Economics in Freefall

I admire

Joseph E. Stiglitz
, because he has a social
conscience and a sense of justice, the absence of which
turns economists into monsters. Despite his virtues and

Nobel Prize
, Stiglitz sometimes falls down as an

of my new book, How The Economy Was Lost,
will be aware that I take him to task for the

production function, which seriously
misleads economics about the scarcity of nature`s

Another of Stiglitz`s shortcomings,
one that he shares with most economists, is his habit of
reifying the market economy. The market is a social
organization. The results of market activity
reflect the behavior of the human participants in the
When economists reify the market, they
attribute the behavior, ethics, and morality—or lack
thereof—of humans to the market itself. Thus, Stiglitz
describes human failures as
and he asks in his new book, Freefall,

"why didn`t the market exercise discipline on bad corporate governance
and bad incentive structures?"

Social institutions are inanimate.
They do not possess life and cannot impose good outcomes
on human action.

Libertarians also reify markets,
but instead of blaming markets for human failures, they
imbue the market with human virtues and even with the
super-human virtue of producing results that human
intelligence cannot improve upon. Economists`
"risk models"
for which Nobel Prizes have been awarded and Federal
Reserve chairman Alan Greenspan attributed the social
institution with economic wisdom beyond man`s.

It is likely that the practice of
reifying the market economy developed as a form of
shorthand. It was convenient to say that the market did
this and that rather than to have to describe the human
interactions that produced the results. The market was
transformed from an abstraction into a life form and
became the actor instead of the humans operating within
the institution.

If the outcomes are good,
libertarians attribute the good results to the market`s
virtues; if bad, libertarians blame human
interference—government regulation. Economists of
Stiglitz`s persuasion see it in the opposite way. Good
results are produced by regulation; bad results are the
result of allowing the market to make decisions on its

This way of thinking, which reifies
a social institution, is ingrained in economics. It is
the source of enormous confusion and has resulted in a
pointless long-running ideological battle that Stiglitz
calls "a battle
of ideas."

It is possible to clear away the
confusion. First, understand that a free market is one
in which prices are free to respond to supply and
demand. Economists of all persuasions understand that to
fix a price below the price at which supply and demand
equate results in shortages. Economists have learned
this from rent control. Fixing a price above the price
at which supply and demand equate results in surpluses.
Economists have learned this from agricultural
subsidies. A free market does not mean a market in which
human behavior is not regulated. A free market is one in
which supply and demand are permitted to equate.

Second, understand that regulation
regulates human behavior, not the market. It is the
actors in the market who are charged with regulatory
infractions, not the institution itself. Regulation is
necessary because of human faults, such as greed, fraud,
carelessness, not because of market faults. Regulation
is necessary because of human failure, not because of
market failure.

Third, understand that the problem
of regulation is that it is done by flawed humans. Human
flaws do not disappear by moving human action from the
economy to government. Most likely the flaws worsen as
government decisions are often unaccountable. Many
economists assume that regulators act in the public
interest. However, as George Stigler, another Nobel
Prizewinner, pointed out several decades ago, regulators
are invariably captured by the industries that they

There are endless examples of
regulators—indeed, entire governments—captured by the
private interests that they are supposed to regulate.
For example, in a recent subscriber`s edition of


(June 16-30), Jeffrey St. Clair describes in detail the
incestuous relationship between the government`s
Minerals Management Service and the oil industry. An
agency charged with regulating the impact of oil
drilling on the environment became
"a bureaucratic
facilitator of big oil."

the environmental catastrophe in the Gulf of Mexico

and looming catastrophes along Alaska`s fragile

Indeed, economists themselves and
academics are often captured by private interest groups
and turned into shills. In
How The Economy
Was Lost
, I accuse economists of shilling for
transnational corporations when they falsely describe
jobs offshoring as the beneficial workings of free
trade. Like the
Israel Lobby,
corporations have found that money
will purchase professors, academic departments and think
tanks, as well as journalists.

Offshoring transforms American
workers` wages into

performance bonuses for executives,
capital gains
for shareholders, and

honoraria and research grants
for economists who
shill for the practice.

The problem that the US economy
faces is far more serious than the financial crisis
resulting from financial deregulation. The reason that
traditional monetary and fiscal policies cannot produce
an economic recovery is that so much of the US economy
has been moved offshore. As the jobs have departed,
there is no work to which low interest rates and massive
government spending can recall workers.

This is the real freefall.

Paul Craig Roberts

was Assistant Secretary of the Treasury during
President Reagan`s first term.  He was Associate
Editor of the
Wall Street Journal.  He has
held numerous academic appointments, including the
William E. Simon Chair, Center for Strategic and
International Studies, Georgetown University, and Senior
Research Fellow, Hoover Institution, Stanford
University. He was awarded the Legion of Honor by French
President Francois Mitterrand. He is the author of

Supply-Side Revolution : An Insider`s Account of
Policymaking in Washington
and the Soviet Economy


Meltdown: Inside the Soviet Economy
and is the co-author with Lawrence M. Stratton of

The Tyranny of Good Intentions : How Prosecutors and
Bureaucrats Are Trampling the Constitution in the Name
of Justice
. Click


for Peter Brimelow`s
Forbes Magazine
interview with Roberts about the recent epidemic of
prosecutorial misconduct.