One of the first things the Nobel Prize winner and former chief economist at the World Bank, Joseph Stiglitz, told me when we met in London earlier this month was that the tax breaks currently enjoyed by the wealthy in the UK are “inexcusable” and that Labour – which currently has no plans to raise capital gains tax in line with income tax – should pursue “more progressive taxes” if it forms the next government.
Over peppermint tea in the bar of a London hotel, Stiglitz said there was “a lot of richness” in Labour’s agenda and that “they’re pushing on a lot of things, moving in the right direction on health, education, enhancing security and promoting investment”. However, he also called for a “stronger competition policy” and declared that there is “no ethical or economic argument” for taxing wealth at a lower rate than income. “I don’t see why you should give favourable treatment to a billionaire earning capital gains,” he said, “so he can buy another yacht.”
Joseph Stiglitz has spent more than half a century watching people make the same fundamental mistake. Born near the end of the Second World War in Gary, Indiana, he was an early critic of the laissez-faire economic theories that took hold in the West in the second half of the 20th century, led by Milton Friedman and Friedrich Hayek. In 1970, Friedman had written a paper – that he summarised in an essay in the New York Times – that declared that business had only one “social responsibility”: to increase profits and maximise shareholder value. The paper was so influential that its central tenet, the idea of fiduciary duty, became part of corporate governance laws around the world.
Stiglitz was then in his mid-twenties, and as a fellow of the Hoover Institute at Stanford University (he jokes that he was a “diversity appointment” to the right-wing institute) he had opportunities to debate these ideas with Friedman himself. His own work showed the opposite conclusion, that stock market value maximalisation could not be achieved except at the expense of wider society. He demanded Friedman show him the flaws in his proofs: “He couldn’t disprove it, he couldn’t explain where my argument was wrong… and 55 years later, nobody’s disproven that result.” Friedman himself would later admit, in one of his final interviews in 2002, that his belief in the self-regulating market had been disproved by Russia’s descent into kleptocracy. “I was wrong,” he concluded. “Joe was right.”
But by then, people were already ignoring more of Stiglitz’s warnings. Reagan and Thatcher had committed fully to the “market fundamentalism” of neoliberalism (Thatcher kept a copy of Hayek’s The Constitution of Liberty in her handbag) as the source of economic growth. In 1992, Stiglitz wrote a paper which warned that turning mortgages into tradable securities, as had then begun to happen, would lead to a situation in which no one – neither the banks selling the mortgages, nor the brokers bundling them into bonds and trading them – would have an incentive to make sure the applicants could really afford them. In 1993, he joined Bill Clinton’s council of economic advisers, before becoming its chair in 1995, where he warned against the growing appetite for deregulating the financial sector. “Remember,” he told Clinton, “it was the Great Depression that led to regulation.”
During the first Clinton administration he was “able to stave off” those in the Treasury, such as the head of the Federal Reserve Alan Greenspan, who believed it was important to regulate financial markets as lightly as possible. But in 1997 he left to become chief economist at the World Bank, where he saw similar movements in other countries. “You could see that rapid expansion of credit in an under-regulated financial system is a recipe for financial crisis,” he told me. The growth this credit seemed to provide was too tempting, however, and the derivatives market boomed.
The crash that arrived in 2008 – caused by banks and brokers handing out cheap credit without stopping to ask if it was affordable – was for Stiglitz “the apex of neoliberalism”, the ultimate demonstration of the misapprehension that had guided Western economics. “It showed that financial liberalisation had failed even in the citadel of capitalism.”
Now 81, Joseph Stiglitz carries a walking stick but he still talks with a restless energy, smiling often. We roam the ground floor of his Westminster hotel, searching for a spot free from the muzak that is piped from the ceiling in every room; nowhere, it seems, is safe, and the staff aren’t allowed to turn it off. In a small way this seems to represent what we’ve met to discuss: freedom.
The great delusion of neoliberalism, Stiglitz argues, is that it was never really liberal at all. This is the central point of his new book, The Road to Freedom: Economics and the Good Society. It is published 80 years after Hayek’s The Road to Serfdom, which argued that there was no political freedom without free trade, free markets, free enterprise. History has shown us that Hayek was wrong, Stiglitz told me. “Where we see populism and nationalist authoritarianism, it’s not in the countries where government has done too much, like Scandinavia, but in countries where it’s done too little – like the United States.”
Today’s strange and contradictory new politics, in which left and right seem to have dissolved into a mass of issues and grievances, could be said to stem from the same fact: that in deregulating markets, liberalising trade and privatising public infrastructure, neoliberal governments created freedom for some people, but not without taking it away from others. The more freedom banks had to make money, or companies had to choose how and where they operated, the less choice others had about the kind of job they could have or the life they could afford. More than once during our conversation Stiglitz quotes Isaiah Berlin: “Freedom for the wolves has often meant death to the sheep.”
His critics argue that deregulated capitalism and free trade have elevated hundreds of millions of people from extreme poverty. Stiglitz said this fails to imagine the counterfactual: the economic growth we could have had from greater regulation, greater state investment in education and public health. “Growth is much slower in the era of neoliberalism. So not only did it lead to more inequality, and increased concentration of market power, it didn’t even deliver on the one narrow, materialistic objective of GDP.”
Instead, neoliberalism has given us a market-power economy, driven not by competition but by anti-competitive behaviour. The recipe for success in this world is not to make a better product that inspires demand, but to persuade investors that you will be able to form a monopoly in which demand is irrelevant. Companies such as Amazon and Uber can go for a decade without making a profit, so long as they “scale” to the point where their market power is unopposed. In the case of Twitter, Elon Musk was obviously going to be terrible at running the social platform. By last summer the company had, by Musk’s own admission, lost around half of its advertising revenue – but the lack of a real alternative keeps his asset valuable. As Warren Buffett said, the trick to buying a good company is to pick one so well defended from the market that “your idiot nephew could run it”.
This economy of misdirection has serious consequences for economic growth, but worse still is what it means for the culture and politics that depend on it. “Our very economic system shapes preferences and beliefs,” Stiglitz writes in The Road to Freedom, and the brutal individualism – the “unfailingly dismal view of human nature” that is supposed by neoliberal economics – has “misshaped our society and the people in it”. The “neoliberal axioms on universal selfishness and greed”, he writes, have “created large numbers of people who are well described by those axioms”.
At their head is the ultimate idiot nephew, Donald Trump, a monster from the 1980s, a grotesque cartoon of what a successful businessman might look like. Trump is the beneficiary of neoliberalism because he offers to return the economic freedoms it took away. His voters would not describe the loss of their “opportunity set” in the same terms as an economist like Stiglitz, but they know they’ve been had. Callous libertarianism and a contempt for the rule of law have become attractive to people whose freedoms have been stolen from under their noses. Neoliberalism, Stiglitz writes, has put us “on the road to 21st-century fascism”.
All the same, Joseph Stiglitz remains an optimist. Economics has a lot to answer for, but it is now taught in a very different way. No course is taught without focus on “externalities” such as pollution and climate change. In contrast to the “strong populism” in the United States there are “strong progressive movements”.
“A lot will depend on the outcome of the election, not only for the United States, but for the world,” he told me, but he lives in hope that Joe Biden will win. “And that means things will get better. But it’s not a sure thing.”
[See also: The rise of WhatsApp government]
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