from the New Republic:
The New Republic
Falling Down
by Joseph Stiglitz
No manufacturing. No new ideas. What's our economy based on?Post Date Wednesday, September 10, 2008
More than 75 years ago, confidence in the market economy got a rude shock as the world sank into the Great Depression. Adam Smith had said that the market led the economy, as if by an invisible hand, to economic efficiency and societal wellbeing. It was hard to believe that Smith was right when one in four Americans was out of a job. Some economists held true to their faith in self-regulating markets; they said, just be patient, in the long run the market's restorative forces will take hold, and we will recover. But Keynes's retort ruled the day: In the long run, we are all dead. We could not wait. Today, even conservatives believe that government should intervene to maintain the economy at or near full employment.
Those who believe in free markets have now received another rude shock: We have not yet sunk into an "official" recession, but it has been more than half a year since any new jobs were created, and, meanwhile, our labor force continues to grow. If the Great Depression undermined our confidence in macroeconomics (the ability to maintain full employment, price stability, and sustained growth), it is our confidence in microeconomics (the ability of markets and firms to allocate labor and capital efficiently) that is now being destroyed. Resources were misallocated and risks were mismanaged so severely that the private sector had to go running to the government for help, lest the entire system melt down. Even with federal intervention, I have estimated the cumulative gap between what our economy could have produced--had we invested in actual businesses, rather than, say, mortgages for people who couldn't afford their homes--and what we will produce over the period of our slowdown to be more than $1.5 trillion.
Blame has rightly fallen on the financial markets because it is their responsibility to allocate capital and manage risk, and their failure has revived several old concerns of the political (and economic) left. Some looking at the U.S. economy's decreasing reliance on manufacturing and increasing dependence on the service sector (including financial services) have long worried that the whole thing was a house of cards. After all, aren't "hard objects"--the food we eat, the houses we live in, the cars and airplanes that we use to transport us from one place to another, the gas and oil that provides heat and energy--the "core" of the economy? And if so, shouldn't they represent a larger fraction of our national output?
The simple answer is no. We live in a knowledge economy, an information economy, an innovation economy. Because of our ideas, we can have all the food we can possibly eat--and more than we should eat--with only 2 percent of the labor force employed in agriculture. Even with only 9 percent of our labor force in manufacturing, we remain the largest producer of manufactured goods. It is better to work smart than to work hard, and our investments in education and technology have enabled us to enjoy higher standards of living--and to live longer--than ever before. America's dominance in so many aspects of high-tech is testimony to the real returns to these soft expenditures. Indeed, I would argue that we would do even better if we had more resources in these sectors. ......(more)
The complete piece is at:
http://www.tnr.com/politics/story.html?id=947bf9e5-923b-409a-adac-579658c99ddf
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