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Monday, July 07, 2008

Stiglitz: The End of Neo-Liberalism?

Is there a "silver lining in the cloud now hanging over the global economy"?:

The end of neo-liberalism?, by Joseph E. Stiglitz, Commentary, Project Syndicate: The world has not been kind to neo-liberalism, that grab-bag of ideas based on the fundamentalist notion that markets are self-correcting, allocate resources efficiently, and serve the public interest well. It was this market fundamentalism that underlay Thatcherism, Reaganomics, and the so-called “Washington Consensus” in favor of privatization, liberalization, and independent central banks focusing single-mindedly on inflation.

For a quarter-century, there has been a contest among developing countries, and the losers are clear: countries that pursued neo-liberal policies ... lost the growth sweepstakes...

Though neo-liberals do not want to admit it, their ideology also failed another test. No one can claim that financial markets did a stellar job in allocating resources in the late 1990’s, with 97% of investments in fiber optics taking years to see any light..., [and the more recent] massive misallocation of resources to housing...

Nor did markets prepare us well for soaring oil and food prices. Of course, neither sector is an example of free-market economics, but that is partly the point: free-market rhetoric has been used selectively – embraced when it serves special interests and discarded when it does not. ...

This mixture of free-market rhetoric and government intervention has worked particularly badly for developing countries. They were told to stop intervening in agriculture, thereby exposing their farmers to devastating competition from the United States and Europe. Their farmers... could not compete with US and European Union subsidies. ...

Those who promulgated this mistaken advice do not have to worry about carrying malpractice insurance. The costs will be borne by those in developing countries, especially the poor. This year will see a large rise in poverty, especially if we measure it correctly. ... In many countries, increases in food and energy prices will have a particularly devastating effect on the poor...

Defenders of market fundamentalism want to shift the blame from market failure to government failure. ... But ... US banks mismanaged risk on a colossal scale, with global consequences, while those running these institutions have walked away with billions of dollars in compensation.

Today, there is a mismatch between social and private returns. Unless they are closely aligned, the market system cannot work well.

Neo-liberal market fundamentalism was always a political doctrine serving certain interests. It was never supported by economic theory. Nor, it should now be clear, is it supported by historical experience. Learning this lesson may be the silver lining in the cloud now hanging over the global economy.

    Posted by on Monday, July 7, 2008 at 12:15 PM in Economics | Permalink  TrackBack (0)  Comments (53)


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