The limits of freedom

Joseph Stiglitz's latest book argues for a shift from capital-centric profit motives to a more inclusive and morally grounded approach in economic policy

The Road to Freedom: Economics and the Good Society

Author: Joseph E Stiglitz

Publisher:  Allen Lane

Pages: 356

Price: Rs 899

One person’s freedom is another’s unfreedom. This one sentence in the book defines the theme of The Road to Freedom: Economics and the Good Society by Joseph Stiglitz. It is an important read, particularly in the context of the debate on freebies, revdis, redistribution and inheritance tax. It is also important in the context of the arguments being made by Thomas Piketty about inequality, with particular reference to India. Dr Stiglitz takes on the arguments by Milton Friedman and Friedrich Hayek about the neoliberal thinking of free markets. He also reinterprets Adam Smith and his theory of moral sentiments. This is a nuanced book, in which it is difficult to find clear answers— for obvious reasons. The world itself is complex with conflicts — between individuals; families; countries; generations; human and nature.  In each case, one party exercises its right to survival and prosperity (freedom), which comes at the cost of the other (unfreedom). How to minimise the harm and optimise universal welfare is the basic quest of the book.

In asking these difficult questions with simple and relatable illustrations, Dr Stiglitz highlights the limitations of each of our actions. Recognising the limitations alone would have a sobering effect on the actions. That will help us to do minimal harm while optimising welfare. The easiest and relatable illustration is that of traffic rules. Traffic rules are restrictive (and therefore represent unfreedom) and coercive (due to the tickets issued for violation) but are needed to optimise the good of all and to reduce chaos that comes out of unfettered freedom.

Why are free markets not really free? The argument is that the underlying assumption that free markets mean a freedom to choose is flawed. That is because the underlying assumptions of free markets of near-perfect competition are never met. Contracts are always between unequal parties — say, employer and employee —where the former has far greater power to enforce her side of the contract and therefore could be exploitative. Competitive advantage through efficiency in the markets is not always because the competitor is inefficient. The profit-maximising definition of efficiency leads to exploitation and extraction of resources (including human resources) in a very short horizon. The role of the state becomes important here. The presence of the state as a rule-setter to restrict “freedom” in free markets is to optimise operations.

Let me take a simple example to illustrate the argument. Free market enthusiasts argue that overall growth and economic prosperity leads to a trickle-down effect by two means: (a) the growth itself creating opportunities for people; and (b) increased tax collection leading to better welfare and redistribution. Strong regulation on labour compensation and practices makes workers better off; reduces the profit of the corporation accruing due to “exploitation” and reduces the need for the state to redistribute welfare payments to the exploited worker. The welfarist labour law regime itself ensures that the redistribution takes place in the local loop where everyone optimally benefits by getting a fair rent. Therefore, the role of the state, if any, has to be much greater when we talk of free markets. Dr Stiglitz illustrates how the 2008 global financial crisis illustrated the phenomenon of privatisation of profits and socialisation of losses. The corporations were bailed out, while the resources used were generated from the taxpayer.

One of the underlying arguments that Dr Stiglitz makes is that there is a moral position underlying all economic arguments. While the human race defined in the market context is seen as a selfish, profit-maximising, rational being, the reality is otherwise. When we examine the exchanges in the family, across families in society, we find that it is perfectly fine to be welfarist and caring. But there is a larger moral question. Should one have the freedom to exploit and then redistribute or be welfarist at her choice, or should the freedom to exploit be curtailed? How does one define exploitation?

In the chapter on why neoliberal capitalism failed, Dr Stiglitz identifies these multiple sources of exploitation. While neoliberalism advocates hands-off policies even for public goods, progressive capitalism looks at a more interventionist approach keeping the larger welfare of society in view. This is particularly important when the damages appear intangible (environment) and there are large information gaps.

The most striking feature in the book are references to the cooperative system, particularly the credit unions as an antidote to large banks and the risks that they expose the economy to. Moving towards smaller neighbourhood community-based economic initiatives may turn out to be more inclusive and equitable than embracing the centrality of capital. Cooperatives, for instance, by their very statement of identity move away from the primacy of capital towards compensating other factors of production fairly. The credit unions sort out the financial savings and credit needs of the community in the local loop and approach the external world only for the residual requirements. That would mean fewer structures and overheads, and less intermediation costs of the so-called professionals and better handling of resources. While Dr Stiglitz does not go so far as to say that we need to fundamentally change our economic thinking, he takes us away from the capital-centric primacy of profits argument to a more well-rounded argument of progressive capitalism.

While this is a book that is largely in the economic sphere, these arguments also need to be part of a political discourse that is consultative and inclusive. To that extent, we need to move away from centralisation and look at capital-led efficiency and profit parameters with a bit of scepticism and with a view that all efficient and extractive profit frameworks need a strong oversight of the state.

The reviewer is a professor, Centre for Public Policy, Indian Institute of Management, Bangalore. mssriram@pm.me,