Are you serious Mr. Stiglitz?

Joe Stiglitz is a very smart man, perhaps the most prolific economic theorist of his generation.  His book Whither Socialism? contains a list of over 160 articles which he had published in the leading journals of our profession.  For his work on asymmetric information, Stiglitz was justly awarded the Nobel Prize in Economics.

However, Stiglitz is also scandalously sloppy as a public intellectual. Robert Skidelsky recently summed up Stiglitz's problem as follows: "he lacks the eloquence, urgency, and passion of the preacher, while he has too often abandoned the rigor of the scientist."

Stiglitz, in fact, seems to write words down in public forums just because he has thoughts pop into his head and without really thinking through what it is he is saying rigorously.  He thought it, therefore it must be right.  It is an example of the excesses of the college professor pontificating in class --- remember the scenes with Sam Kinison in Back to School. Now Stiglitz has written an op-ed that claims that Neo-Liberalism has reached its end.  In this op-ed he actually claims that neo-liberalism was never supported by economic theory nor economic history.  Instead, neo-liberalism was a political doctrine supported by interest groups.  So much for the Nobel winning ideas of Hayek, Friedman, Stigler, Buchanan, Coase, Becker, Lucas and V. Smith.  So much for the empirical evidence on the governmental causes of the Great Depression, the historical record on economic performance and political tryanny under communism, the failed efforts at development planning in Africa and Latin America, etc.

One must remember that Stiglitz actually wrote once that while "Chicago economics was well-funded, it was not well-founded."  See just whatever thought pops into his head goes immediately to paper.

Not only does he dismiss in this latest op-ed an entire stream of intellectual history in economics from Adam Smith through J. B. Say and Bastiat to Mises and Hayek, and the other thinkers I named, but he is trying to dismiss without any data analysis the positive benefits of market reforms for much of the world over the past 30 years.  Again, lets remember this is just an op-ed -- though of course one written by a thinker that is internationally recognized and respected as an economist. Thankfully, Andrei Shleifer's "The Age of Milton Friedman" will be published in the Journal of Economic Literature, and it contains data and argument that demonstrates the empirical record is contrary to what Stiglitz suggests so professional opinion has yet to be completely swayed over to Stiglitz's opinion on theory and evidence.

Comments

[PKS]

Who would you argue is the better price theorist: Stiglitz or Kirzner (and why)?

[Peter Boettke]

Kirzner --- see my review of Stiglitz's Whither Socialism in the JEL. The reason, Stiglitz over-estimates the role of equilibrium prices in the defense of the market order, and under-estimates the role of disequilibrium prices in spuring entrepreneurial discovery.

Stiglitz is brilliant, but myopic (he found a hammer and the rest of the world is a nail).

To put this more technically --- I would suggest that Fisher's Disequilibrium Foundations of Equilibrium Economics explains why Kirzner is more important ultimately to economic science than Stiglitz, and Shleifer's Inefficient Markets work on behavioral finance demonstrates that while markets may not be first-best Pareto Efficient, they are nevertheless EFFECTIVE --- it is the idea of effective markets (or what could be called adaptive effiency) and the complex coordination of economic affairs these markets can engender that underlies the defense of the market.

Pete

[Steve Horwitz]

As a follow up, Esteban Thomsen's very under-appreciated *Prices and Knowledge* remains a very good treatment of Stiglitz's work from an Austrian perspective.

[PKS]

The Thomsen book has no discussion of efficiency wage theory nor credit rationing. They are arguably Stiglitz's big contributions.

Am I missing something?

[Peter Boettke]

Efficiency wage theory and credit rationing are but applications of his fundamental theory of asymmetric information and imperfect market structure and it is the fundamental theory of information and the meaning of competition which Thomsen is discussing.

So yes I would say you are missing the legs being cut out from underneath the applications. But this is not a good forum for discussing this. I have some discussion of these issues in my What Went Wrong With Economics paper from many years ago.

Pete

[PKS]

So you would argue that Thomsen has demolished Stiglitz on credit rationing et al even though he does not mention those applications?

[Steve Horwitz]

I should have been more specific: Thomsen's book addresses the whole issue of equilibrium and disequilibrium prices and the implicit welfare standard that Stiglitz adopts. As Pete says, the other theories are extensions/applications of that argument. Thomsen's book in and of itself is only worthwhile for its discussion of the eq/diseq issues.

And for the record, neither Pete nor I used the word "demolished" or anything like it. Thomsen's book is a "very good treatment" was my phrase and I'll stand by it.

[PKS]

"So yes I would say you are missing the legs being cut out from underneath the applications"

Sounds like PB thinks them demolished to me.

But apologies if I have misread.

[matthew mueller]

Reading through this post I couldn't help but think the same thing about Dr. Boettke: he is a very smart man, but his uncompromising faith in free markets prevents him from appreciating the incisive and technically sophisticated arguments that are made by opponents of laissez-faire. I would not call Dr. Boettke sloppy or myopic, however.

Now, I can only briefly comment on the economists Boettke mentioned. Friedman's work on monetary theory has been challenged by many professional economists, in particular Post Keynesian economists. His thesis that a constrained money supply prolonged and exacerabted the Great Depression gets the causal chain of production and money supply backwards. Money creation chases production, production does not follow increases in the money supply. And for Hayek's work on business cycles and monetary theory (work for which he was awarded the Nobel Price), there are many problems with it. The best article that deals with these problems is probably Shackle's "Hayek as Economist" reprinted in his book "Business, Time and Thought." Very briefly, the most important decision concerning investment is not the length of the production process, but the projected length of the durability of those intermediate goods. For example, while it may take a year or two to build a house, it will remain in use for a hundred years. The latter time-lapse is the most important consideration. Also, the idea of a perfectly "linear" sequence of production stages confuses the way in which one aspect of industry is responsible for the maintenance and performance of other industries. Also, the theories of Buchanan and Lucas only work if we presume that market agents are perfectly rational. And for Coase, the economists that have pursued his original query implicitly assume that all forms of organization are necessarily efficient because this is what we observe in the real world.

My point in all this is that the verdict is still out on not only the tenability of these contributions to economic theory, but their conclusiveness and applicability to the real world as well. Once you adopt the neo-liberal framework, then of course government seems to be the source of all our problems. Reading Coase, Friedman, Hayek and Douglass North will only confirm this because they take the efficiency of market operations as given. Their empirical investigations start from this premiss.

[Steve Horwitz]

Let's see Matt:

Pete said: "For his work on asymmetric information, Stiglitz was justly awarded the Nobel Prize in Economics."

and he said: "Stiglitz is brilliant, but myopic"

Yeah, he can't appreciate the arguments of his opponents. Nope not at all.

What do you want him to do Matt? Agree with people he actually disagrees with? Isn't it possible that Pete really DOES understand and appreciate Stiglitz's arguments, but just finds them WRONG? Is it only possible to appreciate an argument if you agree with it? What does one have to do in your eyes to be seen as "appreciating" an argument but still disagreeing with it? And why doesn't what Pete has done here qualify?

[PKS]

"Is it only possible to appreciate an argument if you agree with it? What does one have to do in your eyes to be seen as "appreciating" an argument but still disagreeing with it?"

Maybe explain clearly where the argument is wrong (other than just sloganeering about plan coordination, etc). It would surely make for a publication also. Look at Lorne Carmichael's bonding critique. Short and hit well.

[Steve Horwitz]

Pete said: "I have some discussion of these issues in my What Went Wrong With Economics paper from many years ago."

So, apparently, PKS, he has done so.

[matthew mueller]

Dr. Horwitz,

I wasn't attacking Boettke in my post. I was only pointing out that dismissing the work of Stiglitz by relying on the work of Nobel Price winning economists is not a good way to make a case. Let me stress that I have the highest respect for Austrian economics and you and Dr. Boettke. I am posting my thoughts on this blog because I enjoy hearing how you two will respond to me comments. It is an education for me. I am not out to attack or humiliate you guys.

With that said, I think there could be more dialogue between the Austrians and the proponents of information asymmetry. I admit to having not read Thomsen's book yet, but it looks very good. I have, however, read Boettke's article "What Went Wrong with Economics?" His discussion of Grossman and Stiglitz is very brief, appearing on pages 29-30 of a 55 page article. His point is that Stiglitz's interpretation of Hayek is incorrect because Hayek conceived of disequilibrium prices as being soures for the discovery and elimination of error. Boettke's treatment of Stiglitz and Grossman's own theory is not discussed.

About the role of relative prices as signals for entrepreneurial discovery, I would urge Austrians to consult Lachmann's 1956 book on capital theory. In the second chapter, he makes it very clear that disequilibrium prices cannot convey the sort of information that is required for market adjustment and correction. Read Lachmann's chapter "On Expectations" in his Capital and Its Structure book. Indeed, this point is crucial for Lachmann's analysis of the structure of production. Incorrect prices preclude us from summing up the market values of capital and arriving at an accurate measure of the wealth of an economy. Now I have talked with Peter Lewin about this point, and he is correct in pointing out that elsewhere Lachmann does endorse the Kirzerian theory of entrepreneurship and the positive role disequilibrium prices play in the correction of error. But this does not resolve the conflict that exists between Austrian capital theory and Austrian entrepeneurship.

[Steve Horwitz]

I'm looking at chapter two and I don't see the argument you do Matt. Yes, LML says disequilibrium's pervasiveness means that prices cannot *perfectly* convey information and assure equilibrium. But he also says:

"Even [in a world of continuous change] price changes do transmit information, though now incomplete information"

He then goes on to discuss the way that markets weed in and out better expectations about the future. He says:

"successful expectations, which stand the test, are on the whole, more likely to reflect 'real forces' than unsuccessful expectations. And those whose expectations are never successful are likely to be eliminated by the market process. Moreover, as we shall see in Chapter IV, the market also tends to evolve institutions which mitigate interpersonal and intertemporal inconsistency."

It's also worth noting that in the same chapter, LML engages in an extended critique of Shackle.

Bottom line Matt, I don't think you can use that chapter to argue that "he makes it very clear that disequilibrium prices cannot convey the sort of information that is required for market adjustment and correction."

He makes it clear that disequilibrium prices cannot produce EQUILIBRIUM because they do not convey ALL of the information, but he believes they are a key part of the process of "market adjustment and correction," short of assuring equilibrium. This is especially the case when you combine his analysis of disequilibrium prices with his analysis of institutions.

I see nowhere that LML denies that disequilibrium prices are not signals for entrepreneurial discovery, although nothing guarantees that any given act of entrepreneurship will be "right". I only see an argument that says we cannot expect them to produce general equilibrium. They do indeed communicate information that informs the expectations of actors.

The point is that disequilibrium prices do this imperfectly but better than any alternative.

[Renato Drumond]

It's ironic that some of Stiglitz comments on this article could be classified as 'neo-liberal'.

"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."

He discovered that politicians who use free-market rhetoric aren't ardent free-market supporters. What a surprise!

"For all Reagan’s free-trade rhetoric, he freely imposed trade restrictions, including the notorious “voluntary” export restraints on automobiles."

And how the rhetorical use of free-market ideas prove that free-market recommendations are bad? Stiglitz should honestly respond if he prefers the actual or the rethorical policies of Reagan.

"The only time that the Bush administration turned green was when it came to ethanol subsidies, whose environmental benefits are dubious."

Since when ethanol subsidies are 'neo-liberal' policy?

[Peter Boettke]

Matt and PKS ---

What is unclear about the statement that Stiglitz overestimates the role that equilibrium prices play in the defense of the market, and underestimates the role of disequilibrum prices in producing market coordination? Apparently Matt is caught in the same trap as Stiglitz as Steve Horwitz pointed out concerning Matt's misreading of Lachmann.

It is also why in response to PKS I recommended Franklin Fisher's Disequilibrium Foundations of Equilibrium Economics, and also Shleifer's Inefficient Markets. No sloaganeering going on, but arguments related to foundational price theory and the market system. On my 1997 piece, I often forget what was in the final version --- I have a more extended paper from that period which was folded into that one and then edited away discussing knowledge conveyance, knowledge discovery, and knowledge use. Like Stiglitz, I tried to develop the argument from Type 1 and Type 2 errors and discuss the bias in systems, but following Kirzner's discussion in Market Theory and the Price System, I point out that the types of errors in a world of scarcity actually imply one another. Thus, the critical question is one of error detection, adjustment, and error eradication through disciplining devices (what Steve Horwitz alludes to in the Lachmann's discussion of weeding in and weeding out ---- see the paper by Leeson, Coyne and myself in the Review of Political Economy on "Does the market self-correct?").

Matt -- I would suggest that beside post Keynesian sort of criticisms you might find more "serious" economic criticisms in the work on irreversible investment by Dixit and Bernanke --- I also think this work has several points of commonality with Austrian work on capital theory. Whereas standard theory is caught in a conundrum by these puzzles, Austrian theory I would suggest offers arguments as a way out.

Finally, Matt I am not sure you have captured the situation correctly if you believe Coase, Friedman, Hayek and North PRESUME market efficiency rather than provide arguments for why market forces tend to work. In fact, Hayek's entire project is against arguments by assumption (as the market socialist did).

[matthew mueller]

Dr. Horwitz,

Yes, those passages are all in the chapter, but you are only entirely there yet. The reading you are giving Lachmann is what he would call a "quasi-stationary state" which he described in the following way: "In this state knowledge is guided by prices functioning as signposts to action." This state is flawed because such a model posits a world in which "changes are few and far between, and each change has had its full repercussions before the next change takes place." It is on this model that Lachmann takes his cue and initiates a grand departure from the "quasi-stationary state".

Again, describing the "quasi-stationary state", Lachmann writes "Every significant change in needs or resources expresses itself in a price change, and every price change is a signal to consumers and producers to modify their conduct. Thus people gain knowledge about each other by closely following market prices." Kirzner couldn't have put it better! But this is not Lachmann's view. Here is Lachmann's own position: "But in the world in which we are living change does not follow such a convenient pattern. Here knowledge derived from price messages becomes problematical." He goes on to say that information that is communicated through prices often get "jammed" or "delayed" and it becomes increasingly difficult to find out the order in which they were sent. And perhaps most importantly, "today's knowledge may be out of date tomorrow, hence no longer a safe guide to action." Also speculation may give rise to anticipations of tomorrow's prices without first fully adjusting to today's prices.

Lachmann then develops his theory of expectation formation on incomplete (and misleading!) information. Now I don't see how you can impose on Lachmann's theory the view that disequilibrium prices are signals for entrepreneurial discovery. But I am not denying that there are "equilibrating" passages of market adjustment in Lachmann's book. But you have to understand Lachmann's project, and how he classifies different approaches. The interpretation you have given Lachmann is not his own; it is instead the "quasi-stationary state [which] is the background of most neo-classical economics" (page 21).

[Steve Horwitz]

Matt,

Two quick things:

1. Disequilibrium prices provide information. Imperfect and incomplete (to quote Neil Peart), but information nonetheless. Such imperfectly informative prices are part of what entrepreneurs rely on to do what they do. They must interpret those prices and sometimes they're right, and sometimes they're wrong. But without them, there is no chance at getting it right. Thus disequilibrium prices are aids to entrepreneurship. This is Mises's argument as well.

2. I think you have fallen for a false dichotomy where if we can't talk about equilibrium, we can't talk about order in the economy. Rejecting that binary was the research agenda of the BHP "Beyond Equilibrium Economics" paper. It comes in two propositions:

a. Paris gets fed.
b. Equilibrium does not describe the real world.

Our research agenda was to ask the (very Mengerian!) question:

What are the nature of the systematic processes within markets that despite their being constantly in disequilibrium nonetheless produce orderly and pattern-predictable outcomes?

There is a third way. Rejecting equilibrium theorizing does not mean the denial of systematic market processes. And I would suggest that Lachmann agrees with me there.

[Peter Boettke]

Matt,

All of those points about incomplete and imperfect information are Hayekian points about why the state of equilibrium does not follow. These points do not undermine market process theory, they undermine general competitive equilibrium theory. However, again see Fisher's Disequilibrium Foundations for why even ge theory can be salvaged IF and ONLY IF the disequilibrium adjustment theory articulated works (not presumed, but works).

We can talk Lachmann all you want when we get to FEE --- at one point I was completely enchanted by him and Shackle. It might sound strange to you, but I was shaken of this by Kirzner's The Meaning of Market Process. Don't get me wrong I am still enchanted by LL, it is just that IK provides an answer.

Pete

[Peter Boettke]

I must confess some confusion as to the way this conversation has gone as a reaction to my post. First in my post I relied on Keynes's brilliant biographer Robert Skidelsky's assessment that Stiglitz had lost his way as a scholar and has yet to find his voice as an economic popularizer. My terms myopic was introduced to explain Skidelsky's assessment of intellectual sloopiness. Second, I pointed out that Stiglitz makes empirical assertions, but with no real data analysis in his op-ed. This is tied to his claim that neither economic theory nor economic history provide an argument for liberalism. He is just wrong on the theory and the facts. We should discuss that. Third, I contrasted an op-ed which impacts public opinion on these issues, with a Journal of Economic Literature paper which impacts professional opinion. My claim was that thankfully Stiglitz's attitudes have not YET impacted professional opinion, and in fact that the evidence provided by papers like Shleifer's counters almost every single empirical claim that Stiglitz makes on the relationship between liberalism and growth, development, and even equity.

Why the conversation hasn't really gone in that direction remains a mystery to me.

[David]

As far as Austrians are concerned, Stiglitz is not well-founded. To call corporate welfare, enormous defense expenditures and budget deficits free-market policies defies all reason. And why do "liberals" and socialists always insist on calling classical liberals "neoliberals", Hayek "von Hayek," and multinationals "transnationals"? Unfortunately, other pro-market economists are (somewhat) guilty as charged: Buchanan, Becker, and V. Smith have all recently endorsed McCain (and have endorsed W Bush in the past). I really do appreciate that Austrians such as Pete, Steve etc. [and D North] have not made this Chicagoan mistake, and so there is no guilt by association and Stiglitz is just totally wrong.

Matt,

I think Lachmann's point is that Kirznerian/Hayekian market coordination works as far as knowledge coordination is concerned, but not for coordination of expectations (see his 1976 paper). But this argument is actually more pro-market than it seems: rents (e.g. labor markets, rental housing, restaurants) as well as markets for perishable goods do exhibit coordinating tendencies. Markets that deal with the world in 1000 years do not. Institutions may however stabilize expectations in the medium term. Theoretical scorecard:

Short term: Markets 1 Central planning 0
Medium term: Markets .5? Central planning 0
Long term: Markets 0 Centreal planning 0

So even with Lachmann's qualifications, markets are superior in several important instances, even before we look at the empirical evidence!

[DPrychitko]

Pete mentioned Franklin Fisher's book. This is probably the most important neoclassical book written to the contemporary Austrian project.

Steve said "successful expectations, which stand the test, are on the whole, more likely to reflect 'real forces' than unsuccessful expectations."

The problem with this language, Steve, and probably the reason you must place ' ' around real forces, is that you use real forces too vaguely. What are the real forces? The scarcity of inputs? Realized profits and losses? Emerging supply and demand conditions, and their potential to coordinate plans?

If so, why call these real?

(Side point of mine, in three paragraphs: *All* are phenomena of the mind -- including scarcity. Not merely scarcity as a concept of the economist's mind, but scarcity from the chooser's perspective...

... Now we all face scarcity in general. You might wish (or might not wish) to refer somehow to that notion of scarcity as something 'real.' BUT, having said that, what I consider scarce (old time music, for example) you probably don't consider scarce, and so on, and this is important because the actual entrepreneurs out there are trying to profit from serving the demands of *these* particular scarce goods. While demand for all goods emerges from scarcity -- which you might say is somehow a 'real force,' but now you're into a collective or aggregate concept here! -- I can't see how you can call any particular individual or group demand for a *particular* good a 'real' force....

... In short, I am not convinced that any particular supply or demand is 'real.' At least, I'm still not sure how your term is defined or how it applies. Placing quote markets around it allows you to evade THAT issue -- an argumentative strategy, but you've also pushed the Sensory Order analysis so where does it fit with your claims *here*?) This end my three-paragraph side issue, if it is a side issue at all.

---> Most important, you say in the above quote that "successful" entrepeneurial expectations are "more likely" to "reflect" these so-called "real forces" of yours. But is this just a tautology? If the expectations are "more likely," can you provide examples where successful expectations do NOT reflect real forces? (Plus, can unsuccessful expectations actually once in a while "reflect" real forces?)

Pete said "We can talk Lachmann all you want when we get to FEE --- at one point I was completely enchanted by him and Shackle. It might sound strange to you, but I was shaken of this by Kirzner's The Meaning of Market Process. Don't get me wrong I am still enchanted by LL, it is just that IK provides an answer."

"An" answer is a good choice of words. This way, Pete, you can always respond with an "I said an answer, not THE answer." Another argumentative strategy, I suppose.

BUT, I recall that Kirzner also says in the book -- which indeed is his best statement of his theory of entrepreneurship -- that entrepreneurs can be WRONG even though their market is fully coordinated! I think he uses the example of the horse-drawn carriage just prior to the introduction of the automobile. Kirzner argues that we can assume the carriage market is fully coordinated but because people would rather have a car (before they learn it is exists!?) the entrepreneurs, even though they are serving and fully coordinating the present demands of the consumers, HAVE IT WRONG.

So Steve, have I now provided you with an example of "succesful expectations" failing to reflect real forces? Or is it succesful coordination not reflecting real forces? I don't know. I can see where Kirzner -- as an equilibrium/disequilibrium theorist -- might try to say that although we presently have full coordination in the carriage industry we really do not have (a sustainable?) equilibrium because it is all about to change, but Boettke, Horwitz and Prychitko fought against that kind of disequilibrium approach. So how does THAT square with your continued defense of our earlier paper? And Pete, where are you on all of this?

Lastly, Steve said "Rejecting equilibrium theorizing does not mean the denial of systematic market processes. And I would suggest that Lachmann agrees with me there."

Yes, Lachmann would.

You haven't mentioned who wouldn't agree with you there: Kirzner, Rothbard, Garrison and most other Austrians!

[Steven Horwitz]

Dave,

The quote you spent so much time deconstructing is actually Lachmann's, not mine. You might want to ask him why he put "real forces" in quotes. ;)

I'll try to address the underlying questions another time, as I'm about to board a plane shortly.

[DPrychitko]

Geeze. Again (I've done this before somewhere on this blog) as Roseanne Roseannadanna so often said: "Nevermind."

Sorry Steve. I thought it was part influenced by the "really real" stuff from Boettke and Beaulier. But they can't have a backward influence on the once-living Lachmann, and a once-living Lachmann shouldn't be confused with a now-living Horwitz.

Enough from me. I quit. Too much of a waste of my time making mistakes like this.

[PKS]

"Pete said: "I have some discussion of these issues in my What Went Wrong With Economics paper from many years ago."

So, apparently, PKS, he has done so."

Sorry, but I find no argument in that piece that Stiglitz's efficiency wage model and credit rationing model are wrong.

Why is Stiglitz wrong to argue that the labor market and credit market will not clear?

Does Stiglitz not undermine the Austrian claim that markets 'work'? (Sure, 'work' is fuzzy, etc, etc).

"No sloaganeering going on, but arguments related to foundational price theory and the market system"

Sure - but those books are not by Austrian price theorists.

Also, could someone please explain to me what is going on in that Kirzner essay on induced and underlying variables. On one reading I thought he was pretty much ceding the whole game to Lachmann (but wanting to play a word-game where coordination still takes place in some 'sense'). On another reading, I found him more persuasive. On yet another reading I was just confused.

Incidentally, I highly recommend Dr Prychitko's essays demolishing Austrian welfare theory (the truly stinky work of Rothbard and Cordato). Why are those brilliant essays so little discussed by Austrians and so little known?