I read this book in contrast to Friedrich von Hayek's "The Road to Serfdom," which is a a manual for the type of classic liberalism/neoclasicalism that Stiglitz attacks. The following is my comparison of the two.



In concluding Whither Socialism, Joseph E. Stiglitz states that "if I were to claim that socialism as an ideology can now officially be declared dead, I do not think it would be an exaggeration." This declaration is made after a lengthily and sustained attack on socialism in the form of market socialism and communism as described by models based on the central tenets of capitalism. Stiglitz's supposed frontal assault on socialism is in all actuality a flanking maneuver against capitalism.

As Stiglitz is berating socialism from one side of his mouth he is suggesting a move away from liberal economics through greater governmental intervention on the other. The changes Stiglitz supports are of just the type warned against in Friedrich A. Hayek's The Road to Serfdom. Hayek notes that in theories like Stiglitz's "the question is no longer how we can make the best use of the spontaneous forces found in a free society. We have in effect undertaken to dispense with the forces that have produced unforeseen results and to replace the impersonal and anonymous mechanisms of the market by collective and `conscious" direction of all social forces to deliberately chosen goals." Hayek would see the direction Stiglitz seeks to push the economy as the first leg of a trip on the road to serfdom.



Walrasian model via Arrow and Debreu

Hayek was strongly influenced by the work of the Austrian school and therefore, would undoubtedly (as evinced by his writing) feel that the complexity of subjective individual human choices in the market would leave models lacking at best. Nonetheless, Hayek alludes to some of the elements of the Walrasian model throughout his book but in many respects he attacks them. It is precisely this model that Stiglitz spends approximately the first third of his book attempting to disprove.

The Walrasian model "postulates large numbers of profit- (or value-) maximizing firms interacting with rational, utility-maximizing consumers on and an economy in which there is a complete set of perfectly competitive markets--for all goods, in all periods, in all states of nature (for all risks), at all locations." In less technical terms this model first supposes "that it is possible for markets to engender a general economic equilibrium, a set of trades between economic actors in which every firm demands resources and labor and sells outputs in a profit-maximizing fashion, subject to its technological constraints." Consumers provide labor then purchase goods at utility maximizing market prices that do not exceed the value of the labor or resources they are willing to sell. "This set of trades is equilibrium in the sense that no demand (by a firm or consumer) goes unfulfilled and no supply (of a resource or commodity) goes unpurchased."

Hayek generally applies his ideas in a Walrasian setting as far as capitalism is concerned. He certainly envisions the give and take of the market as described above noting that "our freedom of choice in a competitive society rests on the fact that, if one person refuses to satisfy our wishes we can turn to another." This satisfying of wishes would of course include a value maximizing decision by the consumer in an attempt to better his position. Hayek however does not follow the mathematical formulation of the Walrasian model in respect to the presumption of perfectly competitive markets. This presumption relies on perfect information related to all goods at all locations at all times. Hayek writes that "we may have to sacrifice a possible immediate gain as the price of our freedom--but we avoid, on the other hand, the necessity of making future developments dependent upon the knowledge which particular people now possess."

Stiglitz uses the formal description of the Walrasian model to build an argument against the Lange-Lerner-Taylor theorem, which was derived from the Walrasian model. The Lange-Lerner-Taylor theorem is a theory of market socialism which presumes that "if the government allocates capitol in exactly the same way the private firms would allocate it' then the resource allocations emerging from the two systems would be identical." Stiglitz concedes that "Hayek had rightly criticized this view that the central planner could never have the requisite information." Within this statement lies the heart of Stiglitz's argument against the Walrasian model. Stiglitz, however, carries the effects of imperfect information over from its effect on a central planner to its effects on consumers and producers.

"What is generally referred to as the first fundamental theorem of welfare economics shows that under certain conditions every competitive equilibrium is Pareto efficient--that is no one can be made better off without making some one worse off." This theorem is a modern rendition of Adam Smith's invisible hand wherein "it is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest." Smith goes on to describe how this self love promotes societal good as a side effect writing "by pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it."

Hayek concurs with the notion that a person in a society acting in their own interest tends to promote the good of the whole society. Hayek does not limit this to its application to economic effects; however, he would argue that this ability to pursue one's best interest also has bearing on political good. Of self-seeking efforts bettering one's position Hayek states that "what in ordinary language is misleadingly called the economic motive means merely the desire for general opportunity, the desire to achieve unspecified ends. If we strive for money it is because it offers us the widest choice in enjoying the fruits of our efforts." Hayek notes that the "argument in favor of economic freedom was the outcome of a free growth of economic activity which had been the undesigned and unforeseen by-product of political freedom." He uses this notion to serve as a warning that governmental control over economic activities is tantamount to government control over every aspect of the citizenries' lives. As economic freedom has had the byproduct of political freedom in Hayek's view, loss of economic freedom would result in loss of political freedom. This tying together of economic and political good differs greatly from the traditional notion of Pareto optimality. Since Hayek does not presume perfect information about the effects of market decisions on conditions in the future he implies an added value to decentralized decisions that outwardly may appear inefficient. He states that "in the short run the price we may have to pay for variety and freedom of choice may sometimes be high, in the long run even material progress will depend on this very variety, because we can never predict from which of the many forms in which a good or service can be provided something better may develop."

Stiglitz takes a purely formal economic approach in analyzing the first fundamental theorem of welfare economics. He argues "that the first fundamental theorem of welfare economics -asserting the efficiency of competitive economies -is fundamentally flawed" and that "quite contrary to that theorem, competitive economies are almost never efficient." Stiglitz again attacks the lack of perfect information as is assumed in the rigid formal model of Pareto efficiency. Stiglitz notes that "the incompleteness of the market can itself be explained by transaction costs, and important component of which is information costs." Stiglitz sees these information costs as precluding any possibility of having a Pareto efficient market. Stiglitz uses asymmetries of information as an example of a situation where the market is not efficient. If one party has more, or more accurate, information they may be able to strike a bargain wherein they come out as the winner over the other. Additionally, Stiglitz posits that the high cost of information creates barriers to Pareto efficiency. Where one firm lowers its price for a good the "low-priced firm can gather for themselves a larger customer base, but the high-priced firms can survive, serving only those who have high search costs and who have not had the good fortune to find a low priced firm." Stiglitz concludes his analysis of the first fundamental theorem of welfare economics by describing that the failures of market socialism are due to the fact that like capitalism, market socialism failed to pay any attention to the problems posed by imperfect information.

Hayek in the Austrian tradition would tend to look in a negative light on the formalistic model driven approach to the first fundamental theorem of welfare economics. Undoubtedly he would consider the information costs as Stiglitz describes them to be a problem, though he may view them as a part of the whole of the transaction. Hayek does however express that:

In a competitive society the prices we have to pay for a thing , the rate at which we can get one thing for another, depend on the quantities of other things of which by taking one, we deprive the other members of society. This price is not determined by the coconscious will of anybody. And if one way of achieving our ends proves too expensive for us, we are free to try other ways. The obstacles in our path are not due to someone's disapproving our ends but to the fact that the same means are also wanted elsewhere.

This statement clearly mirrors the formal description of Pareto optimality, Hayek doesn't mention t