India has a lot more scope to pursue progressive capitalism: Joseph Stiglitz

You argue that neo-liberalism or unfettered capitalism increases the freedom of the rich at the cost of the freedom of the poor. Can you tell us how?

The fundamental point is that one person’s freedom may impinge on that of another. We live in a highly integrated society where what one person does affects others. The great philosopher Isaiah Berlin said “The freedom for the wolves means death for the sheep”. If you allow firms to exploit others through monopoly power or deceptive practices, it increases the profits of the monopolist but decreases the well-being of the workers, which actually impedes economic efficiency. So there are trade-offs.

In many of these cases, the gains of the rich come not only at the expense of the poor; the overall sum total of goods and services produced in the economy may be decreased. So that’s why you need collective action. You need government, you need regulation, you public investment. Friedrich Hayek wrote in his very famous book called “The Road to Serfdom” in 1944 that he was afraid that governments assuming the role of delivering welfare and macroeconomic stabilization after World War-II would put countries on the road to serfdom or authoritarian fascism. He was wrong. What we see today is the growth of authoritarian populism in countries where governments have done too little. It’s not in countries where governments take an active role, like in the Nordic countries, that we find fascism growing rapidly. It’s really in the countries where there are problems of millions left behind, as in the United States. It is neo-liberalism that is at the source of today’s growth of fascist populism.

But many would argue that no country has really ever had truly free markets and may also point out that governments distort markets everywhere and so it would be incorrect to blame capitalism for our troubles. Do you think these critics have a point?

I’d say if we had that kind of extreme capitalism things would be even worse. We would have more inequality, exploitation, monopoly power, economic volatility, and climate change would be worse. We know the economy is not self-regulating. We know that the powerful can exploit the less powerful. We would not in the United States have the kind of technological advantage that we have over other countries if the government hadn’t spent so much on research and on education. Our technological superiority is largely based on government spending.

You say real-world markets are not as perfectly competitive as economists assume them to be in their textbook models, and that governments have a key role to play in correcting market failures. But do we necessarily need textbook-style perfect competition to benefit from markets?

There is competition in our market. You have Google, Microsoft, Facebook competing in one area or another. But what we’ve learned over the years is two things. One, even a little bit of market imperfection can lead to gross inefficiencies in the economy and open up large opportunities for exploitation. But the second thing is that in the American economy today we have massive imperfections of competition. Perfect competition is about prices being very close to cost or they’re actually at cost. But what we’ve seen in the data in recent years is that the gap between price and cost is enormous, and so anybody looking at the economy would have to say we are very far from a perfectly competitive equilibrium, and that means we are very far from an efficient economy. Firms devote a lot of their energy not to making better products but to making a less competitive marketplace. They have been very clever in innovations that reduce competition. And so rather than using the scarce talents of our society to produce better products, they use their scarce talents to reduce competition, increase monopoly power and increase exploitation.

You call for a greater role for the government to correct the wrongs of neo-liberalism. But public choice economists argue that governments are easily captured by rich powerful interests as politicians care more about their own personal interests than about the public interest. Why do you disagree with this bleak assessment?

Human fallibility is a problem that we face in all organizations. As long as humans are fallible, both the private and the public sector are going to be fallible and we try to create systems of checks and balances that make sure that there are not these kinds of abuses. We often make derogatory remarks about bureaucracies, but bureaucracies are the institutional arrangements that we’ve established to try to avoid one person taking advantage. People complain about the government being both corrupt and incompetent. But we have seen important instances where the private sector is corrupt and incompetent too. So the reality is that both the private sector and the public sector can be corrupt and inefficient. One of the functions of a Free Press is to point out the corruption and incompetence in both the public and the private sector. It’s what I view as part of our systems of checks and balances, where the public sector checks the private, and the private sector checks the public, while civil society checks both of them.

You criticize the private ownership of important underground resources in the US. But some would argue that private ownership gives people an incentive to tap into these resources. What do you think of this argument?

The question is who really is the owner of the land on which our countries exist. My view is it should belong to everybody. It wasn’t that the Texas billionaire is responsible for the shale oil or gas that lies underneath his land. It was just there. And typically, they bought the land not even knowing that there was oil underneath. Or they may have known it but the owner of the land didn’t and they basically swindled the owner of the land because they took advantage of their asymmetric information. That creates enormous disparities in wealth and those disparities in wealth are bad for society. It’s very different from somebody creating something like the transistor. That’s an innovation that ought to be rewarded. But it wasn’t the owner of the iron ore or the oil that created the oil. Now the second part is how do we optimize the development of those resources. Many of these resources exist in reservoirs underneath the land and oil flows under underneath many people’s property. If each of them tries to get as much out of that reservoir as they can, there will be inefficient extraction. Yes, you may get a lot in the short run, but the long run extraction is actually lower. Alternatively, if there were government management of the whole resource, it would be done much more efficiently. Of course, there are some governments that are not very efficient. I don’t want to pretend that every government is efficient. But take the example of Norway. It has managed the extraction of its oil and gas very efficiently. It has created a company to do it. But at the same time, the government has taken an active role in managing the whole process. So, my view is that one can have a very efficient state. We require a strong democracy and strong press to make sure that that the government is doing what it should do, that the companies that they contract with are doing what they should do, that they aren’t stealing and so forth.

How is your argument for progressive capitalism relevant to a country like India where the role of the state is much larger than in developed countries?

While you say the role of the state is very large in India, you’ve actually liberalised a lot, for example in the financial sector and the government is not taking an active role in many areas like healthcare and housing. And you have allowed billionaires to flourish without paying their fair share of taxes.

So I believe that there is a lot more scope for what I call progressive capitalism in India. You need environmental regulations; so much of India is an environmental disaster, including the use of water and many of the areas of agriculture, and pollution in the cities.

To me, when I visit India, I see the scope for a lot larger role for the government to create a better society. And India is now growing to the standard of living or wealth that it can afford to have these conditions that are so important to the lives of ordinary Indians.