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.
It’s rare for your regular working-class economist to be the FIRST to worry, so forgive me if I point out that I expressed almost identical fears to Stiglitz’ fears nine months ago in the Wall Street Journal. (On the minus side for crystal ball-gazing, one of my star exhibits for socialism noveau was Honduran president Zelaya, who was just overthrown last weekend.) And then I worried some more about this in Foreign Policy (January/February 2009).
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 (along with providing a cheap excuse to recycle a couple of my old columns). 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.