Joseph Stiglitz is awarded the Nobel Memorial Prize in Economic Sciences in 2001 together with his two other colleagues, George A. Akerlof and A. Michael Spence, for their pioneering research done in the area of information economics. This book is developed on the basis of their research in that area.
Basically their research assessed the significant role played by information in the current practice of economic transaction. Their study shows that the existing asymmetry of information between agents, due to each agent’s pursuit of self-interest, compromises fair transaction in the market. For instance, a client doesn't reveal his health problems to his insurance agent. Or a car salesman holds back certain information from his customers about the secondhand car he tries to sell. And this, according to Stiglitz, is in direct contrast against Adam Smith's market economy.
More than three hundred years ago, Adam Smith wrote that the characteristic pursuit of self-interest in the market will effectively though unintentionally bring about the common good of the society at large. The famous metaphor 'invisible hand' is used by Smith to describe how this accumulated pursuit of self-interest by every individuals in the society will eventually work towards the common good.
In other words, Smith was saying that self-centred pursuit indirectly contributes to the welfare of the community even though the individuals pursuing it often are not conscious of these wider positive implications that their pursuit has. Hence external factors such as the involvement of government in the redistribution of wealth and the management of the natural resources are redundant as the invisible hand by itself knows why it should do what when and how to do it.
As Smith has written in Part IV.I.10 of 'The Theory of Moral Sentiment',
“[The rich] are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species.”
(Adam Smith, ‘Part IV: Of the Effect of Utility upon the Sentiment of Approbation, IV.I.10’ in The Theory of Moral Sentiment, available at http://www.econlib.org/library/Smith/smMS4.html#Part IV. Of the Effect of Utility upon the Sentiment of Approbation (accessed 5 July 2011).
Stiglitz remarked that Smith's idea has been inherited as a dogma in economics and have spawned what we now called "market fundamentalism", a "belief that markets by themselves lead to economic efficiency." (p.xiii)
Stiglitz’s research raises critical questions concerning Smith’s proposal by pointing out that the pursuit of self-interest does not promote common good for the society. He shows that the existence of asymmetry of information due to the pursuit of self-interest has jeopardized the prospect that common good can be attained without any external regulation.
In Stiglitz’s own words,
"My research on the economics of information showed that whenever information is imperfect, in particular when there are information asymmetries—where some individuals know something that others do not (in other word, always)—the reason that the invisible hand seems invisible is that it is not there. Without appropriate government regulation and intervention, markets do no lead to economic efficiency." (p.xiv)
However, that is not the gist that Stiglitz’ wanted to make in this book. Rather it serves as the framework to understand the entire argument in 'Making Globalization Work'.
The major portion of the book is compilation of incidents happened around the world that Stiglitz perceived as evidences that expose the inadequacy of Smith’s idea. Pages after pages are problems seen in our current globalized context. Stiglitz, nonetheless, clarified that these problems are not due to globalization but "in the way globalization has been managed." (p.4)
One very good point raised in the book is the need for countries to adopt Human Development Indicator (HDI), which provides a broader approach to appraise development by combining the measures of income, life expectancy, and education, as a gauge for nation’s development rather than depending solely on Gross Domestic Product (GDP). (p.44)
To reflect further on Stiglitz's proposal, the importance of metric measurement lies in the fact that such measurement does not merely provide a track record of a country’s economic performance but actually supply a national narrative for the country. And with that, the national identity and responsibility for the country and towards fellow citizens to make sense of themselves in the reality of a nation-state.
That means if a country is obsessed with GDP, then economic performance will be prioritised at the expense of other significant aspects that mark a healthy community such as manageable stress level, better quality of family life, low crime rate, high level of tolerance over differences, ecological concerns, and others.
The book is critical over the policies of the International Monetary Fund (IMF) for its inconsistency and hypocrisy, and over various profit-driven legislature bodies like the Trade-Related Aspects of Intellectual Property Rights.
It is difficult for the reader to fail to notice the author's extensive exposure to international issues, covering almost every continent. However, I find two of his analyses on Malaysia's condition mistaken.
First, his positive evaluation of Malaysia’s ruling party UMNO’s "aggressive affirmative action program to help the ethnic Malays." (p.49) Stiglitz affirmed this policy as,
"[A]n important part of nation building; the view that all groups would benefit from a more stable and equitable society was widely accepted, even though some members of Malaysia’s ethnic Chinese community may have lost opportunities as a result." (p.49)
Stiglitz does not seem to be aware that such program has backfired itself. Instead of developing the Malay community, the community has become too dependent on the program.
Due to the nature of the program that is based on ethnicity, the racial gap in the Malaysian society has since widened and deepened, producing a segmented job market. We find that the majority of the Malays occupies the civil sector while other ethnic groups have no choice but to strive in the industrial and commercial sectors. As a result, the middle class of other ethnic groups expanded faster than the Malay.
The race-based policy also has implicated the education system of the country. Generally the other ethnic groups have to work harder compared to the Malays to gain entry into local public universities. Many of the Malays take it for granted that the government will provide a place for them in the universities with the race-based quota system.
It worth bearing in mind that this quota system is not similar with those in America that serves the purpose to cultivating a multi-cultural learning environment among university students. In the Malaysian context, this quota system has been abused: Many Malays lack the willingness to strive since they perceive that they can always rely on the government to favor them. This inevitably drives racial discrimination, intellectual disparity, and increased distrust among different ethnic communities.
Stiglitz's second mistaken analysis is on the Malaysia’s management of its natural resources through Petronas. (p.33-34, 143) The oil business in Malaysia is a controversial affair. For instance, the federal government has been depriving millions of dollars of oil royalty to opposition-ruling states such as Kelantan. (See Kelantan claims RM800m per annum oil royalty, http://www.themalaysianinsider.com/malaysia/article/kelantan-claims-rm800m-per-annum-oil-royalty/ [accessed 5 July 2011].)
As a side note, I find it puzzling for Stiglitz who spent the entire Chapter 6 of the book in alarming the current ecological crisis would affirm so highly the economic values of the oil industry.
The fact is that Malaysia’s economy has become too dependent on its petroleum business arm, Petronas, which contributes up to half of the country’s revenue. (See FACTBOX-Petronas: Malaysia's golden goose, http://uk.reuters.com/article/idUKSGE65T0DL20100701 [accessed 5 July 2011].) It is only a matter of time for the country's economy to arrive at its impeding crisis for heavily relying on a natural resource that is depleting.
Moving on to other matters discussed in the book. The author, despite all his practical recommendation for governmental intervention in contemporary world, has ignored (if not failing to make explicit) the fundamental issue contributing directly to the discourse on economics: the notion of justice in power relations.
This lack rendered the reader a sublimed sense of vagueness in the solution proposed by the author. Unless this issue is addressed, there simply would not be resolution among dissenting countries and corporations since everyone is driven by self-interest.
To give an example, Stiglitz argued from the ground of "fundamental values" that a comprehensive democratic process would subject pharmaceutical companies to trade off profit for the right of life. (p.131-132) However, it is doubtful that democracy, which basically a polity empowered by the people’s self-interest, would bring about a better-adjusted economic process.
When subjected to democratic process, pharmaceutical companies' willingness to trade off profit depends on workers in the companies to cast vote for that trade off. If the majority of the citizens are against the trade off, then does that means there is nothing can be done?
The persistence of these perplexing questions demonstrates that at the bottom of the discussion on globalization is the negotiation on who says what belongs to who and why. This is a political question as much as a moral discovery. If it is not the invisible hand, then who should have the final say on goods distribution, citizens’ employment and welfare, and corporations’ global responsibility? In the book, Stiglitz tells us that there is no invisible hand and hence the market by itself cannot provide answers to these questions. Yet he does not tell us how can the government and citizens of the globe fare better.