I am reading Soldiers of Reason, Alex Abellas hagiographic account of the rise of the RAND Corporation in which he shows how ideas that originated with its mathematicians have by virtue of its proximity to power come to dominate such diverse disciplines as political science, international relations, philosophy, sociology, (even religious studies!) and economics (NB: for more on the subject, don’t miss Adam Curtis’s classic film The Trap). Prominent among them are systems analysis, game theory, and rational choice theory. The latter gave us everything from the arms race to the recent financial collapse. In his review of Robert Skidelsky’s Keynes: The Return of the Master, the new biography of John Maynard Keynes, Joseph Stiglitz writes:
We should be clear about this: economic theory never provided much support for these free-market views. Theories of imperfect and asymmetric information in markets had undermined every one of the ‘efficient market’ doctrines, even before they became fashionable in the Reagan-Thatcher era. Bruce Greenwald and I had explained that Adam Smith’s hand was not in fact invisible: it wasn’t there. Sanford Grossman and I had explained that if markets were as efficient in transmitting information as the free marketeers claimed, no one would have any incentive to gather and process it. Free marketeers, and the special interests that benefited from their doctrines, paid little attention to these inconvenient truths.
While economists who criticised the ruling free-market paradigm often still employed, as a matter of convenience, simple models of ‘rational’ expectations (that is, they assumed that individuals ‘rationally’ used all the information that they had available), they departed from the ruling paradigm in assuming that different individuals had access to different information. Their aim was to show that the standard paradigm was no longer valid when there was even this seemingly small and obviously reasonable change in assumptions. They showed, for instance, that unfettered markets were not efficient, and could be characterised by persistent unemployment. But if the economy behaves so poorly when such small realistic changes are made to the paradigm, what could we expect if we added further elements of realism, such as bouts of irrational optimism and pessimism, the ‘panics and manias’ that break out repeatedly in markets all over the world?
Joseph Stiglitz on Media Matters with Bob McChesney
Joseph Stiglitz on BookTV, interviewed by Lori Wallach of Public Citizen.