Book Review: Freefall by Joseph Stiglitz
Joseph Stiglitz is one of the most important, yet somehow under-the-radar economist today. In Freefall: America, Free Markets, and the Sinking of the World Economy,Stiglitz provides readers with a narrative of the events leading up to and during the financial crisis and Great Recession. He does a masterful job of diagnosing the problems, critiquing policy decisions and creating a comprehensive forward-looking vision of what an economy SHOULD look like. This last aspect is where Stiglitz truly excels. While others have offered excellent narratives of events, exposed some of the many villains and immortalized its heroes, Freefall provides readers with a depiction of what an ideal big picture landscape looks like.
The book begins with an equal opportunity rebuttal of the policy choices made by both the Bush and Obama administrations to date. Then, Stiglitz makes quick work of those who argue that this crisis was “unforeseen” and “could not have been anticipated” while dissecting the sources of this failure in foresight. Too many in the financial sector and the field of economics placed blind faith in an ideology which preached that in the event of a problem, all wrongs would be isolated and fixed by the market’s self-correcting tendency to find an equilibrium. It is this ideology—the efficient market theory—that Stiglitz seeks to destroy in Freefall with gems like:
“If the efficient market hypothesis had been right and market participants were fully rational, they all would know that they could not beat the market. They all would then just “buy the market”–that is, someone with .01 percent of the country’s wealth would buy .01 percent of each of the assets….The very fact that market participants spend billions…trying to beat the market itself refutes the twin hypothesis that markets are efficient and that most market participants are rational.”
Stiglitz won the Nobel Prize in Economics and attained international acclaim for his work demonstrating the asymmetry of information in markets and rebutting the notion that markets are inherently efficient. The zero-sum nature, in which one person’s loss is another’s gain, combined with the presence of externalities in and of themselves are evidence of inefficiencies. A common theme throughout Freefall is the belief that it is government’s obligation to minimize the impact of negative externalities through a thorough, but not overreaching regulatory system, while maximizing the prevalence of positive externalities with a more forward-looking economic stimulus that generates increased investment and jobs growth. Additionally, he argues that the very idea of too-big-to-fail is in and of itself a market inefficiency that leads to a widespread misallocation of capital. With the talk of the Volcker Rule seemingly swaying markets on a daily basis, this timely explanation by Stiglitz highlights the rationale behind its necessity–controlling moral hazard risks and finding a solution to our unbalanced financial system.
Stiglitz’ incorporation of the global elements of this crisis further distance Freefall from other “crisis” books. One of the more intriguing ideas put forward is that of a global reserve currency. As the former chief economist at the World Bank, Stiglitz witnessed first hand the asymmetries of the movement towards globalization and free trade and the negative consequences of growing global imbalances. He illustrates how global imbalances lead to the suppression of aggregate demand and heightened economic instability on a global level. The idea of a global reserve currency originated with Keynes nearly a century ago, and it is fitting that Stiglitz is its torch-bearer today.
The analysis and prose are excellent throughout and difficult economic concepts are explained in a very readable manner. Where Stiglitz truly shines is in the last two chapters: “Reforming Economics” and “Towards a New Society.” He takes the lessons learned from the issues leading into the financial crisis and their troubling outgrowths and offers his view of a coherent, forward-looking economic landscape. Right now decision makers react with ad hoc policies and no clear vision or plan. What Stiglitz would like to see is an actual underlying set of principles that we strive towards and consciously contemplate in reaching important policy decisions. This is exactly what our country needs in one of these most uncertain of times.