Two cents on Stiglitz

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Emmanuel has spotted a howler in Joe Stiglitz’s 2006 book, Making Globalization Work:

Anderson and Cavanagh of the Institute of Policy Studies famously noted in 2000 that of the world’s 100 largest economic entities, 51 are now corporations and 49 are countries. Stiglitz recycles this idea in ch. 7 of his book on multinational corporations…

Before you do, I feel obligated as an educator to tell you that this argument comparing national output with corporate revenues is technically incorrect and fallacious. It is irksome that Stiglitz did not consult two books on globalization that came out earlier in 2004 that pointed out the flaws in this countries-companies comparison…

As I have previously discussed, the anti-globalization crowd often pumps up factual errors to taboid-ish proportions to make their points. If they are to be taken seriously, then they should start to make sensible arguments instead of bloopers and practical jokes like this one. It is unfortunate that those who should know better sometimes buy into this balderdash.

I would attribute it as an oversight if one of my undergraduate students made this sort of error, but it should absolutely not pass muster with a Nobel laureate in economics.

This one has indeed been around a while. In fact, I recall debunking it myself using the very same sources in 2004!

While we’re reading Stiglitz, let’s return to his first popular book on the topic, Globalization and Its Discontents (see my review from a few years ago). On pages 7374, Stiglitz writes:

Behind the free market ideology there is a model, often attributed to Adam Smith, which argues that market forces – the profit motive – drive the economy to efficient outcomes as if by an invisible hand. One of the great achievements of modern economics is to show the sense in which, all the conditions under which, Smith’s conclusion is correct. It turns out that these conditions are highly restrictive…

The Washington Consensus policies, however, were based on a simplistic model of the market economy, the competitive equilibrium model, in which Adam Smith’s invisible hand works, and works perfectly. Because in this model there is no need for government – that is, free, unfettered, ‘liberal’ markets work perfectly – the Washington Consensus policies are sometimes referred to as ‘neo-liberal,’ based on ‘market fundamentalism,’ a resuscitation of the laissez-faire policies that were popular in some circles in the 19th century…

The theory says that an efficient market economy requires that all of the assumptions be satisfied.

As Alex Tabarrok reminded Dani Rodrik a while back, those conditions are sufficient but not necessary!

Hat tip to my friend Sabrina (who may or may not endorse my analysis) for the second Stiglitz story.

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