Joseph Stiglitz has a Prescription for the Road to Freedom and the Good Society

Joseph Stiglitz is one of the lions of liberal economists. He served in several prominent positions in the federal government and is a Nobel Prize winning economist. His 2024 book, The Road to Freedom: Economics and the Good Society, is a gem and is an important counterweight to economic thinkers like Friedrich Hayek. Hayek called one of his books the Road to Serfdom and asserted that society would be considerably less free if government played a central role in regulating the economy.

In contrast, Stiglitz believes that we become less free if we loosen the economy of most government safeguards. Economic students should read texts from both schools of thought and make up their own mind. When I majored in economics at college in the 1980s, most economic departments focused on Hayek’s approach and Stiglitz book was decades away from print.

When a student majored in economics in the 1980s, he learned the neo-classical approach to economics. In most situations according to this framework, the market produced the optimal output of various goods which were priced fairly. This outcome was referred to as perfect competition. However, the neo-classical outcome was subject to several assumptions including that companies vigorously competed and did not collude, that there was a symmetrical flow of information between buyers and sellers, and that production of goods mostly did not impose negative externalities such as pollution. The neo-classical economists admitted that in some situations the assumptions of perfect competition were violated. However, these violations occurred in a small minority of cases. Hence, a hands-off, minimal role for government was not only justified but required to let markets operate efficiently.

Stiglitz turns this paradigm on its head. He asserts that the assumptions of neo-classical economics are regularly and frequently violated. He provides several examples in his book including pollution emitting industries and more recently the misinformation spread by companies on the internet. He therefore calls for frequent government intervention and rigorous regulation. In response to complaints that a public sector hand stifles freedom, he posits that economists should consider trade-offs. But given the tendency of market economies to regularly violate the assumptions of perfect competition, those who may lose some freedom (such as companies that exploit an information advantage over consumers) are vastly outnumbered whose freedom and welfare are enhanced (consumers protected against abusive and price-gouging products).

During my career in the fair lending field, I would regularly employ the Stiglitz framework. Regulations mandating clear disclosures of loan terms and prohibiting abusive practices were needed to protect consumers from unscrupulous lenders who exploited an information advantage to overwhelm consumers with a dizzying array of obtuse and predatory practices. The financial crisis of 2008-2009 was caused in large part by predatory lending. The Consumer Financial Protection Bureau (CFPB), under the mandate of the Dodd-Frank Consumer Protection and Wall Street Reform Act of 2010, improved mortgage loan disclosures, prohibited lending beyond borrowers’ abilities to repay, and various deceptive loan terms and conditions. Now, enforcement of these new laws and regulations is imperiled by the uncertain status of the CFPB.

The Community Reinvestment Act (CRA) operated under the premise that lack of information on borrower creditworthiness was caused by redlining and bank discrimination against neighborhoods. In order to fix this information barrier to an efficient and equitable loan market, CRA requires banks to affirmatively and continually serve all communities, including low- and moderate-income ones. In other words, they are now required to obtain information on customers they either previously discriminated against or neglected. The result of CRA has been to fix several neighborhood markets and increase lending as banks found substantial numbers of safe and sound lending opportunities. I describe in more detail how this occurred in my upcoming book Ending Redlining through a Community-Centered Reform of the Community Reinvestment Act.

Another critical Stiglitz insight involves economic decentralization. In order to achieve competitive markets, prevent oligopolies and monopolies, and prevent anti-democratic concentrations of economic power, government should encourage a plethora of economic actors, smaller and community-based companies as well as larger ones. The economy should feature checks and balances through decentralized power just as occurs in a healthy political system. In his new book, The Banks we Deserve: Reclaiming Community Banking for a Just Economy, Oscar Perry Abello outlines several policies that promoted smaller, neighborhood-centered and community-owned lending institutions as well as banks owned by people of color.

All too often, however, government promoted bigger banks at the expense of smaller ones, through misguided assumptions of larger is better for economies of scale and safety and soundness (via diversification of risk). The Trump administration is currently concentrating economic power and destabilizing smaller lenders through such actions as its proposed diminishment of the Community Development Financial Institutions Fund.

One other major contribution of Stiglitz is how culture can influence the development of a good economy and society. If norms promote community solidarity, a collective outlook, and concern for fellow human beings, people and companies are less likely to litter, pollute, and impose negative externalities on the rest of us. In some societies, these norms might be so strong as to eliminate the need for strong doses of regulation. A society that values exploration of thought and empathy for others is also more likely to arrive at more equitable solutions. Stiglitz approvingly cites Rawls’ veil of ignorance in this context. In contrast, a culture of fear, greed, and distrust of intellectual inquiry will create an oppressive, inefficient, and inequitable economy and society. The nexus between culture and economics is overlooked and limits our abilities to achieve consensus and compromises on economic policy.

In my view, Stiglitz gets it more right than thinkers like Hayek or Milton Friedman. But this is not just intellectual score keeping. Our views on these matters are incredibly timely now and will help determine whether we have a thriving economy and society or an oppressive one. So read these economic thinkers and think seriously about the impacts of institutional arrangements on our economy on our freedom.