Progressive Confusion about Human Welfare


The deep political polarization in the United States has spilled over to the academic realm. Today’s progressive thinkers are determined to undermine the influence of the great conservative and libertarian thinkers—most notably John Stuart Mill, Friedrich Hayek, and Milton Friedman. One prominent entry into the genre comes from Joseph Stiglitz, winner of the Nobel Prize in Economics, in his recent polemic The Road to Freedom: Economics and the Good Society. Stiglitz’s title plays off the title of Hayek’s far greater 1944 book, The Road to Serfdom. Stiglitz writes as a man possessed of strong opinions but incapable of sustained discourse. He flits from topic to topic in disorganized fashion, making it virtually impossible to extract from his multiple musings a clear account of either his rhetorical targets or his view of the “good society.” Stiglitz the economist is plainly out of depth in writing about political philosophy or law.

This harsh judgment of Stiglitz should not be misinterpreted as an uncritical celebration of the far deeper thinkers he attacks. John Stuart Mill is famous for his articulation of the harm principle in his 1859 book, On Liberty: “The only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others.” Unfortunately, his principle is both too broad and too narrow. Too broad, in that his thesis has no explicit libertarian base, so that Mill does not distinguish between harms caused by competition, which are generally to the good, and harms by the use of force and fraud, which are not. He makes this mistake because he wrongly isolates the particular transaction from its systematic effects on third parties, for which competition produces positive-sum gains, while force and fraud produce negative-sum games. Mill thus never mentions monopoly power, nor does he have any discussion on the optimal form of taxation: to raise taxes to supply public goods, to guard against the dissipation of common-pool assets, or to regulate the organization of network industries like railroads. Yet his conception of harm is too narrow insofar as it does not comfortably reach either antitrust or common-pool problems.

Hayek made his greatest contribution in defense of decentralized decision-making authority by showing that the organization of the price system can coordinate the use of social resources better than any social planner, which is why onerous rent-control systems have to fail. But he never developed a consequentialist theory that allowed an understanding of how to plan for roads and railroads, which require developing coherent communication and transportation grids. His belief in the dominance of private ordering left him with little to say about the proper uses of taxation and eminent domain, because his favored spontaneous order of incremental development cannot deal with these issues. Yet Hayek’s contribution to the socialist calculation debate remains the best attack on the extravagant claims of central planning, whereby the state seeks, as Stiglitz does, to find some ideal distribution that does not impair growth.

Friedman was, of course, the champion of voluntary market exchanges, monetary stability, and flat taxes. He is known today for both his steadfast opposition to the New Deal cartelization programs in agriculture, transportation, and labor, and for his dogged insistence that corporations should have the maximization of shareholder profits as their sole goal, leaving to the government regulators to stop their abuses, such as pollution, while letting individual shareholders decide whether to underwrite charitable activities with their distributions of corporate profits. His insistence proved a major intellectual barrier against the proliferation of ESG (environmental, social, and corporate governance) that too easily drifts off into massive instances of wealth transfer. But Friedman’s general views on regulation (like those of his good friend and great economist, George Stigler) left him unprepared to deal with various environmental regulatory schemes that use a delicate mix of private and public remedies: ex ante and ex post relief remain the great challenges of system design.

All these criticisms of these great thinkers relate to their inability to develop an integrated theory of taxation and eminent domain. Alas, the standard libertarian prohibition against force and fraud does not recognize, as does a classical liberal theory, the imperative to make forced exchanges in which all are required to sacrifice in order to advance the common good, i.e., a Pareto improvement, preferably with an even distribution of surplus. Stiglitz ignores this tradition and wields the proposition that the government indeed has the power of eminent domain as a purported fatal objection to the classical liberal theory—yet eminent domain is in fact a central component of that theory. But Stiglitz offers no explanation whatsoever as to how that power should be exercised, and whether government actions pursuant to it are disguised wealth transfers or generate Pareto improvements whereby all individuals are left better off owing to the intervention.  The modern law fails at getting this right in two major areas: the zoning laws after Euclid v. Ambler (1926), with excessive zoning powers, and Penn Central Transportation Co. v. City of New York (1978), on the confiscation of air rights, both of which require painstaking analysis in lieu of some brief passing reference.

Instead of working through these issues systematically, area by area, Stiglitz first denounces the heterogeneous “Right” for its simple-minded views, only to demonstrate his own analytical deficiencies. He thus falls back on a misleading generalization that “one person’s freedom can often amount to another’s unfreedom.” Yes, there are always tradeoffs, but the definition of freedom that matters is one that allows liberty of action so long as it does not involve the use or threat of force on the one side, or the use of fraudulent devices on the other. Classical liberalism does not treat the two contestants as interchangeable. Stiglitz’s crude version of freedom gives the term no lexical power, and it does not even attempt to measure whether certain initiatives are positive- or negative-sum moves, a vital concern to any economist.

His sloppiness of thought has dire consequences. Stiglitz goes so far to say that libertarians are against the creation of highway systems that limit the freedom to move about at will. But there is no classical liberal who rails against setting out the rules of the road. On this point, Hayek is extremely instructive: his observation about this debate is that the government should set the rules of the road in ways that maximize the net gains from traffic movement, taking into account both the costs of constructing the system and containing its accidents. There are serious questions of system design that the government must coordinate and effectuate: how do we separate traffic moving in opposite directions; do we use stop signs, traffic lights, ramps, or overpasses?

Yet Hayek was also right when he chastised governments for seeking to determine the composition of the traffic. Thus it is a mistake to condition entry onto public roads on becoming a common carrier (who must take the goods of others for a regulated fee); or to say that under the Motor Carrier Act of 1935, your certificate of convenience and necessity will let you carry oranges from California to Illinois but not wheat back from Illinois to California; or that the Civil Aeronautics Board determines routes and rates for airlines; or that the Federal Trade Commission could determine, as the progressive jurist Felix Frankfurter wanted, the composition of the traffic on television and radio by administrative decree.

The list of historical errors goes on. Stiglitz condemns an allusion that lauds an “employer’s freedom to pay whatever they can get away with” under “the elegant name of ‘freedom of contract.’ ” But, unbeknownst to Stiglitz, the entire tradition of freedom of contract historically understood the need for a well-crafted system of formalities, like the writing requirements and registration system. It incorporated a basic account of the police power, articulated in the oft-misunderstood decision in Lochner v. New York (1905), which allowed regulation to protect health, safety, morals, and the general welfare, including the antitrust enforcement against contracts in restraint of trade—all at the height of laissez-faire.

So why does Stiglitz make this series of elementary blunders? In part, because he misses the distinction that Hayek stressed in the opening of The Constitution of Liberty (1960), namely between loss of freedom and want of wealth. Stiglitz flat out declares that “[a] person facing extremes of want and fear is not free.” Wrong, for it matters whether that poor person is free to sell his labor in an open market, where he may well rise from rags to riches or into the middle class, or whether he is shackled down with handcuffs, or faces a minimum-wage law or licensing restriction that prevent him using his labor, or, indeed, receiving personal assistance from individuals, churches, or charitable organizations, who supply a helping hand—standard practices under laissez-faire. But Stiglitz lacks any systematic background in particular subject-matter areas to answer the specific questions. His goose eggs on every relevant issue are par for the course for progressive thinkers who always find clever ways to dissipate everyone else’s wealth and individual worth.

© 2023 by the Board of Trustees of Leland Stanford Junior University

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