The political consensus which has guided policymaking for the past four decades has never felt more under threat than in 2024.
Its not hard to see why. Economic growth since the financial crisis has been poor. What growth there has been has often served only to further enrich the already rich. Millions of people across the developed world have been left behind by the promises of globalisation and are now demanding change.
In a new book, Joseph Stiglitz, former chief economist at the World Bank and a Nobel-Prize winning economist, argues that a faulty concept of freedom is partly to blame for these failures.
“You see the incoherent use of the word freedom all over the place,” he told City A.M over a half-eaten fry-up in Whitehall.
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Freedom
What’s the problem? In essence, the common view of freedom is too individualistic. Stiglitz argues that a simple focus on individual freedom does not take into account the consequences of one’s actions, what economists call externalities.
These externalities can end up placing huge limitations on the freedom of others. He cites a number of examples where the pursuit of individual freedom has led to huge negative externalities for society as a whole, including gun ownership in the US, financial deregulation, and pollution.
Quoting political philosopher Isaiah Berlin, Stiglitz writes: “Freedom for the wolves means death for the lambs”.
Indeed, Stiglitz’s motivation to defend the concept of freedom emerged out of the pandemic and debates around mask-wearing.
“In the pandemic we had the right wing saying ‘we have the right not to wear masks’ and rest of us saying, ‘we have the right to live,” he said.
“The right framed it as a freedom. You had to say, well, its your freedom versus other freedoms”.
Neoliberalism
Where does this simplistic strand of thinking about freedom come from? Stiglitz finds fault with the dominant strand of economics for the last 40 years, which often gets call neoliberalism.
In particular, Stiglitz targets the work of two men, Friedrich Hayek and Milton Friedman, both of whom were hugely influential on Reagan and Thatcher’s reforms in the 1980s.
Stiglitz singles out two ideas. The first is that individual freedoms rely on economic freedom. In the Road to Serfdom, Hayek argued that any step in planning the economy would inexorably lead to authoritarianism.
The second argument, made frequently by Friedman, is that free markets are efficient. Unleashing market forces therefore not only secures individual freedoms but also enriches society.
Both these arguments, Stiglitz argues, are wrong.
Start with market efficiency. Much of Stiglitz’s earlier work focused on the impact of asymmetric information in markets and its potential to disrupt market efficiency.
“No market economy even approximates a competitive ideal of perfect competition, perfect information, and perfect risk and capital markets,” he writes. “Even small deviations from the perfections required by the competitive ideal have big consequences.”
So if market efficiency depends on perfect information, then markets can never be efficient.
It is the job of government – and regulators – to intervene to make more markets more effective. But Stiglitz argues this was never popular with the business community because laissez-faire regulation made them lots of money.
“People whose interest it is to perpetuate the status quo hold disproportionate sway in the political system,” Stiglitz writes. In person he’s more blunt. “Deregulation was wonderful for financial markets. Until things crashed, they made a bundle of money and are still making a bundle of money,” he said.
Turning to the relationship between political and economic freedom, Stiglitz argues that the failure of free markets to create wealth across a wide portion of the population now threatens political liberty.
To put it another way, economic freedoms actually threaten political freedoms.
“It is neoliberalism – the belief in unregulated, unfettered markests – that has led to massive inequalities and provided fertile ground for populists,” he writes.
Human impact
But perhaps most worryingly, Stiglitz argues that the failures of neoliberalism run deeper on a human level.
In neoclassical models, people are perfectly selfish. Stiglitz notes that people are not anywhere near as selfish as the models imply – but there is one exception: economists.
“Economists are indeed more like the individuals they assume in their theories, in particular they are more selfish,” he writes.
The problem is that when selfish economists design incentive structures to discourage certain behaviours, they can crowd out other, more effective mechanisms for curbing harmful behaviours.
For example, an Israeli day-care centre introduced fines for parents who picked their kids up late. Once the fine was introduced, late pick-ups increased because a social obligation to arrive early was converted into an economic relationship.
Neoliberalism has created “selfish, materialistic and dishonest citizens, and contributed to a growing lack of trust,” he argues.
Progressive capitalism
In place of the negative concept of freedom, based purely around the absence of constraints, Stiglitz would prefer politicians and economists to focus on ‘opportunity sets’.
For an economist, opportunity sets are “the only thing that matter,” he writes. “One’s opportunity set determines, indeed defines, one’s freedom to act. Any reduction in the scope of actions one can undertake is a loss of freedom”.
Public policy should try and expand opportunity sets for the greatest number of people, he argues, which can often involve imposing constraints on certain sections of the population.
Stiglitz does not go into much detail on what progressive capitalism would look like, but it resembles a 21st Century version of social democracy.
“Progressive capitalism puts the well-being of all citizens at its centre and goes beyond material goods to incorporate a sense of security and freedom,” he writes.
Stiglitz, who was an economic advisor to Jeremy Corbyn, has been a long-time critic of neoliberalism, but his criticisms are falling on more fertile ground in the early 2020s than the early 2000s.
Indeed, one can recognise his criticism of globalisation and his emphasis on security in Rachel Reeves’ Mais Lectures as much as in President Biden’s transformative presidency.
Underlying it all, though, is a basic insight. “The economy is supposed to serve society, not the other way round.”
The Road to Freedom: Economics and the Good Society, by Joseph Stiglitz, is out now, £25, Allen Lane.