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The rapid collapse of socialism has raised new economic policy questions and revived old theoretical issues. In this book, Joseph Stiglitz explains how the neoclassical, or Walrasian model (the formal articulation of Adam Smith's invisible hand), which has dominated economic thought over the past half century, may have wrongly encouraged the belief that market socialism could work. Stiglitz proposes an alternative model, based on the economics of information, that provides greater theoretical insight into the ...
The rapid collapse of socialism has raised new economic policy questions and revived old theoretical issues. In this book, Joseph Stiglitz explains how the neoclassical, or Walrasian model (the formal articulation of Adam Smith's invisible hand), which has dominated economic thought over the past half century, may have wrongly encouraged the belief that market socialism could work. Stiglitz proposes an alternative model, based on the economics of information, that provides greater theoretical insight into the workings of a market economy and clearer guidance for the setting of policy in transitional economies.Stiglitz sees the critical failing in the standard neoclassical model underlying market socialism to be its assumptions concerning information, particularly its failure to consider the problems that arise from lack of perfect information and from the costs of acquiring information. He also identifies problems arising from its assumptions concerning completeness of markets, competitiveness of markets, and the absence of innovation. Stiglitz argues that not only did the existing paradigm fail to provide much guidance on the vital question of the choice of economic systems, the advice it did provide was often misleading.The Wicksell Lectures
|1||The Theory of Socialism and the Power of Economic Ideas||1|
|2||The Debate over Market Socialism: A First Approach||15|
|3||Critique of the First Fundamental Theorem of Welfare Economics||27|
|4||A Critique of the Second Fundamental Theorem||45|
|5||Criticisms of the Lange-Lerner-Taylor Theorem: Incentives||65|
|6||Market Rationing and Nonprice Allocations within Market Economies||83|
|9||Centralization, Decentralization, Markets, and Market Socialism||153|
|11||The Socialist Experiment: What Went Wrong?||197|
|12||Reform of Capital Markets||207|
|13||Asking the Right Questions: Theory and Evidence||231|
|14||Five Myths about Markets and Market Socialism||249|
|15||Some Tentative Recommendations||255|
Posted June 18, 2009
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The American economist Joseph Stiglitz argues that the neoclassical model ('the competitive paradigm') propped up the idea of market socialism, so the failure of market socialism also refutes the neoclassical model.
In market socialism, governments use prices, just like market economies do, to allocate resources. But as Stiglitz points out, in the real world of imperfect information and incomplete markets, "there is no presumption that markets are efficient." He concludes, "the first fundamental theorem of welfare economics - asserting the efficiency of competitive economies - is fundamentally flawed."
The second fundamental theorem - that market mechanisms allocate resources efficiently - is also flawed. He writes, "Quite to the contrary of the contention of the market paradigm, reliance on the stock market may actually result in a distortion of the allocation of resources. ... The stock market . does not provide the information required to make rational investment decisions."
In fact, "Information acquisition activities relating to the stock market are basically rent-seeking activities." Early information gets the rent, as when the Rothschilds made millions from being first to hear the result of the Battle of Waterloo.
Stiglitz writes naively, "the takeover movement itself seems somewhat of a puzzle since the firms taking over seem to gain little if anything." It is not a puzzle if you check who gains from these dodgy deals - top executives (primed by bribes, bonuses and share options) and those who take the fees and commissions. As management guru Peter Drucker commented mordantly, "Dealmaking beats working."
Stiglitz shows, "We cannot, in general, be assured that private production is necessarily 'better' than public production." "There are some free marketeers who say that the first step to success is to privatize the state enterprises. . They have no scientific basis for that conclusion." More recent research by Massimo Florio (in The great divestiture, 2006) found that Britain's privatisations did not improve efficiency and had a net social cost. The only gainers were the top managers.
He observes, "perhaps no myth in economics has held such sway as that which I will refer to as the property myth. This myth holds that all that one has to do is correctly assign property rights, and economic efficiency is assured." But as he points out, China's growth shows that well-defined property rights are neither necessary nor sufficient for success.