Sunday, October 18, 2009

A Big Surprise: Bhagwati Defends Free Market Economics

Jagdish Bhagwati is a poster child for multiple intelligences. He is famous for having manipulated the equations of neoclassical trade theory with consummate skill, but whenever he jumps into a verbal argument he makes embarrassing errors of reasoning and commits the greatest sin of the disputant, failing to understand the views of the other side. When you read his screeds, you wonder why anyone pays attention.

So the first response I had to his latest outburst, Feeble Critiques: Capitalism's Petty Detractors, was to delete it. But then I thought, maybe there is something to learn from a critique of this guy—he can’t be that vacuous, can he? So I read it again. No, he is that vacuous, but now that I’ve invested the time I feel I have to say something about the experience.

Bhagwati is defending “capitalism”, by which he means a primary reliance on free, unconstrained markets in national and international affairs. He seems to be reacting especially against Joe Stiglitz, who has written widely on the inadequacies of neoliberalism, especially in the wake of the ongoing economic crunch. In typical Bhagwati fashion, he introduces his nemesis by mentioning that he shared a Nobel prize with George Akerlof, and then spending several sentences praising the latter to the skies, with nary a mention of the former. (I’m a big fan of Akerlof, but Stiglitz’ innovations in economics are of the highest order.) In other words, pure pettiness.

Then Bhagwati gets down to argument, sort of. He says that the current crisis is just a temporary speedbump on the path to universal riches—but, of course, to simply assert this is to assume what needs to be proved. He should read up on “begging the question”. (Perhaps his background in trade theory, a giant piece of question-begging in its entirety, has preconditioned him in this respect.) He invokes China and India as examples of countries that have adopted liberalism and prospered, without being aware that his critics dispute this. (To regard China as “liberal” is bizarre, and Dani Rodrik has written persuasively on why liberalization should not be seen as the basis for India’s accelerating growth rate.)

There are many pixels spilled over the effort to tar all critics of neoliberalism with the experience of the Soviet Union: you are either with us or with the Stalinists, for free markets or for central planning. What this has to do with someone like Stiglitz I can’t imagine. Add to Bhagwati’s reading list Whither Socialism?, Stiglitz’ post mortem on the formerly-existing mode of production.

What about the claim that trade competition from the poor countries, and especially China, have depressed wages in the US? Bhagwati cites his own work and that of two other authors, but does not given even a brief explanation for why his results should be regarded as a refutation of those who come up with something else. (He does make an ad hominem swipe at Paul Krugman: K’s paper on trade and wages was commissioned by Larry Summers, and, well, you know about him.) Homework assignment: look up “cherry-picking”.

We learn that the Washington Consensus was not imposed, but was taken up “with gusto” by India, China and Russia. This gusto business is a strange descriptor for the ex-USSR, as is “liberalism”, but the main problem is that critics of the Washington Consensus never claimed that China or India were bullied—rather, that most of Latin America, sub-Saharan Africa and southeast Asia were. To put it simply, debt was the lever, and China and India were the only two developing countries not laboring under massive debts to western banks (thanks to the policies Bhagwati deplores).

A few paragraphs later, Bhagwati launches into an attack on financial deregulation. It was an intellectual error, he says, and reflected not only cognitive capture by what he calls the “Wall Street–Treasury Complex”, but also “old-fashioned lobbying”. I was starting to warm to him, but then he attributes regulatory failure to leftists and protectionists. Hank Paulson, you see, is an “ardent environmentalist and graduate of liberal-leaning Dartmouth College” (guilt by matriculation) and Charles Schumer (the only politician identified by name) is a serial Japan-, then India-, then China-basher. If you’re Bhagwati, this proves financial deregulation was a conspiracy by the forces opposed to free markets.

In case you were wondering, it was not the private sector that gave us subprime mortgages either. This was a conspiracy hatched by populists within the government, who wanted to maximize home ownership. Granted, there have been many public programs that unwisely pushed people into mortgages who should have put their scarce savings somewhere else, but surely the folks at Countrywide had something to do with it too, not to mention the securitization bandwagon that was entirely of Wall Street’s doing. And is Bhagwati aware that housing bubbles have had a tendency to appear in the buildup to financial crises throughout modern history, or that there have been recent housing meltdowns in other countries (Spain, Ireland, England) with different sets of laws and policies? Add Reinhart and Rogoff to the man’s bookshelf, and maybe also Chapter 3 of the IMF’s latest World Economic Report.

Bhagwati concludes with a call for charity on the part of the rich and a safety net for the poor. This will keep the population pacified, he hopes, so that economists of a critical bent cannot “enjoy a success that they do not deserve.” Do I hear a rumbling among the ranks? Increase their rations and they won’t cause us any trouble....

On third thought, deletion would have been the best choice.

11 comments: said...

Bhagwati has traditionally combined a curious set of views, strongly pro-free trade with support for controls on at least short-term international capital flows. Is this still the mixture, or is he now for free international capital movements?

I think that when Singh was finance minister in 1991, there was enthusiasm for much of the Washington Consensus package in India, although only parts of it were enacted. I would say in 1992 there was maybe a six month period of such enthusiasm, when Yegor Gaidar was premier, but not after that. China has never been all that enthusiastic.

Peter Dorman said...

Bhagwati restates his support for regulation of international capital flows, for the purpose of maintaining deregulated international flows of goods and services. He accepts the claim that there is a tradeoff between the two. But: as far as I can tell, this willingness to restrict capital flows is the only departure he makes from neoliberal orthodoxy, and his interpretation of the failure of governments to regulate this properly is that it reflects the failure of government generally (ubiquitous rent-seeking). His views haven't change in at leat 15 years, when I started noticing his policy writings.

Anonymous said...

"... primary reliance on free, unconstrained markets in national and international affairs ..."

It would seem that this should be the baseline assumption of all economic policy proposals.

The other alternative, which has not worked despite the effort of many years, is to return again to the idea of regulating either production, trade, or income - or some combination of the three.

Since non-mainstream economic policy proposals haven't been all that successful in protecting the little guys and gals from predatory interests, a different tack might be suggested.

Of course, if you assume that capitalism will last forever; that it can be managed well enough to avoid the odd depression; and that inequality, poverty, and exploitation can be kept within some definable bounds, you will probably also assume a different approach is not called for.

Good luck with that...

TheTrucker said...

Free trade isn't free.

Who do you think pays for the protection of the property rights that are the basis of all this "free" trading and "free" flow of capital and
enforcement of intellectual rights?

More to the point, if the USA is the world policeman then why are we not collecting a fee from all the "owning" participants to fund this protective service?

If we can think of a way to implement and collect a global assets tax then "free trade" might work for the common people. Until then the USA should be collecting import tariffs to pay for the police service.

Anonymous said...

"More to the point, if the USA is the world policeman then why are we not collecting a fee from all the "owning" participants to fund this protective service?"

Perhaps this is beside the point, but when was the last time the US had a positive trade balance?

It would seem we have effectively been importing goods free of charge - (?)minus debt service(?) - for about 40 years. And running up a tab which will not likely ever be paid.

Can you think of another country which has that kind of deal with its trading pawns... er, uh, partners?

almostinfamous said...

More to the point, if the USA is the world policeman then why are we not collecting a fee from all the "owning" participants to fund this protective service?

because the USA is not the world's policeman, it is at best the world's vigilante. the cops at least are theoretically answerable - who is the US Govt., answerable to? it's people? they have been deprived the vocabulary to even ask questions!

Chee Heong Quah said...

Even Paul Krugman in his Oct 19's NYT column agrees that banks would continue to gamble in the expense of taxpayers if bail-outs were to continue in the future without solid reforms.

I would say that instead of reforms they should be a non-interventionist Fed and government.

Kevin Carson said...

Bhagwati displays the central defining feature of the vulgar libertarian: he conflates the corporate world order we live under with "free trade" and "free markets," when in fact it depends on an overwhelming concentration of state power. Neoliberalism and the "Washington Consensus" depart from genuine free market principles in many ways--not least among them their heavy emphasis on "intellectual property," which plays the same protectionist role in the corporate world economy that tariffs used to play for the old national industrial economies.

Neoliberals misappropriate the language and symbolism of "free markets" the same way Stalin misappropriated the language and symbolism of socialism.

Shag from Brookline said...

It's revealing to look at macro economists under the microscope. said...


Actually as a mostly trade economist, Bhagwati is more a microeconomist than a macro one.

Shag from Brookline said...

Either way, Bhagwati is probably looking through the wrong end.