In the old liberal economics, tax rates had no effect on incentives, command-and-control regulations never had unintended consequences, and monetary policy was purely decorative. Privatization of retirement accounts would be as dangerous as privatization of nuclear weapons. The Phillips Curve, which had no theoretical basis whatsoever even in the Keynesian model, guaranteed that there was a tradeoff between unemployment and inflation that omniscient liberal economists and legislators could fine-tune at will.

Some time during the Reagan and Thatcher free-market booms, the smarter and younger liberal economists grudgingly became aware that their old belief system didn’t work. Without ever admitting error, they tiptoed away from the mantras listed above. Among the best and brightest of the new bunch was Joseph Stiglitz. Stiglitz chaired Bill Clinton’s Council of Economic Advisors for four years, then moved on to be Chief Economist of the World Bank for another three before sharing the Nobel Prize in economics in 2001 for his work on market information asymmetries.

This year Stiglitz weighs in with Globalization and Its Discontents, in which he attempts, commendably, to take an empirical rather than emotional look at the costs and benefits of globalizations. Almost undebated for decades, globalization has become an issue in the last several years, as meetings of multilateral economic bodies have turned into urban war zones. Stiglitz has made his book succinct and readable, rare accomplishments for an economist and ones for which he deserves applause.

By “globalization,” Stiglitz limits himself to meaning increasingly interrelated global trade and financial activity, rather than more dubious notions like “cultural imperialism.” Indeed, Stiglitz’s focus is on the work and effects of the three main postwar multinational economic entities: the World Bank, the International Monetary Fund, and the World Trade Organization. Focusing on their policies toward Russia throughout the 1990s, East Asia in 1997-98, and Argentina from the late 1990s through the present, Stiglitz is unsparing in his criticism of the mistakes these multinational entities have made.

Stiglitz recognizes that globalization has brought important benefits to poorer countries and at any rate is not going away soon. But he notes with surprise and disappointment that all three entities are dominated by the countries that founded them and continue to provide most of the funds–chiefly Western Europe, the United States and Canada, and Japan. Saving particular ire for the IMF, he reports that all three organizations have in the main become captives of the people and worldviews of those in control: financiers and finance ministers for the IMF and World Bank, commercial interests and trade ministers for the WTO.

As economic theorist Gomer Pyle might say, “Sur-prise, sur-prise!” A student of Hayek or of James Buchanan and public choice theory would not only have observed such developments now but would have predicted them from the structure of the organizations. Still, it is laudable that a basically liberal economist is able to acknowledge such deep flaws in multinational government-sponsored organizations.

The ironic counterpoint to this, however, is that he is more ambivalent about free trade, the one policy that 20 years ago he and nearly every liberal economist would have supported wholeheartedly.

Stiglitz would improve the workings of the IMF, the World Bank, and the WTO by giving a greater voice to the constituents in the poorer countries. Although the notion that poor people in countries with bad governments shouldn’t be made lab animals for haughty IMF (read: French) bureaucrats is laudable, if this proposal were put into effect it would run into the fate of any plan to have borrowers control a bank. “Economic democracy” doesn’t work.

While stiglitz does have a remarkably realistic understanding for a liberal of many aspects of how the world economy works, he gratingly makes two blunders over and over. First, he describes the IMF’s pinched proclivity for requiring poor countries to raise taxes and balance their budgets as being the handiwork of “free market” economists, whom he pointedly distinguishes from “first-class” economists. Note to Professor Stiglitz: since Ronald Reagan’s victory in 1980, the central policy of mainstream free-market thought has been to reduce taxes and spur economic growth even if this means running a deficit. Second, he equates free markets with what Mikhail Gorbachev used to refer to as “wild capitalism”: government’s turning a blind eye to the wealthy and powerful’s plundering the weak and impoverished by any means at hand. Thus, Stiglitz blames the economic catastrophe of 1990s Russia on his philosophical opponents rather than acknowledging that national and international government entities alike were surprised at how thoroughly Russia’s kleptocracy dominated its new economy.

Let us hope that liberal economists learn as much in the next 20 years as Stiglitz’s book suggests that they have learned in the last 20.