As Joseph Stiglitz sees matters, the euro suffers from a fatal flaw. The euro is the currency of 19 European countries; and common money blocks efforts of nations that, according to Stiglitz, need to devalue their currencies. More generally, attempts to restrict government control of the economy arouse the wrath of this implacable enemy of the market.

As he explains, "When two countries (or 19 of them) join together in a single-currency union, each cedes control over their interest rate. Because they are using the same currency, there is no exchange rate, no way that by adjusting their exchange rate they can make their goods cheaper and more attractive. Since adjustment in interest rates and exchange rates are among the most important ways that economies adjust to maintain full employment, the formation of the euro took away two of the most important instruments for insuring that."

This limitation on government policy is more than a theoretical possibility. The Troika (European Commission, European Central Bank, and International Monetary Fund), influenced by nefarious German bankers, insists on "sound" money, much to the distress of Greece and other countries in need of economic stimulus. Making matters worse, the Troika demands that these countries raise taxes and slash government services, in order to reduce their huge debts. If these demands are refused, the Troika threatens to cut off further loans to the ailing governments.

If the euro is not to Stiglitz's liking, the gold standard is even worse: "America's depression at the end of the 19th century was linked to the gold standard … with no large discoveries of gold, its scarcity was leading to the fall of prices of ordinary goods in terms of gold — to what we today call deflation. … And this was impoverishing America's farmers, who found it difficult to pay back their debts. … So too the gold standard is widely blamed for its role in deepening and prolonging the Great Depression."

Stiglitz fails to note that many of the strongest defenders of the gold standard, e.g., Jacques Rueff, strongly condemned the gold exchange standard that prevailed in the 1920s. But never mind his historical mistake; let us concentrate on the most essential issue. Why does Stiglitz think that people cannot adjust to falling prices? Why must government control the money supply and, more generally, regulate the free market?

Here we arrive at the key to Stiglitz's thought. He is a Nobel laureate, according to many the most important economic theorist of his generation, and he claims to have proved that an unregulated free market must almost inevitably fail. "There is an abstract theory (called the Arrow-Debreu competitive equilibrium theory) that explains when such a system of unrestrained competitive markets might work and lead to overall efficiency, it requires markets and information that are far more perfect than that which exists anywhere on this earth. … The circumstances that they [Arrow and Debreu] identified where markets did not lead to efficiency were called market failures. Subsequently, Greenwald and Stiglitz showed that whenever information was imperfect and markets incomplete — essentially always — markets were not efficient."