Monday, April 4, 2011

Economic Absurdities of Joseph Stiglitz

Joseph Stiglitz, the 2001 Economics Nobel laureate professor from Columbia university recently addressed the students of University of Michigan at the 2011 Critical Issue Forum. The excerpts of his speech are available here. During the Q&A session with the students and other luncheon participants Stiglitz addressed the critical issues which USA and world is facing today. During his address Stiglitz dished out as many as possible economic absurdities. Regardless of his economic accolades of world's renowned economist, a Nobel prize winner, former world bank chief economist, chief of Clinton's economic advisory team, he demonstrated the shallow depth of his economic knowledge. Below I expose his absurd economics, which is hallmark of most of the mainstream economics, especially the Keynesian brand.

Absurdity no 1: It is well known fact that the US economy is right now bankrupt and is facing a huge budget deficit of US$ 14.2 trillion. When asked by audience about how to reverse this budget deficit Stiglitz gave a stunning answer. He said, "one of the main ways to reverse this deficit is through increase of government spending in worthwhile programs."

Analysis: Anyone who has taken the class of public finance knows that, budget deficit is a result of government spending more than their incoming tax revenues. Now, how in the world one can reverse the deficit, which is result of government spending more than their revenues, by SPENDING MORE, as Stiglitz says!!! How increasing government spending in worthwhile programs is going to decrease the deficit? And who will decide which are the worthwhile programs? Central planners? Or Stiglitz himself? Sure he will be glad to take that powerful role of savior of this world like many of his socialist predecessors.

Economic law tells us that only market process can properly allocate the scarce resources in an economy. The system of 'profit and loss' guides the entrepreneur in allocating his resources in such a way so that he can satisfy the most urgent needs of consumers. Any intervention by the central planning authority will result in mis-allocation of resources and misery for the consumers and entrepreneurs.

Only market process can determine which are the worthwhile projects. For example, if consumers will want to eat more banana compared to apple then they will demand more banana which will increase profit of banana farmers and reduce profit of apple farmers, resulting in some apple farmers reallocating their resources now in producing banana.

Increasing government expenditure to reduce the budget deficit is an absurd idea.

Government deficits can only be eliminated by eliminating government expenditure.

Absurdity no 2: Then Stiglitz, like a true Keynesian, cursed Saving. He said, "It used to be thought that saving was a virtue, but the world needs more investment, smarter investments."

Analysis: This statement of Stiglitz proves beyond doubt that he doesn't understand how an economy works. In his Keynesian world saving is not a virtue. He is only praising investment. Now one has to ask an important logical question that, from where does investment comes from? How is investment possible? And the answer is, from and through Savings!!! Investment is only possible with prior saving. Without saving investment is not possible. And saving is only possible when people work and produce resources which are over and above what they are consuming. So for saving, production is must i.e., if an economy wants to progress then that is only possible through production => saving => investment => capital accumulation => more production => more saving, and so on.

And remember, government don't produce, save and invest anything. Government officials are pure consumers of resources. They rob hard working citizens of their savings through tax and consume and spend those resources on things which can win them votes in next election. Government only transfer resources from the productive private sector of economy to the unproductive government sector.

Absurdity no 3: In the end, Stiglitz offered some (ill) advice for students of econom­ics. He said, "Our society can only function if we get away from the focus on self-interest," Stiglitz said. "I hope that in whatever job they do there's a sense of social responsibility and sustainability. The problem we're in is because too many people focused on just their own benefit and not the society impact."

Analysis: Self interest is not the problem, as Stiglitz wants us to believe. Humans are selfish at the gene level and nobody can change this human nature. What society need to do is to evolve such institutions which can use the beneficial side of this selfish nature. And societies have evolved such institution in the form of free market capitalism, the system which Stiglitz abhors. In the free market, selfish human nature result into benefits for everyone. Adam Smith through his parable of 'invisible hand' demonstrated this fact brilliantly. In the free market, individuals guided by their selfish nature brings about the very social welfare which Stiglitz wants. Suppose person A is very selfish and he wants to amass lot of wealth. In a free market capitalism this is only possible if he serves his fellow citizens first. For example, to be wealthy he can start a business of producing and selling those goods and services which many consumers are demanding. That business can be, let's say, of computers. He will first have to produce computers of highest quality at a lowest possible price. Because consumers like his product they will purchase it from him giving him their money. This way person A can make huge profit. And this profit is his lot of wealth. As is clear, before person A becomes rich he will have to serve his fellow citizens increasing their standard of living by providing their desired computers to them! Like person A, everyone else who want to follow their selfish interest will have to serve others. Capitalism turns the self interest into altruism in the form of societal welfare!

Milton Friedman and Hayek discussed this apodictic truth of market very nicely in their interviews here and here.

Contrary to free market capitalism, in the State official run centrally planned society selfish nature of human being shows its ugly head. The fundamental basis of State's survival is the robbery of its citizens' hard earned resources in the form of coercive taxation. Without taxes (visible and hidden in the form of inflation) State cannot survive. Government officials become rich without serving anyone of us common man simply by looting all of us! In a State run society businessman also become super rich by working in cahoots with the State officials, and not by serving their consumers. They don't need to serve their consumers because they get bailed out by their government buddies whenever they screw up their businesses. They use government system to create monopolies. They kill market competition with the help of government officials. People who work with government also don't need to serve their fellow citizen because their income comes from government loot in the form of taxes.

In Franz Oppenheimer's language, under the State official run centrally planned societies people who are all selfish will use the 'political means' of survival rather than the 'economic means'. They will become parasites for the society and will rob and kill hard working people.

Stiglitz needs to understand both, the two sides of selfish human nature and the system which can harness the beneficial side of this nature. If he is really worried about serving the society at large then he should be advocating the free market capitalism. But he dislikes market and advocates a large government! And this surely is an absurd idea.

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