“The Revival of the Big Markets vs. State Planning Debate”

The possibility of an outbreak of protectionism has been raised frequently as a potential byproduct of the recession, but that may not be the biggest concern with regard to developing countries. When Stiglitz and Easterly agree, that’s noteworthy:

Joe Stiglitz preaches markets to poor countries!, by William Easterly: Stiglitz in the current issue of Vanity Fair is afraid how poor countries will respond to the global crisis and the record of American hypocrisy on economic policy (like what America prescribed for itself in 2008-2009 vs. what it prescribed for Asia during 1997 crisis). All of this will tarnish market economics so much, fears Stiglitz, that poor countries will turn away from markets altogether in favor of some heavy-handed state planning and socialism. Stiglitz, who is not usually considered market economics’ best friend, is right to be scared. …

One of the reasons to be worried is the precedent from the 1930s Depression – not the usual worry about a huge wave of global protectionism. No, the worry is about the intellectual precedent that the Depression so discredited markets that government planning and intervention became the default model of development economics for the next 30 years – the 1950s through the 1970s.

I’m thrilled to have a heavyweight like Joe Stiglitz to make this case better and more credibly than I could…. The issue now is not subtleties about the right type of financial regulation, global vs. local standards, or calibrating fiscal stimulus. The issue in development now is the revival of the big markets vs. state planning debate. Let’s hope it comes out differently this time than it did for early development economics after the Depression.

Here’s a small part of Stiglitz’ essay:

Wall Street’s Toxic Message, by Joseph Stiglitz: …[N]o crisis, especially one of this severity, recedes without leaving a legacy. And among this one’s legacies will be a worldwide battle over … what kind of economic system is likely to deliver the greatest benefit to the most people. Nowhere is that battle raging more hotly than in the Third World… In much of the world,… the battle between capitalism and socialism—or at least something that many Americans would label as socialism—still rages. While there may be no winners in the current economic crisis, there are losers, and among the big losers is support for American-style capitalism. This has consequences we’ll be living with for a long time to come. …

I worry that, as [other countries] see more clearly the flaws in America’s economic and social system, many in the developing world will draw the wrong conclusions. A few countries—and maybe America itself—will learn the right lessons. They will realize that what is required for success is a regime where the roles of market and government are in balance, and where a strong state administers effective regulations. They will realize that the power of special interests must be curbed.

But, for many other countries, the consequences will be messier, and profoundly tragic. The former Communist countries generally turned, after the dismal failure of their postwar system, to market capitalism, replacing Karl Marx with Milton Friedman as their god. The new religion has not served them well. Many countries may conclude not simply that unfettered capitalism, American-style, has failed but that the very concept of a market economy … is … unworkable under any circumstances. Old-style Communism won’t be back, but a variety of forms of excessive market intervention will return. And these will fail. The poor suffered under market fundamentalism—we had trickle-up economics, not trickle-down economics. But … these new regimes … will not deliver growth. Without growth there cannot be sustainable poverty reduction. There has been no successful economy that has not relied heavily on markets. … The … governments brought to power on the basis of rage against American-style capitalism … will lead to more poverty. …

Faith in democracy is another victim. In the developing world, people look at Washington and see a system of government that allowed Wall Street to write self-serving rules which put at risk the entire global economy—and then, when the day of reckoning came, turned to Wall Street to manage the recovery. They see continued re-distributions of wealth to the top of the pyramid, transparently at the expense of ordinary citizens. They see, in short, a fundamental problem of political accountability in the American system of democracy. After they have seen all this, it is but a short step to conclude that something is fatally wrong, and inevitably so, with democracy itself. …

Francis Fukuyama … was wrong to think that the forces of liberal democracy and the market economy would inevitably triumph, and that there could be no turning back. But he was not wrong to believe that democracy and market forces are essential to a just and prosperous world. The economic crisis, created largely by America’s behavior, has done more damage to these fundamental values than any totalitarian regime ever could have. …

Originally published at Economist’s View and reproduced here with the author’s permission.

3 Responses to "“The Revival of the Big Markets vs. State Planning Debate”"

  1. Guest   July 1, 2009 at 5:03 pm

    I fail to see what the problem is (or was) with the development model prevalent during the period from WW2/colonial independence to the 1970s/80s. The developing world grew much faster during this period then since, and improvements in HDI and the poverty situation were much faster as well. I am not arguing for any sort of central planning; that was never normal outside of China and the Soviet Bloc, but something the world has been doing with their economic system hasn’t been working since then.

  2. Caveat Emptor   July 1, 2009 at 5:27 pm

    I’d rather have almost any economic system than the fake capitalism the U.S. and Britain have modeled since 1980, in which private fraud and speculation are vastly rewarded during the expansion of credit bubbles with the government borrowing and printing trillions to save the crooks and gamblers during the contraction of said bubbles. This kind of system ends up specializing in Health Care (increasingly, drugs), Finance, Entertainment, and War (aka Defense). Some “example” for the rest of the world.

  3. Guest (same as above)   July 1, 2009 at 11:28 pm

    Clearly, not everyone has bought the neo-classical argument. My thinking on the issue is that economic theory is still far too underdeveloped to be treated as cannon. In terms of practical policy, if we accept that policies from either edge of the ideological spectrum have achieved positive results in some situations, and negative in others, then it may be better to pay attention to particular situations and policies than to pay attention to systemic orientation.