Joseph Stiglitz's Freefall is an excellent analysis of the global economic crisis by an economist in the Keynesian tradition. Stiglitz is a critic ofJoseph Stiglitz's Freefall is an excellent analysis of the global economic crisis by an economist in the Keynesian tradition. Stiglitz is a critic of what he calls "market fundamentalism--the notion that unfettered markets by themselves can ensure economic prosperity and growth." Economists know of a number of reasons why free markets fail to allocate resources most productively. A market transaction can impose costs or benefits on others who aren't party to the exchange ("externalities"), such as people who have to breathe polluted air. Market participants may act with imperfect information, as when they overvalue the house they are buying or undervalue a class of workers, and those with more information can exploit those with less. Economic agents such as corporate or investment managers may pursue their own interests instead of the interests of those they are supposed to represent. Market failures have a moral dimension, since the pursuit of self-interest is harder to justify if it doesn't actually lead to socially desirable outcomes, in accordance with Adam Smith's "invisible hand." So Stiglitz's economic critique is also a moral indictment: We've been "creating a society in which materialism dominates moral commitment, in which the rapid growth that we have achieved is not sustainable environmentally or socially, in which we do not act together as a community to address our common needs, partly because rugged individualism and market fundamentalism have eroded any sense of community and have led to rampant exploitation of unwary and unprotected individuals and to an increasing social divide."
The recent financial crisis is related to the misallocation of resources in the global economy. Higher productivity reduces manufacturing employment and leaves human resources underutilized. Industries save labor, which is plentiful, but waste natural resources, which are increasingly scarce. Capital isn't directed toward the kind of investments in education and technology that would create enough middle-class jobs. Developing countries underconsume, while developed countries increase consumption despite wage stagnation. The expanding financial sector promotes consumption by encouraging excessive debt, justified by a bubble in housing prices. Wall Street banks buy up shaky mortgages and repackage them as high-quality, low-risk investments. Financial deregulation leaves the government largely helpless to curb excessive risk-taking and speculation.
Most of Stiglitz's book is a critique of the government's response to the financial crisis. In essence, his complaint is that the government was far too generous to the banks and far too stingy with economically distressed homeowners, workers and consumers. With the benefit of federal bailouts, the banks resumed paying dividends to their shareholders and bonuses to their executives, but didn't do much lending to create jobs. Stiglitz calls this approach "ersatz capitalism, the privatizing of gains and the socializing of losses." Stiglitz also discusses how international institutions such as the IMF failed to prevent the crisis and lacked the capacity for a coordinated response to it. Global faith in American-style capitalism has been shaken, but a new approach better balanced between private markets and public initiatives remains to be developed.
I would have preferred Stiglitz to organize the book almost the opposite of the way he has, putting the economic theory first, then using it to analyze the global economy, and then discussing the economic crisis. That would seem to me to be most logical, although maybe not as interesting to readers who want to cut to the chase. His policy points would sometimes be more persuasive if he had laid a stronger foundation for them in economic theory. He sometimes sounds like he's preaching to the choir, assuming that his readers share his economic assumptions. Other than that, I found the book very informative and persuasive....more