We don’t often delve into political economics, as its not really our schtick on this blog, but this article by economist Joseph Stiglitz in The New Republic on the factors that caused the current woes is in my view quite good, in that its clear cut and sensibly argued, and tallies with some of the thoughts Umair Haque has been having.

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.

But the view that our recent success is based on a house of cards has more than a grain of truth to it. In recent years, financial markets created a giant rich man’s casino, in which well-off players could take trillion dollar bets against each other. I am among those who believe that consenting adults should be allowed great freedom in what they do–as long as they don’t harm others. But there’s the rub. These high-rollers weren’t just gambling their own money. They were gambling other people’s money. They were putting at risk the entire financial system–indeed, our entire economic system. And now we are all paying the price.

Or….To put it another way, the game was rigged against the citizens. But the bigger crime was that these rigged markets were giving the wrong signals, thus mis-allocating resources. And when it all collapsed, societies that were screwing their poorest off welfare seemed delighted to give it to their richest:

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.

And its not as if there were not healthy opportunities anyway - but why be sensible in an “I win, you lose” game?

…had those in the financial sector allocated capital and risk in a way that fueled the economy, they would have had handsome profits. But they wanted more, and so established incentive structures that encouraged gambling. If they gambled and won, they could walk away with a share of the profits. If they gambled and lost, the investors would bear the consequences. It was almost as if the entire financial system was converted into a giant casino in which the system was rigged to guarantee those running the games huge returns, at the expense of the players.

Northern Rock anyone? The outcome however is quite a bit further reaching, as I suspect we will find over the next few years:

Those on Wall Street may have walked off with billions, but those billions are dwarfed by the costs to be paid by the rest of us. Some have lost their homes and life savings–to say nothing of their dreams for their own futures and those of their children. Others are innocent bystanders who resisted the false promises of the mortgage brokers and the credit card companies, but now find themselves out of jobs as the economy weakens. And the poor are hurt as state revenues plummet, forcing cutbacks in public services.

He’s talking about the US, but this could as easily be said of the UK which was loaded with debt as quickly as the loan credit contracts could be printed.

In short, the problem with the U.S. economy is not that we have allocated too many resources to the “soft” areas and too few to the “hard.” It is not necessarily that we have allocated too many resources to the financial sector and rewarded it too generously–though a strong argument could be put forward to that effect. It is that too little effort was devoted to managing real risks that are important–enabling ordinary Americans to stay in their homes in the face of economic vicissitudes–and that too much effort went into creating financial products that enhanced risk.

This made slightly chilling reading as I recall reading many years ago how the Western European world slid from freemen to Feudal peasants because the rich were able to own more and more of the assets, forcing the increasingly impoverished freemen into a cycle of taking on more debt, which made them sell more of their possessions, and thus getting poorer - thus renting more and more assets from their overlords till they had nothing.

The question is - what do we do? I’m sure there were many of us watching the last 5 years or so and shaking our heads saying “this is nuts”, but what can individuals do? Our elected representatives by and large did nothing. The mass media on aggregate did virtually nothing. I don’t know if they were colluding, or just too dumb to see it happening, but either way they don’t deserve much trust anymore. Its not clear to me that exchanging one lot for another in the same political system can bring global robber barons to heel. Who, then will fight for the citizenry in the future? Answer comes there none. How can we thus best mobilise ourselves to ensure that we do claw some of the wealth back, and enable economies to be run in the interests of their participants?

Can this Social Web we are building help in any way, while we are still (relative) Freemen?