Joseph Stiglitz: Widening the Scope of Economics

Joseph Stiglitz: Widening the Scope of Economics 26. MAI 2013 Joseph Stiglitz (press photo) Innovation Norway has invited Nobel price winner Joseph E. Stigliz to present his ideas at its conference on May 28 and to give a lecture at the University of Oslo on May 29. This blog posts gives a short presentation of Stiglitz and his research. By Per Koch, Special Adviser, Innovation Norway When Innovation Norway invited Joseph E. Stigliz (1943- ) to be the main speaker at the very first Innovation Norway Signal Conference, this was for two important reasons: Firstly he has made important contributions to the development of the discipline of economics, giving us new tools to better understand a world in continuous transformation. The current economic crisis has taught us that we desperately need new ideas and new concepts in both economic policy and innovation policy development. We may agree or disagree with his conclusions, but there is no doubt that he has generated a lot of stimulating debate. Secondly he has made his mark as a doer as well as a theoretician. He knows policy development from the inside. Stiglitz was, for instance, a member of U.S. President Bill Clinton’s Council of Economic Advisers from 1993-95, and served as CEA chairman from 1995-97. He has been a Chief Economist and Senior Vice-President of the World Bank. He has chaired several international commissions such as the Commission on the Measurement of Economic Performance and Social Progress, which critiqued the reliance on GDP as an indicator of advancement, and the UN Commission of Experts on Reform of the International Financial and Monetary System. This engagement in policy making is paralleled in his passion for social development and global challenges. He was a lead author of the 1995 Report of the Intergovernmental Panel on Climate Change, which shared the 2007 Nobel Peace Prize. A critique of the invisible hand In his recent book, the Price of Inequality, he argues strongly that the current level of income inequality in the US is at historic levels not seen since the Great Depression. The top 1 percent of Americans take home nearly 20 percent of the country’s income, the richest 1 percent own more than a third of the country’s wealth. From 2009-2011, the top 1 percent of Americans gained 121 percent of the additional income created in the “recovery”. This amazingly high number reflects the fact that the poor are still in recession. Stiglitz argues that this development is unsustainable and a threat to social justice as well as democracy. The following quote from the book sums up his main argument: “Markets have clearly not been working the way that their boosters claim. Markets are supposed to be stable, but the global financial crisis showed that they could be very unstable, with devastating consequences. The bankers had taken bets that, without government assistance, would have brought them and the entire economy down.” This quote reflects his basic mistrust in economic theory that states that the market knows best, no matter what – a way of thinking he has labeled “market fundamentalism”. Asymmetric information This mistrust is, in fact partly grounded in his critique of one of the basic premises of influential economic models: that all information in an economic system is freely available to all actors in that system. In 2001, he was awarded the Nobel Prize in economics for his analyses of markets with this so-called “asymmetric information”. Stiglitz helped create a new branch of economics, “The Economics of Information,” exploring the consequences of the fact that people may hold back information. Moreover, it takes time and effort for companies to catch up with the competitors’ knowledge wise. On this basis he pioneered such concepts as adverse selection and moral hazard, which have now become standard tools not only of theorists, but of policy analysts. Industry and government His arguments about “asymmetric information” underpin his belief in a role for government. In Freefall, his 2010 book about the financial crisis, he puts it this way: “Governments need to play a role, and not just in rescuing the economy when markets fail and in regulating markets to prevent the kind of failures we have just experienced. Economies need a balance between the role of markets and the role of government – with important contributions by nonmarket and nongovernmental institutions.” (Freefall, p. xii) This does not mean that he is hostile towards a market economy– far from it. In the same book he underlines that he believes “that markets lie at the heart of every successful economy.” It is just that the lack of perfect information means that markets are rarely – if ever — in perfect balance. “Marked failure” is the norm, rather than the exception. This means that markets do not automatically lead to economic efficiency. There may, for instance, be unemployment even if the economy as a whole is growing. According to Stiglitz, this opens up for a role for government The Nordic Model This balanced approach economic policy brings him closer to what Norwegians call “the Nordic Model”. The Nordic Model is embraced by both sides of the political spectrum in Norway, exactly because it leads to an industrial policy that includes active roles for industry, government as well as civil society. In Norway, Stiglitz will be considered a far less controversial figure than in his homeland, the United States. To what extent government intervention is needed is, of course, a matter of debate, in Norway as well as in the US. Some economists and policy-makers on both sides of the Atlantic have said that Stiglitz goes too far in the direction of government intervention, arguing that government does not have access to all relevant information either, and may make mistakes of the same proportion as the markets. Stiglitz’ theories, however, do take into account the limitations on the information and the imperfections of incentives on the part of all economic participants, including the government. Research Stiglitz has also made major contributions to monetary theory, to the development of economics and trade theory, to public and corporate finance, to the theories of industrial organization and rural organization, and to the theories of welfare economics and of income and wealth distribution. In the 1980s, he helped revive interest in the economics of R&D. Globalization His skepticism towards simplistic economic models is also reflected in his approach to globalization and international trade. He argues that the so-called Washington Consensus on trade and capital market liberalization (developed by the World Bank, the International Monetary Fund and the U.S. Treasury) paid too little attention to issues of equity, employment, to pacing and sequencing of reforms, or how privatization in various economies were conducted. The policy also put too little emphasis on sustainability, Stiglitz argues, being that an economic, social, political or environmental sustainability. Stiglitz’ belief in a role for the government leads him to argue that the relevant international agreements often impinge on the rights of sovereign states to make decisions. Given that there are no democratic global institutions that can deal effectively with the problems created, this becomes a serious problem, Stiglitz argues: “In effect,” he writes, “economic globalization has outpaced political globalization.” (Making Globalization Work). Again, he is not anti-market or anti-globalization. He acknowledges the positive potential of international trade: “2.4 billion people whose countries have suffered colonialism and exploitation, wars and internal disarray, have seen unprecedented growth for a quarter of a century or more.” But he is worried about the recessions, depressions and the environmental degradation that often follow, and our lack of tools to do something about these problems. And he adds: “Trickle-down economics, which holds that as long as the economy as a whole grows everyone benefits, has been repeatedly shown to be wrong.” A Norwegian language version of this article will be published in the forthcoming issue of Innsats, Innovation Norway’s magazine. More information on the Innovation Norway Signal Conference (in Norwegian). More information about Stiglitz’ University of Oslo talk (in Norwegian). Both events are fully booked, but his Innovation Norway presentation will be streamed online, and the University of Oslo will provide a video from “the Aula lecture”.