The revival of Keynesian ‘supply-side economics’ and a proactive industrial policy under the Biden administration appeared to mark a significant shift. Neoliberals had long insisted that governments let the forces of market globalization unfold, accommodated by ensuring a noninflationary environment through austere fiscal and monetary policy. But the Global Financial Crisis and the dramatic growth in government support for financial markets that followed suggested that markets weren’t as smoothly self-regulating or ‘free’ from public authority as had been claimed. The emergency measures implemented during the pandemic, which widened the financial safety net far beyond the banking sector, propelled these ideas into the mainstream. As policymakers broke with the neoliberal rulebook, previously marginal ideas rose to respectability. Propelled by a geostrategic reorientation, Biden’s Build Back Better agenda seemed to signal a renewal of the conviction that governments could ‘design’ markets rather than merely correct them.
When inflation surged at the end of 2021, many economists were quick to blame the government’s pandemic generosity for having fuelled aggregate demand. Larry Summers led a hawkish media offensive demanding austerity. Others however – Team Transitory, as they came to be known – counselled a more cautious approach. They pointed to the supply-side interruptions caused by the pandemic and the war in Ukraine, arguing that inflation was likely to be temporary. The solution was not to starve the economy of demand or to suppress wages; instead, public investment was required. As the Federal Reserve began to raise interest rates, the Biden administration declined to practise Obama-era belt-tightening. It did so on the strength of arguments that economists including Joseph Stiglitz, perhaps the most prominent establishment proponent of supply-side economics, had advanced in a letter defending the Build Back Better agenda. At the end of 2023, as inflation came down, Stiglitz declared victory for Team Transitory.
Taking a step back from immediate policy questions, Stiglitz has recently published a new book that seeks to reconstruct economic policy from first principles. ‘What kind of economic system is most conducive to a good society?’ is the central question of The Road to Freedom – its title a clear riposte to Hayek, who in The Road to Serfdom (1944) famously warned of the authoritarian danger posed by even modest levels of government intervention. Stiglitz’s book is not only an attack on the neoliberal faith in free markets, but an attempt to reclaim the ideal of freedom back from the right. This is a variation on a familiar argument – namely, that the market provides only ‘negative’ freedom, not ‘positive’ freedom: the capacities or resources we might need to put our otherwise merely formal freedom to use.
This is not Stiglitz’s first foray into normative theory and system design. In 1994, he published Whither Socialism? at a high point of market triumphalism, as the collapse of communism in Eastern Europe appeared to confirm what many economists had long believed: that centralized command economies simply cannot work. Stiglitz was one of the few establishment thinkers to sound a note of caution. Drawing on his information-centred reinterpretation of the operation – and limits – of market mechanisms (for which he would later receive the Nobel Prize), Stiglitz argued that the role of governments could not be reduced to a choice between non-interference or corrective action. Such a framing misunderstands how markets work and the role of government institutions in their design. In the many books Stiglitz has written since he was dismissed from the World Bank in 2000 (for questioning the organization’s single-minded commitment to free-market principles) and began teaching at Columbia University, he has allied that insight to a left-of centre political agenda, criticizing unqualified faith in free markets as an ideological ploy benefiting corporations and the wealthy while subjecting the rest of the population to instability and insecurity.
In this latest book, Stiglitz advances his critique with particular reference to the political philosophy of John Rawls, whose main claim was that institutions should guarantee minimum freedoms (positive and negative) for all citizens and permit inequality to widen only as long as the most disadvantaged were the primary beneficiaries of the gains (the ‘difference principle’). Indeed, it’s not a wild stretch to see The Road to Freedom as a modest companion volume to A Theory of Justice (1971). Rawls used the postulates of microeconomics to add rigor to questions of political theory, but he had little interest in practical economic questions – he was concerned with the design of political institutions, not markets. His thought-world did not feature banks, firms, unions, regulators or tax collectors, let alone malfunctioning supply-chains or inflationary pressures. And he was not perturbed by the kind of economic problems – oligopolistic market structures, information asymmetries, coordination issues, market externalities – that preoccupy Stiglitz.
What kind of alternative does Rawlsianism offer to the status quo? On the left, his work is widely considered not to offer a rejection of neoliberalism, but a merely gentler way of presenting and implementing it. At the invitation of Milton Friedman, Rawls even briefly joined the Mont Pèlerin society – although he soon seemed to recognize that its free-market fanaticism was incompatible with safeguarding the civic and political liberties to which his work was devoted. Yet his inattention to politics as a struggle over power and property rather than as a normative enterprise remained. A Theory of Justice was published at a time when new groups were claiming the same liberties as the white middle class. Rawls had little to say about this development, the social friction that it produced, the unwillingness or inability of progressives to accommodate these new claims, why tensions that could not be resolved politically expressed themselves as generalized inflation, or how an ascendant right was capitalizing on the economic chaos to start undoing positive freedoms for all but the most privileged. As neoliberalism radicalized over the next decades, it became easier to appreciate the differences between Rawlsianism and Reaganism. Yet the lines of continuity are sufficient that any attempt to position it as an alternative is bound to obscure rather than illuminate the road to freedom.
The Road to Freedom is divided into three parts. In the first, Stiglitz discusses phenomena that the price calculus of mainstream economics is not equipped to handle. Markets are bad at self-correcting, requiring governments to take the lead. Above all, markets are incapable of taking into account externalities, a catastrophic flaw at a time of rapid ecological deterioration. Stiglitz emphasizes the need for sustained public investment in key technologies, recognizing that many of the legal devices to incentivize private innovation such as patents have degenerated into instruments for rent-seeking. But despite the enormity of the task, he insists that tackling these systemic problems requires a complex, multifaceted constellation of sticks and carrots, in keeping with the tradition of supply-side Keynesianism: ‘it’s often better to use a package of policies, including regulations, prices, and public investments, to address externalities, especially in a case of the scope and complexity of climate change’.
Stiglitz takes his critique of mainstream economics a step further by challenging its assumptions about human behaviour. He draws extensively on recent advances in behavioural economics, which have stressed people’s malleability and the possibility of recalibrating their preferences and their patterns of thought and action. Education is emphasised here, for its ability not just to increase earning power but also to shape individuals’ character and capacities. Such ideas are not particularly new, of course. The economic and social value of education was central to Clinton’s Third Way programme, while the Obama administration was fond of seeking to ‘nudge’ people into adopting better habits with public messaging. There is greater novelty in Stiglitz’s appeal to society-wide norms and trust as key ingredients of supply-side policy, a form of economic communitarianism borne out in the nationalism that sustained Bidenomics.
Finally, Stiglitz offers his outline of a better economic system. Yet here, he fails to go much beyond the general policy sensibilities set out in the previous parts. He recommends a mixed economy that combines decentralized private decision-making with ‘a rich ecology of institutions’, but fails to specify how they would function or interact. By the book’s end, we know little more about what Stiglitz has in mind than we did at the start, where he proposes ‘something along the lines of a rejuvenated European social democracy or a new American Progressive Capitalism’. Without a compelling analysis of why the social-democratic model became unsustainable in the first place, it is not particularly helpful to propose this as an alternative. In other works, Stiglitz has had more useful things to say about the rise of neoliberalism, but even there he conceives of it narrowly, as a misguided political project dedicated to undoing things that worked perfectly fine – failing to register the extent to which neoliberal policy developed out of the tensions of welfare capitalism itself.
Central to this oversight is Stiglitz’s limited conception of the rise of finance. Along with other heterodox economists he conceives of this in terms of a neoliberal shift from public to ‘privatized Keynesianism’, with credit expansion coming to provide the demand stimulus that was formerly achieved through public spending. The problem with such an account is that it overlooks the significant role of finance in postwar Keynesianism. Credit programmes had always been the component of the New Deal reforms that could count on the most broad-based support. As long as borrowers repaid their loans, there would be no reason for credit growth to be inflationary – so went the reasoning. Indeed, the Keynesian understanding of finance as mere intermediation – a technical instrument to efficiently allocate society’s savings – ruled out that credit growth could be a systemic cause of inflation.
Postwar Keynesians in fact developed a paradoxical relationship to the rise of finance. On the one hand, their growth programme depended on extending credit when needed – the Keynesians in the Johnson and Carter administrations did much to deregulate the financial sector. And yet at the same time, their supply-and-demand models took no account of money and finance as active forces, which meant they lacked a sophisticated understanding of the dynamics they were setting in motion. The Federal Reserve became adept at credit support programmes and liquidity backstops to contain the instability that ensued from the deregulation of lending. As Hyman Minsky observed, such measures tempered financial boom and bust cycles into ‘chronic inflation’ – the inevitable outcome of a situation where the government puts a floor under financial markets but does not specify a ceiling, socializing losses but not gains.
For some time, credit growth could serve as a pressure valve, supporting consumer purchasing power, driving investment, particularly in the vital construction sector, and maintaining employment levels. But by the late seventies, inflation had gone from a chronic to an acute condition. As labour unions factored future price rises into their wage demands, a self-reinforcing spiral of inflationary expectations developed. No longer just a nuisance to financiers, inflation was at the root of a massive cost-of-living crisis, sparking widespread popular discontent. The difficulty, both intellectual and practical, that this posed to postwar Keynesianism made it vulnerable to attack from neoliberals, who viewed Keynesian meddling as responsible for the problems in the first place. A new generation, including future Federal Reserve chair Ben Bernanke, responded by remaking Keynesian monetary theory and blurring the difference with neoliberal paradigms such as the rational expectations school. ‘New Keynesianism’ retained a formal concern with the possibility of financial instability without providing much substantive insight into its dynamics. Bernanke’s own work smoothly evolved into a framework for inflation targeting that looked with suspicion on attempts to proactively manage financial instability.
To his credit, Stiglitz recognized that there was something deeply wrong with this direction of Keynesian thinking. In Towards a New Paradigm in Monetary Economics (2003), co-authored with Bruce Greenwald, he drew on his expertise in information economics to argue that money ought to be studied not just as a means of exchange but also in terms of credit relations, which are characterized by elements of uncertainty that need to be understood in their institutional context. According to Stiglitz, it is neoliberalism’s belief in market self-regulation, and its lack of interest in regulatory solutions, that make it such a poor manager of the financial system.
These ideas recalled Minsky’s claim that mainstream Keynesianism, by translating the insights of the General Theory into the static models of neoclassical theory and thereby jettisoning Keynes’s concern with uncertainty, had staged a production of ‘Hamlet without the Prince’. But the echoes were faint. For Minsky, money and finance were technologies in an open-ended struggle for economic survival, and managing uncertainty required governments to use public resources to protect systemically important private portfolios. Stiglitz wouldn’t go so far: for him, uncertainty was a fact of life that needed to be managed with the techniques of institutional economics to safeguard the financial system’s neutral and efficient operation. In the same breath, he questioned and reaffirmed the technocratic dreams of postwar Keynesianism.
The story of neoliberalism in practice often starts with how inflation was defeated by the Volcker Shock and Reagan’s assault on the labour movement, and it typically continues with a narrative focused on deregulation and austerity. But that’s only part of the story. Not only did the monetary policy reset leave intact many of the existing credit and liquidity support programmes, when financial institutions began faltering, the government started to bail out those it considered too systemically important to fail. Expectations of such assistance formed, setting financial markets on a path of sustained expansion. Absent that tide of asset inflation, the neoliberal turn might well have become what many took it to be at the time: a morbid symptom of the waning resilience of the global economic system that had been constructed under US hegemony. Such concerns were prominent until the early nineties. Volcker had been anxious that financial market exuberance could cause inflation to resurge, and his successor Alan Greenspan was initially no less alert to that possibility. It was during the Clinton years that Greenspan gradually found that easing credit no longer fuelled inflation. Seeing only upside, Greenspan eagerly built out the financial safety net, expanding credit facilities and lowering rates whenever liquidity seemed tight.
The Clinton administration’s commitment to fiscal discipline (even as expenditure on policing and incarceration absorbed a growing share of the budget), in combination with its continuation of anti-labour policies, kept inflation at bay. New Keynesians like Summers began to imagine that this offered a formula – financial expansion to drive the economy, public austerity plus central bank fine-tuning to stabilize it – for eternal prosperity. As a member of the Federal Reserve Board, Bernanke popularized the phrase ‘the Great Moderation’, expressing the conviction that financial instability had been overcome. Before long, the belief that asset price dynamics could be responsible for inflationary instability was considered economic illiteracy.
Though we must take exception to such naïve celebration of finance, that should not blind us to its central role in pulling the American economy out of its prolonged slump. Here and there, creative supply-side policies may have engendered micro-level, productivity-boosting synergies; but it was the public floor under the value of privately owned assets that maintained economic growth, delivering capital gains that supported consumption and demand and driving investment in new (tech) and old (housing) sectors. The finance floor became harder to overlook during the Obama years. His administration pursued an uncompromising turn to fiscal austerity following the bailouts of the Global Financial Crisis, and it was the Federal Reserve’s maintenance of a sprawling financial safety net of guarantees, subsidies and backstops that kept the economy from sliding into a second great depression.
In The Price of Inequality (2012), Stiglitz drew attention to post-crisis financial policy as one of the causes of escalating inequality, highlighting the pernicious effects of deregulation and the capture of regulatory oversight by powerful market players. But there is only passing reference to the liquidity support and asset-purchasing programmes that the Federal Reserve put in place. That the bailout state has no real place in Stiglitz’s picture of neoliberal America demonstrates the extent to which his thinking suffers from a blind spot typical of the mainstream Keynesian tradition: the inability to understand the financial system as a powerful, economy-shaping force involving an intricate blend of private risk and public supports. Attacking neoliberalism for its official aversion to government intervention has limited political traction in an age when public institutions are so deeply intertwined with the escalating concentration of private wealth.
During the pandemic, Stephanie Kelton and other proponents of Modern Monetary Theory were able to strip some of the artificial complexity from the policy debates, homing in on the financial architecture that remains murky in mainstream Keynesian ways of seeing the world. They pointed out that financial policy has become an elaborate configuration of bailouts and backstops for banks; and that taking mainstream policy debates too seriously is a sure way to lose sight of the fact that there are no economic laws stopping us from extending similar positive freedoms to other sections of the population. Supply-side Keynesians tend to view MMT as mirroring the naivety or disingenuousness of right-wing free-market thinking: pretending that financial constraints don’t exist is a distraction from the real task of navigating them constructively. Yet faced with a right that appears set to turn the bailout state into an explicit system of executive grace and favour, is it realistic to imagine that more technically sophisticated and nuanced policy agendas will carry the day?
A more effective political response will need to start from clear-eyed acknowledgement that the contemporary state is not primarily in the business of extricating itself from economic life, as per neoliberal ideology, but, to the contrary, forms a dense constellation of mechanisms that support asset values and drive inequality. Far from limiting itself to protecting all citizens’ negative freedom equally, public institutions are deeply and actively involved in the upward redistribution of positive freedom. To imagine that those same institutions might be capable of implementing a sophisticated programme of market redesign and industrial restructuring that could overpower the effects of the deep bailout state is a technocratic fantasy that reflects the limitation that has always plagued mainstream Keynesianism: the inability or reluctance to recognize when economic questions become political.
Read on: Dylan Riley, ‘Sermons For Princes’, NLR 143.