreign investment, deregulate industrial activities, and liberalize international trade by abandoning protective tariffs.

“The Washington Consensus,” declared the former chief economist at the World Bank, “is wrong.” Financial market liberalization, Stiglitz said, did nothing for growth and only increased instability in countries forced to experiment with this reform. “The realization that they [the IMF] may have made a mistake is a major step forward,” he added, reflecting on very recent admissions of problems made by senior personnel at the institution.

Stiglitz’s conclusion is that “political globalization has been outstripped by economic globalization” and that political institutions of a global nature need to be created to deal with a thoroughly globalized economic reality. He suggests globalization itself needs to be democratized, and to do so, fighting must be engaged on specific issues where they come up. Most important of all, he implored his rapt audience, is “understanding what is going on.”

Stefano Zamagni, who joined Stiglitz on the stage from the University of Bologna where he is a leading Italian economic theorist, agreed with Stiglitz’s main points. “Economists and policy makers,” he said, would be judged by future historians of our era as “largely unwise and irrelevant.” As an indication of where popular sentiment is moving—and who might be next in the crosshairs of activists in the post-Seattle era—the dig at economists got the biggest cheer of the night.

Zamagni retains great faith in the market as the best institution for allocating society’s resources. But unlike neoliberal crusaders, who maintain that free, unfettered access to those markets is the most important element that guarantees their proper functioning, Zamagni maintains that basic trust is the essential ingredient. In his brilliantly clear manner, Zamagni stated that “trust is the basis of contracts, and contracts are the engine of the market economy.” Corruption corrodes trust, and it is inequality that leads to corruption. Therefore, Zamagni concluded, equality is the fundamental basis of a properly functioning market economy. And since equality can only be found in a democratic environment, Zamagni came the long way around to repeating Stiglitz’s main battle cry: globalization must be democratized.

But Zamagni had much more to offer his audience. The fundamental belief undergirding all modern economic thinking is that individuals always act in their own self-interest. This belief, Zamagni pointed out, is the same as declaring that all people are a-social—that they care neither to help nor hurt their neighbours, but are only concerned with themselves. Here is where he showed a clever defeat of that long-standing and odious argument: rather than trying to show instances of individuals attempting to help one another, which can always be dismissed by showing how such acts can come around to serving one’s own interest in the future, Zamagni instead brought to the mind of his audiences instances where individuals attempt to hurt one another. Acts committed in the grip of envy, for example, attempt to destroy another’s property, even when such destruction serves no self-interest and cannot lead to any future payoff.

This, Zamagni suggested, proves that in addition to a-social (totally self-interested) behavior, we also daily observe obvious instances of anti-social behavior as well as what he termed “pro-social” behavior—both of which take an abiding interest, whether negative or positive, in the welfare of one’s neighbour. From this point, Zamagni showed that economic policies that only consider the a-social members of society and their a-social acts will always and forever be ineffective. By contrast, an economic policy that acknowledges the presence of anti-social and pro-social members of society, as well as the a-social, cannot help but be more effective and relevant. It was then a small step for his audience to realize, with him, that with such an acknowledgement at the beginning of policy formulation, there could be rich reward for creating policies that reward pro-social acts and penalize anti-social acts. Current economic thinking, by failing to acknowledge pro- and anti-social acts, but instead acknowledging only a-social acts, ignores the bulk of human economic activity, and for this reason, has been irrelevant for decades if not centuries.

A parting shot from Zamagni: we often talk about the sum total of the effects of this or that set of policies. But that implies that all the elements are added together, and allows one to imagine that the value of the whole equation can be maximized by maximizing any one or another of the elements. Instead, Zamagni asked, we should talk in terms of the “product total” of the effects of policies. That way, we must acknowledge that if any one element in the equation is zero, the total value of the whole equation will be zero, no matter how great all the other elements are. This thinking, he pointed out, ensures policies consider the outcomes for all people in a society, not just some.

I would add this additional observation: in such an equation, any element less than one lowers the overall value, and any element greater than one raises it. Any economic policy that treats any member of society as less than whole lowers the value of the entire society; any economic policy that treats all its members as greater than their individual selves will raise the overall value of that society. This point seems to accord strongly with what we observe in real life. The whole is not greater than the sum of its parts, it is greater than the product of its parts.

The talks by Stiglitz and Zamagni at the Playhouse Theatre the evening of June 27 was full of this sort of inspiration and stimulation, and we have VanCity Credit Union, a cooperative, member-owned institution, to thank for it. Admission was free—a completely pro-social act by the bank.

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