Can Economics Pave the Path to a Good Society?

Economics, as it is practiced in the English-speaking world, had its beginnings as a social science. It addressed society as a whole, focusing on its economic aspect. The early economists, namely Adam Smith, David Ricardo and Karl Marx, were aware that power was unequally distributed between social groups, determining their respective ability to get what they wanted. 

This power derived from the unequal ownership of productive resources, but also from sociological factors such as custom and tradition. No wonder that the study of the economy was termed political economy. 

In the late 19th century, this view of an economy was supplanted by one that conceptualised it as a set of markets in which atomistic individuals interacted; think of the markets for labour and financial capital. 

By the first half of the 20th century, economics had evolved sufficiently to assert that the market system was efficient, in the sense that its performance could not be improved upon through intervention by the state. 

The market, it was held, allocated resources across activities as efficiently as possible and led to an income distribution in which no one individual can be made better-off without making someone else being made worse-off. The latter outcome was termed, after the originator of the criterion, a ‘Pareto optimum’. 

Finally, as far as reward in the market goes, what we think of as income, individuals get their just desserts, for they are paid according to their contribution to the product. Despite its weak moral foundation and intellectual failure to explain the Depression that beset western capitalism in the 1930s – which had negative consequences for India as it was fully integrated into to the world system – this view of economics has had a long run. 

Repeated demonstration that some of its claims are wrong, an intellectual enterprise in which Joseph Stiglitz, the author of this book, was a leading player, did not dim  its prestige. Actually, it was to receive a significant boost in the late seventies, with the rise to power of the ultra conservative Margaret Thatcher in the UK and Ronald Reagan in the US. Both these politicians, especially Thatcher, actually used the contested claims of this strand of economics to glorify their free-market policies. 

However, it is a historical event that needs to be reckoned with that they had repeated success in the hustings, once again, especially Thatcher, who was returned to power four times in succession. Their politics appeared to have been vindicated when in 1991 the Soviet Union finally imploded, a development with which the entire eastern European Communist block unravelled. This gave rise to a set of economic policies promoting an extreme form of capitalism, referred to as ‘neoliberalism’, which is part of the focus of Stiglitz in his book.

Neoliberalism’s hallmark is the near total ending of the regulation of the private sector and a withdrawal of the state from almost everything in the economy other than the defence of the nation. The author states categorically that neo-liberalism has failed. His argument is based mainly on the experience of the United States. 

First, he makes the broad observation that since Reagan, its economy has not grown any faster than it did in the quarter century after the Second World War, a time of considerable government intervention in the US economy. 

Next he points to the worsening income distribution accompanying the stagnant real incomes of the American working class, the global financial crisis of 2008, which followed the deregulation of finance in the US, and the devastation during COVID-19, when western governments privileged the drug companies over people by refusing the invoke compulsory licensing, which would have enabled greater supply affordability of the cure. 

Neo-liberalism also had an influence on the global economic architecture when western economies were able to influence, in some cases arm twist, global multilateral institutions to ensure a world conducive to capital, of which they had a surfeit. 

Stiglitz cites global rules on intellectual property rights, taxation of multinationals, investment agreements and trade policies, much of which benefited the US economy and the giant corporations within it. This is a cracker of a section, with Stiglitz calling out the injustice of the arrangements and naming both politicians and members of the economics “fraternity” (the author’s term) who brought about the changes and argued for them, respectively.

But the critique of neoliberalism is only one part of Stiglitz’s book. The greater part of it is on freedom and how to further it. He rejects the usefulness of the neoclassical model of efficient market and bases his arguments on what he considers is the shape of actually existing market economies. 

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The core of the author’s argument is best conveyed in his own words: “I be(gan) the book with a straightforward observation: One person’s freedom is another’s unfreedom. Externalities are pervasive, and the management of these externalities – including environmental devastation – that are inevitably the by-products of unfettered markets requires public action(s), including regulations. Indeed, any game needs rules and regulations. I’ve delineated (here) the need for regulations to curb the agglomeration of power and the exploitation of some by others.”

Another key observation is that people can accomplish together what they cannot accomplish on their own. But Stiglitz points out that in many arenas of collective action, the ‘free rider’ problem arises, so that good (efficient) outcomes require some form of coercion that only the government can properly impose. 

Also, it may be desirable to encourage voluntary collective action, through subsidies, for instance. (The non-specialist reader may have to be reminded that externalities are the effects on one individual of the action of another. These can be positive or negative. They are ignored by the market mechanism leading to inefficient outcomes. Stiglitz produces a plethora of examples of externalities, to convey that they are ubiquitous in the kind of world we live in, requiring corrective policy intervention.) 

This is a remarkably clear statement, comprehendible to any undergraduate student of economics, which is quite unusual in a profession that tends to value complexity and jargon over communication. However, an observation about it would be in order. From the first proposition in the passage that I have quoted above does follow a case for regulation, which, of course, would be rejected by neoliberals and the economists whose work has influenced them, namely Friedrich von Hayek and Milton Friedman. 

But is it always the case that one person’s freedom is another’s unfreedom? Surely not. To see this, consider Isaiah Berlin’s concept of ‘positive freedom’, by which he meant an individual’s freedom to pursue one’s own goals or Amartya Sen’s idea of freedom as the ‘capability’ to lead the life an individual has reason to value. It is not obvious that positive freedom enjoyed or capability attained by one person must lead to the ‘unfreedom’ of another.

Stiglitz does provide instances of what he has in mind, such as polluting the river or fouling the commons, yet the proposition referred to above is not universally true. Of course, it goes without saying that the freedom to pursue the kind of life you value is meaningfully circumscribed by the caveat that it does not constrain another’s.

If neoliberalism, which has had a run of close to four decades by now has failed, what should we replace it with? Stiglitz engages with this question at length, providing a definite idea of the ‘good society’ he has in mind.

First, the good society would have no imbalance of political or economic power. In particular, firms would not have the freedom to exploit consumers. At the global level there would be institutions, based on inter-governmental cooperation, that bring justice and fairness to interaction between states and private actors, such in cases of debt repayment.

A key feature of a good society would be that there be much greater public investment than is currently the case in the US, a situation brought about by the adoption of neoliberalism. This investment would be in children and their future, in research and, more broadly, in social and physical infrastructure. The author is quick to clarify that these investments would not just promote growth; they will enhance the opportunities of citizens. The good society for Stiglitz would have greater equality.

However, he cautions that equal outcomes can blunt incentives for performance. Of course, this would be true in the space of production or income, which, surely, is what Stiglitz has in mind. However, if we were to work with Sen’s proposal when we talk of equality being the endowments that enable individuals the functionings they value, and which we should aim to equalise, there need be no blunting of incentives whatsoever.

Altogether, I cannot help thinking that were the author to engage at least a little with the prior work of Berlin and Sen on freedom and social justice, respectively, some of the pitfalls in his argument, which I have pointed out here, would have been avoided. It applies equally to his statement that the philosophical traditions of “the Benthamites and John Rawls can help us think through what set of rules make sense in a good society”. How this can work is perplexing, as the former’s utilitarianism is blind to the distributional concerns which for Stiglitz are of the essence.  

The combination of regulating private enterprise, correcting market failure and providing both public and private goods that promote well-being is eminently sensible, but there is a catch. Stiglitz insists in terming the arrangements “progressive capitalism” which he thinks of as a “rejuvenated social democracy”. Some may argue that the term ‘capitalism” only refers to a mode of production a la Marx. On the other hand, ‘social democracy’ was conceived of as an arrangement far more capacious, also possessing an ethical dimension. It was to be a combination of political freedom and socialism’s concern with equality and human progress. Capitalism is not usually associated with either of these goals to any degree. However, this need not restrain us from endorsing entirely Stiglitz’s description of the contents of the good society.

Before moving on to the final section of my review, I wish to make two points. First, Stiglitz gives too much importance to Milton Friedman’s popular writing on capitalism and freedom as a staging post in America’s shift to neoliberalism. The choice of Friedman is of course appropriate (Paul Samuelson credits Friedman as having single-handedly shifted the American economics profession to the right.)

However, arguably, Friedman’s influence stems from his 1968 paper on the role of monetary policy. Though it relies on ad hoc assumptions, stated and implicit, including that of the absence of involuntary unemployment, an example of what Joan Robinson would speak of as “placing the rabbit in the hat before pulling it out in full view”, it has undoubtedly been influential. Its apotheosis was reached when his proposition of the ineffectiveness of macroeconomic policy to affect the rate of unemployment was embellished by Robert Lucas with the construct of “rational expectations”. The ‘new classical macroeconomics’ that emerged provided the ammunition for the neoliberalism that followed in the political sphere.

A second observation on the book is that it would have helped if the author had clarified the sense in which he is using the expression “efficient” when he refers to the market outcome. While no doubt obvious to the author himself, it need not always be so for the reader, for we can think of four forms of market efficiency, namely – allocative, distributional, technical and informational. As he is referring to theoretical results, a greater precision would have been ideal.

As someone living in India, I am unable to refrain from reflecting on how Stiglitz’s book matters for this country. But before I do so, I speculate on how two strands of opinion here are likely to perceive it. Prime Minister Narendra Modi’s supporters would be peeved by the near complete omission of the country from the discussion. Modi is spoken of as a demagogue, in the same league of authoritarians such as Trump, Putin and Bolsonaro. As a former chief economist of the World Bank, Stiglitz is unlikely to be unfamiliar with the chant that India is today the fastest growing major economy of the world. But he is equally likely to be apprised of India’s lowly ranking in the global per capita incomes league table. Elsewhere, he has spoken perceptively of the agricultural challenge and environmental degradation here.

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A second cohort that is likely to be dismayed by this book would be the old left-wing establishment. The author barely mentions the Soviet Union, suggesting that there is nothing to be learned from its economic history. He brackets “Hitler, Mussolini and Stalin” together, and speaks of Russia and China having imposed hardship on their own peoples. Even as he savages the neoliberals in America, Stiglitz displays no nostalgia for the erstwhile communist regimes. He is an uncompromising champion of democracy.

There are two absences from this book which assume importance in the Indian context. Stiglitz devotes considerable time to the monopoly power of the “for-profit private sector” which can be a source of exploitation of consumers. Indeed, he believes that the tech giants have become far too powerful in the United States. Naturally, he calls for a regulation of this sector by the state.

Now, there is in India a force that is similar in its power, vis-à-vis the public, as the giant corporations of the US. This is the apparatus of governance. This apparatus was set up in the colonial era to extract revenue for the colonial state, initially from the peasantry and subsequently, in a more sophisticated and less transparent way, through budgetary transfers to England by the colonial Government of India. This machinery of government was carried over lock, stock and barrel after 1947. As a result, India remains saddled with an unaccountable bureaucracy that extracts revenue from its poorest citizens by demanding financial gratification for routine services rendered. This, when it is not presiding over waste and pilferage in the public sector that it lords over.

The bureaucratic maze installed to control Indians by a foreign power now serves a small coterie of natives who enrich themselves at the expense of the vast majority. Politicians, who alone can change this state of affairs, do little, as they rely on the bureaucracy to further their agenda. The dead-weight of the bureaucracy in India is an example of Acemoglu-Robinson’s thesis on the colonial origins of comparative development across the globe. It is undoubtedly a factor in the painfully slow progress India has made in the past seventy-five years. The upshot of my characterization should be clear. It would be that while the private sector certainly needs regulation, as argued by Stiglitz, in India, at least, the power of the bureaucracy would have to be curbed in the good society to come.

I turn now to the second aspect missing, or at least not stressed enough, in this book. India remains a space of perpetual threat to the well-being and physical safety of women. In the latest National Family Health Survey (NFHS-5), anaemia among women was found to be  67%, having increased over the preceding decade. Notably, men suffer less from this infirmity that stunts humans. Though female education levels may have grown, this has not translated to a higher labour force participation rate. World Bank data show this rate to be lower in India than in Saudi Arabia, reflexively assumed to be among the most conservative societies in the world.

After the recent incident in which a young woman doctor was first assaulted and then murdered while on night duty in a Kolkata hospital, we can see why this would inevitably be the case. Women face violence at the workplace and must fear stepping out of their homes.

In a heart-rending statement made on television, the mother of the young woman who dies, said, that “women are not safe anywhere.” This is a serious indictment of Indian society, and points to how far it must go to become the good society described in this book.

No amount of welfare schemes that transfer money to women can compensate for the toxicity that they routinely face in India’s public spaces, including their workplace. The road map to the good society in India would be useless if it does not include women’s empowerment. The challenge is that much of this would have to come from the women themselves, for men after all are the guardians of patriarchy.

However, we can see that this is possible after the recent events in Kerala, where a women’s collective in the film industry has brought public attention to the bodily exploitation women are often forced to endure at their workplace and the inequality in financial compensation for similar work.

Though these particularly Indian concerns do not figure in the book, in a riveting passage in his final chapter, Stiglitz outlines what would be needed for India to initiate passage to a better place for itself: “I still believe that if we could move the discussion out of the realms of ideology, identity, and absolutist positions (and) into the realms of healthy debate, a consensus might emerge, not on every matter, but on a much broader range of issues, which would allow us to move easily toward a good society”. Indians who believe they are progressive want to heed this sage advice, for our democracy is severely challenged by identity politics opportunistically fanned by all political parties.       

So, what do I make of this book? It would be difficult to claim originality for it. Both the theoretical arguments pertaining to market failure and accounts of the ideological roots of neoliberals have long been aired in the profession, not least by Stiglitz himself, close to 50 years ago, in his joint work with Sanford Grossman on the informational (in)efficiency of markets, and more recently in his solo study of the unequal gains between countries under globalisation.

Yet, Stiglitz has here delivered a masterclass in the use of economic theory to understand how the economy functions and how to think about building it back better. The achievement is that much more impressive as he has resorted to only the simplest theoretical apparatus in economics to do so, enabling the widest possible dissemination. This is my view of Stiglitz’s most recent book. It may not be particularly new in the ideas it expounds but has placed a great deal of economics in perspective and parsimoniously identified the economic elements of the good society.

Reading it reminded me of John Maynard Keynes’ homage to his teacher Alfred Marshall, “The master-economist must possess a rare combination of gifts …. He must be mathematician, historian, statesman, philosopher in some degree. He must understand symbols and speak in words. He must contemplate the particular, in terms of the general, and touch the abstract and the concrete in the same flight of thought. He must study the present in the light of the past for the purposes of the future. No part of man’s nature or his institutions must be entirely outside his regard. He must be purposeful and disinterested in a simultaneous mood, as aloof and incorruptible as an artist, yet sometimes as near to earth as a politician.”

Very few economists have managed to come even close to achieving this. Stiglitz, on the other hand, goes one step further by bringing sociology to the analysis. There are demonstrations in the book of how employers in early 20th century America were forced to discriminate against black workers through peer pressure even when they were not racist themselves. We are also shown how individual preferences today can be shaped, i.e. ‘made endogenous’ in the economist’s parlance, via a combination of deceptive advertising by corporates and peer pressure on social media. Clearly, it would be naive to ignore sociology when accounting for economic outcomes. Wisely, Stiglitz does not. 

It is to be fervently hoped that this book will be read in India, which desperately needs a social scientist’s touch over the promise of technocratic fixes, in order to address its current malaise. Hopefully, it will raise the quality of the debate on its future. Alas, I am somewhat sceptical, as the economics profession here has got bogged down in the very “dreary desert sand of dead habit” that Tagore had cautioned us against over a century ago.

Here, mathematics is privileged over reasoning and the statistical treatment of transparently disingenuous claims, based on hopelessly tenuous data, celebrated, as long as the method is considered prestigious by the fraternity and the hypothesis is politically correct in its eyes. This has led to a loss of the ability to evaluate ideas independently and, even more tragically, to see the big picture. It would appear to be a formidable task to rescue the practice of economics in India from this impasse. Hopefully, the power, not to mention the elegance, of Stiglitz’s writing will rouse the profession here to separate the science from the ideology when it comes to economic ideas, so that my country can finally be placed on the road to the good society. 

The book is affordable but would have gained from a subject index.

Pulapre Balakrishnan is Honorary Visiting Professor, Centre for Development Studies, Thiruvananthapuram