Thank goodness for economists like Smith who are willing to stand up for freedom, back it up with quality scholarship, and call out people like Stiglitz.

The economist Joseph Stiglitz wrote a book last year, The Road to Freedom, in which he caricatures Milton Friedman and F. A. Hayek and mischaracterizes the history of economic policy as one of ever smaller government, despite the constant growth of the administrative state and the explosion in government debt. You can read Ryan Bourne’s scathing review from the November 2024 issue of National Review here.

Now Vernon Smith, the 97-year-old economist who won the Nobel Prize in economics in 2002 and contributed to Capital Matters’ Adam Smith 300 essay series in 2023, has written a review poking at another aspect of Stiglitz’s wrongness. Writing for the Independent Review, Smith explains how Stiglitz would have profited from having taken seriously the work of Smith and his colleagues in the field of experimental economics.

Smith writes that Stiglitz basically critiques markets for falling short of the abstractions used in economics textbooks. Perfect price competition is a theoretical construct based on a series of unrealistic assumptions. One is that buyers and sellers all have perfect information about the market. “Because information is in fact asymmetric and imperfect,” Smith writes, Stiglitz finds that “market economies have failed everywhere, the evidence for which he searches, and finds, by these interpretations.”

This is a sort of circular reasoning whereby economists create a model based on intentionally unrealistic assumptions, then critique reality for not fitting the model. Smith is one of the top economists who, starting in the 1960s, pioneered a different approach. He began to run experiments with volunteers that simulated markets.

When these experiments began, economists expected them to find that markets wouldn’t clear very well, for precisely the reason Stiglitz suggests: the volunteers were real-life people who didn’t have perfect information. But the experiments found exactly the opposite. As Smith writes, “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.”

Then, Smith ran experiments comparing people with complete information with people with incomplete information, and he found that the people with incomplete information got to the market equilibrium faster “because people in the market could identify better outcomes for themselves than their respective imputations in competitive equilibrium outcomes.”

These experiments were incredible demonstrations of the power of markets and of the importance of the market process. Participating in markets allows people to discover new opportunities that they would not have otherwise found, and markets work to find equilibrium prices like the textbooks say even when the textbook assumptions don’t hold.

Economists have known about these experimental results for 60 years, and they achieved such renown that Smith was awarded the Nobel Prize for experimental economics 23 years ago. Yet, Smith writes, “Stiglitz has remained blissfully unaware of or fettered by these discoveries.”

“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,” Smith writes. “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.” (By economist standards, this is a very sick burn.)

It turns out we don’t need more government intervention in markets, as Stiglitz wants, and the socialism he has supported in places such as Venezuela has made people poorer, not richer. “The appropriate policy recommendation is to fully support the market-system maximization of prosperity, as did Friedman and Hayek,” Smith writes.

Thank goodness for economists like Vernon Smith who are willing to stand up for freedom, back it up with quality scholarship, and call out people like Stiglitz — even at 97 years of age.