Arthur, Perhaps economists should restrict themselves to a very few self evident assumptions. Perhaps too, in their basic thinking - on which all else depends - they should be very careful to be precise in their terminology.
They should check their hypotheses with tests and observations. And they should remember that markets are no more perfect than other human activities. They exist as a way for us to increase our well being. Rather like the introduction of machines, the discovery of new production techniques and the like. When our well being doesn't improve, it can be expected that we join the Luddites in attacking these worthwhile advances, for the science that should be expected to understand these things fails us miserably. Harry __________________________________ Arthur wrote: >Stiglitz' observations on Adam Smith should be a part of every Economics 101 >course. Unfortunatly most economists take the rest of their professional >career to understand the limits to perfect competition--some never realize >that markets are imperfect. > >Gee, maybe economics is like a religion. A series of statements based on >unproven and unprovable assumptions. > >arthur cordell > >-----Original Message----- >From: Ed Weick [mailto:[EMAIL PROTECTED]] >Sent: Monday, July 29, 2002 9:39 AM >To: [EMAIL PROTECTED]; Keith Hudson >Subject: Re: Joe Stiglitz's book > > >There is a tendency to convert intuitive or analytical observations into >truisms and ideologies and then project them into vast supersystems. The >huge institutional and metaphysical superstructure of the organized >Christian church is built on the simple words that Christ may or may not >have said. So too in economics. It's a long time since I encountered Adam >Smith, but his idea, that people behaving in their self interest in a free >market will arrive at socially efficient solutions, as though guided by an >invisible hand, is an appealing one. Unfortunately, the idea became >converted into a truism, and then into a dogma. > >I was in Russia in the mid-nineties when what Stiglitz describes as the >"Washington Consensus" was being applied to that unfortunate country by the >IMF. The Russian government had been urged to rapidly privatize. It >attempted to do so via the "voucher system", which proved disastrous. It >was expected to bring inflation under control, but in fact, to pay its >bills, had to keep feeding inflation by borrowing large sums of money from >bogus banks under the notorious loans for shares scheme, which moved vast >assets into the hands of the "oligarchs". It was expected to clean up the >tax system but could not do so because a large proportion of economic >activity proceeded via the "underground economy", which it lacked the means >to control. Despite the insistence of the IMF, the Russian government could >not meet the requirements of the Washington Consensus because there was no >such thing as a unified and controllable Russia at the time. As a friend of >mine once observed, it was just a bunch of sharks floating around. And >millions of little fish too, being swallowed up by the sharks, being spat >out, and sinking to the bottom. > >I'm not sure of what else might have been done. The liberalization under >Gorbachev seemed to work for awhile but then backfired. As Russian history >has proven time and again, Russia is not a place that you can liberalize >easily or without unexpected consequences. Perhaps more support from the >West to people like Gorbechev and Shevernadze, who, I believe, were >attempting to lower the Iron Curtain gradually without having it come >crashing down, would have been more helpful than the application of "shock >therapy" to the rubble that became Russia following 1989. It's all a long >time ago now, and the solutions of hindsight are never too useful. However, >what the Russian experience suggests, and suggests so strongly that even the >IMF might pay some attention, is that Western truisms and dogmas should not >be applied to situations in which they are not likely to work. Or, the >situation should at least be studied thoroughly before a decision on whether >or not to apply the dogma is made. These are the central lesson of >Stiglitz's book. Let's hope that those in authority learn them. > >Ed > > > I'm enjoying Joe Stiglitz's much-talked-about book, "Globalization and its > > discontents" and find myself very much in sympathy with his main argument > > -- that the IMF has imposed a one-size-fits-all set of conditions on all > > sorts of countries with entirely different problems. > > > > As to his economic views generally, the following two paragraphs (pp73/74) > > summarise his position: > > > > <<<< > > Behind the free market ideology there is a model, often attributed to Adam > > Smith, which argues that market forces -- the profit motive -- drive the > > economy to efficient outcomes *as if by an invisible hand*. One of the > > great achievements of modern economics is to show the sense in which, and > > the conditions under which, Smith's conclusion is correct. It turns out > > that these conditions are highly restrictive. Indeed, more recent advances > > in economic theory -- ironically occurring precisely during the period of > > the most relentless pursuit of the Washington Cenonsensus politics -- have > > shown that whenever information is imperfect and market incomplete, which > > is to say always, *and especially in developing countries*, then the > > invisible hand works most imperfectly. Significantly, there are desirable > > governmental interventions which, in principle, can improve upon the > > efficiency of the market. These restrictions on the conditions under which > > markets result in efficiency are important -- many of the key activities >of > > government can be understood as responses to the resulting market >failures. > > If information were perfect. we know now, there would be little role for > > financial market regulation. If competition were automatically perfect, > > there would be no need for antitrust authorities. > > > > The Washington Consensus policies, however, were based on a simplistic > > model of the market economy, the competititve equilibrium model, in which > > Adam smith's invisible hand works, and works perfectly. Because in this > > model there is no need for government -- that is, free, unfettered, > > "liberal" markets work perfectly -- the Washington Consensus policies are > > sometimes referred to as "neo-liberal", based on "market fundamentalism," >a > > resuscitation of the laissez-faire policies that were popular in some > > circles in the nineteenth century. In the afternmath of the Great > > Depression and the recognition of other failings of the market system, >from > > massive inequality to unlivable cities marred by pollution and decay, >these > > free market policies have been widely rejected in the more advanced > > industrial countries, though within these countries there remains an >active > > debate about the appropriate balance between government and markets. > > >>>> > > > > I find myself agreeing with this statement and, as an apparent > > laissez-faire person, am feeling a little rueful about some of the things >I > > have written on Futurework. However, Joe Stiglitz is writing from the >point > > of view as an American, whereas I write as an English person in a country > > which is without a written constitution, has always had a highly secretive > > and elitist government, and is highly centralised. > > > > Thus our constitution is being invisibly and constantly modified in > > practice (usually by the establishment with few democratic inputs), we do > > not yet have legislation anywhere comparable to the US Freedom of > > Information Act, and our government still attempts to run huge managerial > > systems (health and education in particular -- with numbers of staff far > > larger than any multinational company) by means of directives from London > > -- and by civil servants who have little daily contact with either the > > staff at the coal face or the customers. > > > > (Diversion: as to the 'Big Two' systems in England, the situation is that > > both the National Health Service and the state Education system are now > > close to breaking point. The present Labour government are now making a > > last shot at improving them by injecting vast quantities of money and > > hoping for improvements by the time of the next election in three years.) > > > > So that's where I come from, and many of the comments I've made on FW in > > the past don't necessarily have relevance to other countries. However, I > > feel gratified that one of the themes that I've been concentrating on in > > recent months -- transparency of information -- is something that Stiglitz > > also gives great importance to. It isn't the fact of greedy or criminal or > > monopolistic businessmen that's the problem -- such people are to be found > > in all walks of life -- it's the degree to which politicians (who are > > supposed to be acting on our behalf) become corrupted and secretly >conspire > > to give special privileges to a few. > > > > Keith Hudson ****************************** Harry Pollard Henry George School of LA Box 655 Tujunga CA 91042 [EMAIL PROTECTED] Tel: (818) 352-4141 Fax: (818) 353-2242 *******************************
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