In a little-known speech at the United Nations University, renowned Nobel Prize-winning economist Joseph Stiglitz criticised Western approaches to addressing the global economic crisis for being obsessed with market solutions that cannot work.

His remarks were made just two months before the Organisation for Economic Cooperation and Development (OECD) issued its latest forecast of a “deeply concerning” slowdown in global trade, which the group says has dropped perilously close to levels “associated with global recession.”

The OECD’s chief economist, Catherine Mann, said that: “Policy actions are already being implemented that will help to address the weak underlying trends.”

Professor Stiglitz of Columbia University, who chairs the High-Level Expert Group on the Measurement of Economic Performance and Social Progress (HLEG) at the OECD, contradicted this reassuring promise in his UN University address in September.

Describing standard neoclassical and behavioural models of economics as “wrong” on the basis of new advances in economic research, Stiglitz blamed ongoing economic stagnation on the so-called “Washington Consensus” — a set of neoliberal policies advocated most strongly by the US and Britain.

The Washington Consensus (WC) consists of a string of interlinked policies requiring reductions in public spending; rampant deregulation to reduce restrictions on banks, corporations and other financial actors; extensive privatisation of social and public services; and liberalisation based on reducing taxes, tariffs and non-tarrif barriers to trade.

All this is believed to drive growth and enhance the distribution of wealth.

In reality, as Stiglitz told an audience at the UN University’s World Institute for Development Economics Research, it has done the opposite.

Thirty years ago, he said, “the focus was on limiting the role of the government — getting it out of the way…

“Now we realize that government is essential, and a central part of development policy is improving the performance of the public sector. While the Washington Consensus policies and the theories on which they have been based have been widely discredited, their influence still lingers, often masqueraded using different language.”

Market failure

Slides of Stiglitz’s presentation seen by INSURGE intelligence state that “The 2008 crash showed that markets on their own were neither efficient nor stable.” The crash generated “huge losses from inadequate regulation” and the economy was only saved “through massive government intervention.”

The Eurozone crisis that erupted shortly after the 2008 banking collapse was also a result of giving too much freedom to markets without sufficient institutional and political regulation.

The crisis was “a result of an attempt to share a single currency, without the necessary institutions,” said Stiglitz, “and based on the same flawed economic analyses that underlay the Washington Consensus.”

However, those crises were only the latest signs of a litany of previous failures. His presentation slides critique the “failures” of WC principles in Latin America and Africa, and during the “transition from communism to the market economy.”

“In Africa, structural adjustment led to a lost quarter century and deindustrialisation,” say Stiglitz’s slides. WC policies “focused on limiting the role of the state, limiting the ability of the state to increase its capacities,” but this “didn’t see a flow of foreign investment except in natural resources.”

This created a long-term unequal structural relationship in which foreign investors profited from transfers of wealth and resources out of these countries.

Except in China, Vietnam and countries that joined the European Union (EU), the shift to market economies by former communist states ended up “contributing” to economic failures, according to Stiglitz.

Growth for the few, at the expense of the many

Meanwhile, inequality has dramatically increased “in most countries around the world”, showing that “trickle-down economics didn’t work.”

The impact of global inequality in terms of undermining economic health is also little acknowledged, despite what is now a “wealth of theory and evidence that the distribution of income affects economic performance.”

Together, such facts imply that “GDP was not a good measure of economic performance.”

Metrics of economic progress remain important, but Stiglitz argued that it is “wrong to focus narrowly on GDP”, citing his 2008–2009 work with the International Commission on the Measurement of Economic Performance and Social Progress which has highlighted serious “deficiencies” in the measure.

New metrics are urgently needed, including “those that reflect distribution and environmental sustainability;… [and] the value of government and other services.”

Before his stint at the World Bank, Stiglitz was chairman of President Bill Clinton’s Council of Economic Advisors. In 2009, he was appointed by the President of the UN General Assembly as chair of the Commission of Experts on Reform of the International Financial and Monetary System.

Captive states

The most controversial aspects of Stiglitz’s presentation lay in his rejection of conventional economic models, which he argued have both contributed to the economic crisis and prevented policymakers from finding meaningful solutions to it.

These models fail to capture the actual behavior of individuals, including on issues like saving and consumption, and ignore the crucial role of institutions in reducing efficiencies and serving to “preserve power structures” that benefit a tiny minority.

Contrary to the prevailing wisdom amongst policymakers, “Pervasive market failures [are] associated with competition, externalities, risk, capital markets.” The market “on its own, will lead to excessive borrowing, especially in foreign-denominated debt” as well as leading “to too big and too intertwined financial institutions.”

“Markets are not efficient or stable,” declare Stiglitz’s slides. “That there are not just environmental externalities, but also information and learning externalities and macroeconomic externalities.”

These wider social and environmental realities in which markets are embedded give rise to “multiple needs for government intervention — not just macro-stabilisation, but also industrial and trade policies.”

There is also a need for “strong financial sector regulations” including macro-prudential regulations and “regulations on cross border flows,” and a recognised role for the state in “promoting equality and equality of opportunity.”

Stiglitz also advocated stronger forms of political regulation to prevent what he called “government failure and capture” by special interests, “especially in societies marked by high inequality.”

“Democracy may not provide an adequate check,” he warned. A solid “system of checks and balances” is required, including “more transparency, strong right-to-know laws, restrictions on the influence of money in campaigns, restrictions on revolving doors.”

Stiglitz’s presentation, based on the latest research in economics, calls into question the British government’s continuing infatuation with neoliberal Washington Consensus-style policies. It further suggests that conventional efforts to stave off another global recession will fail.