Making Globalization Work by Joseph Stiglitz

Book Review: 'Making Globalization Work' by Joseph Stiglitz

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.

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