Joseph Stiglitz has written a book entirely devoted to a critique of Milton Friedman’s (1962, Capitalism and Freedom, Chicago: University of Chicago Press) and Friedrich Hayek’s (1988, The Fatal Conceit: The Errors of Socialism, Chicago: University of Chicago Press) argument (“claim”) nexus that competitive free-market capitalism is quite effective in advancing human economic betterment. The usual popular evidence cited in support of the efficacy of markets is the natural experiment of North Korea, able to feed itself only by Chinese purchases of its coal, compared with South Korea, a citadel of productivity and prosperity that exports its products all over the world; also, we have Cuba locked into socialist poverty, and Venezuela’s cyclical variations with the ebb and flow of socialist politics.

Stiglitz, however, prefers to view economic achievement only through the lens of improvements in standard competitive market price theory based on perfect information, which, because information is in fact asymmetric and imperfect, implies that market economies have failed everywhere, the evidence for which he searches, and finds, by these interpretations.

But theoretical work over the past half century has shown the fragility of the intellectual edifice on which they [Friedman and Hayek] rest their case. Even small imperfections of information, small costs of search, or small sunk costs (costs that can’t be recovered if one exits a business) completely change the standard results, giving scope for high levels of market power and exploitation. (p. 40)

It is correct that Stiglitz did work in the abstract intellectual theoretical tradition of neoclassical economics showing how the standard results were changed by asymmetric or imperfect information. He is oblivious, however, to the experimental lab and field empirical research showing that agent knowledge of all such information is neither necessary nor sufficient for a market to converge to competitive supply-and-demand equilibrium outcomes.

Consequently, both the standard and the modified theories are irrelevant because buyers and sellers in possession only of dispersed, private, decentralized, value information easily converge to competitive price-quantity allocations in experimental markets over time via learning in repeat transactions.

It is the standard, as well as the Stiglitz-modified, intellectual edifices that are falsified by experimental research, thereby stranding these edifices as isolated islands of intellectual pursuit. His book is thus flawed at its own claimed foundation based on experimental empirical research. If Stiglitz is to rescue his claim that the market system fails to serve human betterment, then his argument cannot rest on the discredited isolated island of theory he cites.

However, his references to abstract information theory exhaust the scholarly intellectual content of his book. The book is more, and most, accurately described as a political diatribe against “right wing” economics. The evidence is most clearly revealed in the frequency of his use of diatribe-al language as symbolized and measured in the following word count:

the right or right wing, 170 times
(Adam) Smith, 50
free markets, 50
unfettered, 41 (fettered, 0)
the rich, 40
self-interest, 27
selfish, 25
the poor, 25
invisible hand, 20
Chicago, 17
Harvard, 9
the left, 6

I became acquainted with Joseph Stiglitz in the spring of 1971 when I was a visiting fellow at the Cowles Foundation, Yale University. I knew him as an abstract theorist concerned with the effect of buyer and seller knowledge, or information, on market prices in markets. The traditional belief, beginning with the neoclassical intellectual revolution of the 1870s, was that for perfectly competitive theoretical supply-and-demand equilibrium prices to form in markets, the participant buyers and sellers would necessarily have to possess complete knowledge, or perfect information, concerning the operant conditions of supply and demand in their market, and further, large numbers of buyers and sellers were required to assure competitive price-taking behavior. This belief stemmed especially from the writing of William Stanley Jevons, who asserted: “A market, then, is theoretically perfect only when all traders have perfect knowledge of the conditions of supply and demand and the consequent ratio of exchange [price]” (1871, The Theory of Political Economy, London, p. 75).

This standard belief system underlying price theory beginning in the 1870s down to the 1960s that markets require their participant buyers and sellers to have complete knowledge, or information, on the conditions of supply and demand prevailing in any market, motivated George Akerlof, Michael Spence, and Stiglitz to extend this manner of thought and its postulates to recognize and take account of the existence of asymmetric information and to establish that this fundamentally changed the resulting theory’s implications for equilibrium outcomes. For these contributions to theory, Akerlof, Spence, and Stiglitz were awarded the Nobel Prize in Economics in 2001. The following year, the Nobel Prize was awarded to me and Daniel Kahneman. Ironically, my award was for work helping to create the field of experimental economics. This work had included my experiments, followed by many replications by others, showing that the assumption of complete information and any of its variants with asymmetric information was not necessary because people in the experiments were able to discover equilibrium prices by trial and error while possessing only private dispersed information (see, for example, my 1962 article, “An Experimental Study of Competitive Market Behavior,” Journal of Political Economy 70, no. 2, 111–37). Moreover, market experiments comparing complete with private information showed that complete public information slowed convergence to supply-and-demand equilibrium because people in the market could identify better outcomes for themselves than their respective imputations in competitive equilibrium outcomes. They attempted to attain these outcomes, but their attempts failed as unsustainable given what others did, and this is what slowed convergence (Vernon L. Smith, 1965, “Experimental Auction Markets and the Walrasian Hypothesis,” Journal of Political Economy 73, no. 4, 387–93). Hence, public willingness-to-pay/willingness-to-accept (WTP/WTA) information was found irrelevant for the economics of markets.

These asymmetric-information scholars had made what might have been important contributions in extending the belief state of economic theory, but that theory was neither correct nor appropriate in addressing a better and more complete understanding of markets.

This did not mean that certain kinds of information had no effect on market outcomes. To the contrary, as emphasized in the contributions by Spence, information served as a “signal” to better identify the effect of that information on market prices; for example, having a college education was a signal that predicted higher wages in labor markets. Information was an important signal because it affected the WTP of buyers and the WTA of sellers, and affected wage prices, but that critical price-determination process remained unmodeled in the theory literature.

Consequently, the central problem with this theory was that it was irrelevant in price determination: complete information was neither necessary nor sufficient for market participants to use their dispersed and varied private willingness-to-pay and willingness-to-accept information to find and publicize market prices. The first experiments, showing that complete WTP/WTA information was not necessary, were reported in Smith (1962), and none of us could any longer accept the standard and Stiglitz-modified theories. Further experiments, showing that such information was not sufficient, and that equilibrium prices need not require that markets clear, were reported in Smith (1965). (For propositions summarizing and evaluating observed empirical regularities in these experimental markets, see Vernon L. Smith, Arlington Williams, W. K. Bratt, and M. G. Vannoni, 1982, “Competitive Market Institutions: Double Auctions vs. Sealed Bid-Offer Auctions,” American Economic Review 72, no. 1, 58–77; and Vernon L. Smith, 1991, Papers in Experimental Economics, Cambridge: Cambridge University Press.) It was natural, in the first market experiments, to investigate those questions, such as the information state of traders, that were central to the abstract economic theory of the time.

So, the Akerlof-Stiglitz modifications of theory were founded on a false conditional and thus were not germane to practical market performance. They were born falsified. The important game-changing effect of experiments was to refocus price theory on the need to model price discovery by buyers and sellers—who had no need of either complete or asymmetric information—in taking actions that are equilibrating in markets, as e.g., developed by Sabiou Inoua (as reported in Sabiou M. Inoua and Vernon L. Smith, 2022, Economics of Markets: Neoclassical Theory, Experiments, and Theory of Classical Priced Discovery, Cham, Switzerland: Palgrave Macmillan).

Stiglitz has remained blissfully unaware of or fettered by these discoveries and has for the most part interpreted markets as failing because the wealth created through markets has not benefited the poor as much as the rich. Never mind that market prices, including wages, depend directly on WTP and WTA, and it is these that must be related to income, wealth, or other variables. Hence, if a person is poor because their market value commands a low wage, and this wage means that their WTP for consumer goods is inadequate, they will consume less. There is nothing about market performance that guarantees equality in income distributions.

Based on the above experimental market discoveries, the public policy remedy for the poor is to increase their WTP by policies directed to increasing the value of the products of the poor in labor markets, or to supplement their WTP with transfers, such as food stamps or clothing and housing allowances, to the poor. These must be proportional supplements to earned income (as in Hong Kong and Singapore welfare programs) if economic policy is not to trap people into relative poverty, as might have happened to Stiglitz in Gary, Indiana, and me in Wichita, Kansas. The American experience is that many people, besides Joe and me, rise to incredible heights from lowly origins because of the existence of relatively free markets. Most are unaware as to why, because markets work their magic regardless of the beliefs of their agents, and it is an own-interest tragedy that Stiglitz is not better informed.

The needed policy implications are quite clear, and they have nothing to do with Stiglitz’s market failure and everything to do with how markets function. Indeed, the appropriate policy recommendation is to fully support the market-system maximization of prosperity, as did Friedman and Hayek, then use incentive mechanisms to improve the relative positions of those who are disadvantaged in that system. Never kill the goose that lays eggs of gold; rather nourish and feed her with joy and allow innovation to hatch some of those eggs.