Easterly & Stiglitz agree to worry

Usually at odds on their appraisal of development policies and state intervention efficiency, William Easterly (a critic) and Joe Stiglitz (a supporter) agree today to warn against the current criticism of markets, widely accused of causing the financial, and then economic, worldwide crisis.

Bill Easterly ironically notes in his blog Aid Watch that Stiglitz, a Nobel Prize winner that has been strongly critical of the World Bank policies and of the “Washington consensus”, now preaches, however belatedly, markets to poor countries and fears that they “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” concludes Easterly.

We are in for “the revival of the Big Markets vs. State Planning Debate” concurs Mark Thoma , himself a notorious critic of free markets and a strong advocate of increased regulation in general.

I believe that all three are wrong and that the big debate is profoundly misguided today. But it does not matter much!

The big debate is misguided because mistakes are committed by men, not by “markets” or by “planning”, and occur both in market economies and in centrally planned ones. The gist of the debate opposing decentralized market economies and centrally planned ones is really about the optimal degree of centralization of decisions in society. This optimal degree depends on the cost of information (as I suggested in The Second XXth Century, in a Coase-Hayek framework) and not on the occurrence of a specific mistake or crisis, and it varies through time and circumstances.

Bad decisions will be made more often in decentralized systems when information is scarce, and will be made more often in centralized ones when information is abundant. Since we are living in a period of very abundant and cheap information, the decentralized system is currently much more efficient, crisis or no crisis. It follows that, if politicians are broadly rational (and I believe that they are, since they have to obtain approval of voters and powerful interest groups), the centralized and planned system will not return in our societies or in emerging economies, that still are information abundant ones. Indeed, in such a technological environment a centralized state management is generally much less efficient than a decentralized market rule.

That’s why the revival of the great debate is profoundly misguided, and that's also why it does not matter much.