Joseph Stiglitz: World Economically and Politically Destabilised
This overview of Joseph Stiglitz, Nobel Prize Winning Economist and proponent of alternatives to the fundamental belief that globalisation and the invisible hand efficiently distribute resources and provides for market efficiency.
This is courtesy of Wikipedia.
Joseph Eugene Stiglitz, ForMemRS, FBA, (born February 9, 1943) is an American economist and a professor at Columbia University. He is a recipient of the Nobel Memorial Prize in Economic Sciences (2001) and the John Bates Clark Medal (1979). He is also the former Senior Vice President and Chief Economist of the World Bank. He is known for his critical view of the management of globalization, free-market economists (whom he calls “free market fundamentalists”) and some international institutions like the International Monetary Fund and the World Bank.
In 2000, Stiglitz founded the Initiative for Policy Dialogue (IPD), a think tank on international development based at Columbia University. Since 2001, he has been a member of the Columbia faculty, and has been a University Professor since 2003. He also chairs the University of Manchester’s Brooks World Poverty Institute and is a member of the Pontifical Academy of Social Sciences. Stiglitz is also an honorary professor at Tsinghua University School of Public Policy and Management. Stiglitz is one of the most frequently cited economists in the world.
Contributions to economics
Information asymmetry
Stiglitz’s most famous research was on screening, a technique used by one economic agent to extract otherwise private information from another. It was for this contribution to the theory of information asymmetry that he shared the Nobel Memorial Prize in Economics[3] in 2001 “for laying the foundations for the theory of markets with asymmetric information” with George A. Akerlof and A. Michael Spence.
Before the advent of models of imperfect and asymmetric information, the traditional neoclassical economics literature had assumed that markets are efficient except for some limited and well defined market failures. More recent work by Stiglitz and others reversed that presumption, to assert that it is only under exceptional circumstances that markets are efficient. Stiglitz has shown (together with Bruce Greenwald) that “whenever markets are incomplete and/or information is imperfect (which are true in virtually all economies), even competitive market allocation is not constrained Pareto efficient”. In other words, they addressed “the problem of determining when tax interventions are Pareto-improving. The approach indicates that such tax interventions almost always exist and that equilibria in situations of imperfect information are rarely constrained Pareto optima.”[15]:229, abstract Although these conclusions and the pervasiveness of market failures do not necessarily warrant the state intervening broadly in the economy, it makes clear that the “optimal” range of government recommendable interventions is definitely much larger than the traditional “market failure” school recognizes.[16] For Stiglitz, there is no such thing as an invisible hand.[17] According to Stiglitz:[18]
“Whenever there are “externalities”—where the actions of an individual have impacts on others for which they do not pay or for which they are not compensated—markets will not work well. But recent research has shown that these externalities are pervasive, whenever there is imperfect information or imperfect risk markets—that is always.
The real debate today is about finding the right balance between the market and government. Both are needed. They can each complement each other. This balance will differ from time to time and place to place.”
In the opening remarks for his prize acceptance “Aula Magna”,[19] Stiglitz said:[20]
“I hope to show that Information Economics represents a fundamental change in the prevailing paradigm within economics. Problems of information are central to understanding not only market economics but also political economy, and in the last section of this lecture, I explore some of the implications of information imperfections for political processes.”
In an interview in 2007, Stiglitz explained further:[21]
“The theories that I (and others) helped develop explained why unfettered markets often not only do not lead to social justice, but do not even produce efficient outcomes. Interestingly, there has been no intellectual challenge to the refutation of Adam Smith’s invisible hand: individuals and firms, in the pursuit of their self-interest, are not necessarily, or in general, led as if by an invisible hand, to economic efficiency.”
Efficiency wages: the Shapiro-Stiglitz model
See also: Efficiency wages
In the Shapiro-Stiglitz model of efficiency wages, workers are paid at a level that dissuades shirking. This prevents wages from dropping to market clearing levels. Full employment cannot be achieved because workers would shirk if they were not threatened with the possibility of unemployment. Because of this, the curve for the no-shirking condition (labeled NSC) goes to infinity at full employment.
Stiglitz also did some research on efficiency wages, and helped create what became known as the “Shapiro-Stiglitz model” to explain why there is unemployment, why wages are not bid down sufficiently by job seekers (in the absence of minimum wages) so that everyone who wants a job finds one, and to question whether the neoclassical paradigm could explain involuntary unemployment.[22] The answer to these puzzles was proposed by Shapiro and Stiglitz in 1984: “Unemployment is driven by the information structure of employment”.[22] Two basic observations undergird their analysis:
1. Unlike other forms of capital, humans can choose their level of effort.
2. It is costly for firms to determine how much effort workers are exerting.
A full description of this model can be found at the links provided.[23] Some key implications of this model are:
1. Wages do not fall enough during recessions to prevent unemployment from rising. If the demand for labour falls, this lowers wages. But because wages have fallen, the probability of ‘shirking’ (workers not exerting effort) has risen. If employment levels are to be maintained, through a sufficient lowering of wages, workers will be less productive than before through the shirking effect. As a consequence, in the model wages do not fall enough to maintain employment levels at the previous state, because firms want to avoid excessive shirking by their workers. So, unemployment must rise during recessions, because wages are kept ‘too high’.
2. Possible corollary: Wage sluggishness. Moving from one private cost of hiring to another private cost of hiring will require each firm to repeatedly re-optimize wages in response to shifting unemployment rate. Firms cannot cut wages until unemployment rises sufficiently (a coordination problem).
The outcome is never Pareto efficient.
1. Each firm employs too few workers because it faces private cost of hiring rather than the social cost — which is equal to and in all cases. This means that firms do not “internalize” the “external” cost of unemployment – they do not factor how large-scale unemployment harms society when assessing their own costs. This leads to a negative externality as marginal social cost exceeds the firm’s marginal cost (MSC = Firm’s Private Marginal Cost + Marginal External Cost of increased social unemployment)[clarification needed]
2. There are also negative externalities. Each firm increases the asset value of unemployment
Some possible practical implications of Stiglitz theorems
While the mathematical validity of Stiglitz et al. theorems are not in question, their practical implications in political economy and their application in real life economic policies have been subject to considerable disagreement and debate.[24] Stiglitz himself seems to be continuously adapting his own political-economic discourse,[25] as we can see from the evolution in his positions as initially stated in Whither Socialism? (1994) to his own new positions held on his most recent publications.
Once incomplete and imperfect information are introduced, Chicago-school defenders of the market system cannot sustain descriptive claims of the Pareto efficiency of the real world. Thus, Stiglitz’s use of rational-expectations equilibrium assumptions to achieve a more realistic understanding of capitalism than is usual among rational-expectations theorists leads, paradoxically, to the conclusion that capitalism deviates from the model in a way that justifies state action—socialism—as a remedy.[26]
The effect of Stiglitz’s influence is to make economics even more presumptively interventionist than Samuelson preferred. Samuelson treated market failure as the exception to the general rule of efficient markets. But the Greenwald-Stiglitz theorem posits market failure as the norm, establishing “that government could potentially almost always improve upon the market’s resource allocation.” And the Sappington-Stiglitz theorem “establishes that an ideal government could do better running an enterprise itself than it could through privatization”[27] (Stiglitz 1994, 179).[26]
The objections to the wide adoption of these positions suggested by Stiglitz’s discoveries do not come from economics itself but mostly from political scientists and are in the fields of sociology. As David L. Prychitko discusses in his “critique” to Whither Socialism? (see below), although Stiglitz’s main economic insight seems generally correct, it still leaves open great constitutional questions such as how the coercive institutions of the government should be constrained and what the relation is between the government and civil society.[28]
Politics
Clinton administration, 1993 – 1997
Stiglitz joined the Clinton Administration in 1993,[29] serving first as a member during 1993-1995, and then as Chairman of the Council of Economic Advisers during 1995-1997, in which capacity he also served as a member of the cabinet. He became deeply involved in environmental issues, which included serving on the Intergovernmental Panel on Climate Change, and helping draft a new law for toxic wastes (which was never passed).
Stiglitz’s most important contribution in this period was helping define a new economic philosophy, a “third way”, which postulated the important, but limited, role of government, that unfettered markets often did not work well, but that government was not always able to correct the limitations of markets. The academic research that he had been conducting over the preceding 25 years provided the intellectual foundations for this “third way”.
When President Bill Clinton was re-elected, he asked Stiglitz to continue to serve as Chairman of the Council of Economic Advisers for another term. But he had already been approached by the World Bank, to be its senior vice president for development policy and its chief economist.
As the World Bank began its ten-year review of the transition of the former Communist countries to the market economy it unveiled failures of the countries that had followed the International Monetary Fund (IMF) shock therapy policies – both in terms of the declines in GDP and increases in poverty – that were even worse than the worst that most of its critics had envisioned at the onset of the transition. Clear links existed between the dismal performances and the policies that the IMF had advocated, such as the voucher privatization schemes and excessive monetary stringency. Meanwhile, the success of a few countries that had followed quite different strategies suggested that there were alternatives that could have been followed. The U.S. Treasury had put enormous pressure on the World Bank to silence his criticisms of the policies which they and the IMF had pursued.[30][31]
Stiglitz always had a poor relationship with Treasury Secretary Lawrence Summers.[32] In 2000, Summers successfully petitioned for Stiglitz’s removal, supposedly in exchange for World Bank President James Wolfensohn’s re-appointment – an exchange that Wolfensohn denies took place. Whether Summers ever made such a blunt demand is questionable – Wolfensohn claims he would “have told him to fuck himself”.[33]
Stiglitz resigned from the World Bank in January 2000, a month before his term expired.[31] The Bank’s president, James Wolfensohn, announced Stiglitz’s resignation in November 1999 and also announced that Stiglitz would stay on as “special advisor to the president”, and would chair the search committee for a successor.
“Joseph E. Stiglitz said today [Nov. 24, 1999] that he would resign as the World Bank’s chief economist after using the position for nearly three years to raise pointed questions about the effectiveness of conventional approaches to helping poor countries.”[34]
In this role, he continued criticism of the IMF, and, by implication, the US Treasury Department. In April 2000, in an article for The New Republic, he wrote:
“They’ll say the IMF is arrogant. They’ll say the IMF doesn’t really listen to the developing countries it is supposed to help. They’ll say the IMF is secretive and insulated from democratic accountability. They’ll say the IMF’s economic ‘remedies’ often make things worse – turning slowdowns into recessions and recessions into depressions. And they’ll have a point. I was chief economist at the World Bank from 1996 until last November, during the gravest global economic crisis in a half-century. I saw how the IMF, in tandem with the U.S. Treasury Department, responded. And I was appalled.”
The article was published a week before the annual meetings of the World Bank and IMF and provoked a strong response. It proved too strong for Summers and, yet more lethally, Stiglitz’s protector-of-sorts at the World Bank, Wolfensohn. Wolfensohn had privately empathised with Stiglitz’s views, but this time was worried for his second term, which Summers had threatened to veto.[citation needed] Stanley Fisher, deputy managing director of the IMF, called a special staff meeting and informed at that gathering that Wolfensohn had agreed to fire Stiglitz. Meanwhile, the Bank’s External Affairs department told the press that Stiglitz had not been fired, his post had merely been abolished.[35]
In a September 19, 2008 radio interview with Aimee Allison and Philip Maldari on Pacifica Radio’s KPFA 94.1 FM in Berkeley, California, Stiglitz implied that President Clinton and his economic advisors would not have backed the North American Free Trade Agreement (NAFTA) had they been aware of stealth provisions, inserted by lobbyists, that they overlooked.
Initiative for Policy Dialogue
In July 2000 Stiglitz founded the Initiative for Policy Dialogue (IPD), with support of the Ford, Rockefeller, McArthur, and Mott Foundations and the Canadian and Swedish governments, to enhance democratic processes for decision-making in developing countries and to ensure that a broader range of alternatives are on the table and more stakeholders are at the table.
Main article: Initiative for Policy Dialogue
[edit] Commission of Experts on Reforms of the International Monetary and Financial System
In 2009, Stiglitz chaired the Commission of Experts on Reforms of the International Monetary and Financial System, informally known as the Stiglitz Commission, which was convened by the President of the United Nations General Assembly “to review the workings of the global financial system, including major bodies such as the World Bank and the IMF, and to suggest steps to be taken by Member States to secure a more sustainable and just global economic order”.[36]
Books
Along with his technical economic publications (he has published over 300 technical articles), Stiglitz is the author of books on issues from patent law to abuses in international trade.
Stability with Growth: Macroeconomics, Liberalization and Development
In Stability with Growth: Macroeconomics, Liberalization and Development (2006), Stiglitz, José Antonio Ocampo (United Nations Under-Secretary-General for Economic and Social Affairs, until 2007), Shari Spiegel (Managing Director, Initiative for Policy Dialogue – IPD), Ricardo Ffrench-Davis (Main Adviser, Economic Commission for Latin America and the Caribbean – ECLAC) and Deepak Nayyar (Vice Chancellor, University of Delhi) discuss the current debates on macroeconomics, capital market liberalization and development, and develop a new framework within which one can assess alternative policies. They explain their belief that the Washington Consensus has advocated narrow goals for development (with a focus on price stability) and prescribed too few policy instruments (emphasizing monetary and fiscal policies), and places unwarranted faith in the role of markets. The new framework focuses on real stability and long-term sustainable and equitable growth, offers a variety of non-standard ways to stabilize the economy and promote growth, and accepts that market imperfections necessitate government interventions. Policy-makers have pursued stabilization goals with little concern for growth consequences, while trying to increase growth through structural reforms focused on improving economic efficiency. Moreover, structural policies, such as capital market liberalization, have had major consequences for economic stability. This book challenges these policies by arguing that stabilization policy has important consequences for long-term growth and has often been implemented with adverse consequences. The first part of the book introduces the key questions and looks at the objectives of economic policy from different perspectives.The third part presents a similar analysis for capital market liberalization.
Making Globalization Work
Making Globalization Work (2006) surveys the inequities of the global economy, and the mechanisms by which developed countries exert an excessive influence over developing nations. Dr. Stiglitz argues that through tariffs, subsidies, an over-complex patent system and pollution, the world is being both economically and politically destabilised. Stiglitz argues that strong, transparent institutions are needed to address these problems. He shows how an examination of incomplete markets can make corrective government policies desirable.
Stiglitz is an exception to the general pro-globalization view of professional economists, according to economist Martin Wolf.[37] Stiglitz argues that economic opportunities are not widely enough available, that financial crises are too costly and too frequent, and that the rich countries have done too little to address these problems. Making Globalization Work[38] had sold more than two million copies.
The Roaring Nineties
In 2003, Stiglitz published The Roaring Nineties, his analysis of the boom and bust of the 1990s. In 2004 he published New Paradigm for Monetary Economics (Cambridge University Press) and in 2005, Oxford University Press published his book Fair Trade for All.
[edit] The Roaring Nineties: A New History of the World’s Most Prosperous Decade
“The Roaring Nineties: A New History of the World’s Most Prosperous Decade” (2003) continues his argument on how misplaced faith in free-market ideology led to the global economic issues of today, with a perceptive focus on US policies.
[edit] Globalization and Its Discontents
In Globalization and Its Discontents (2002), Stiglitz argues that what are often called “developing economies” are, in fact, not developing at all, and puts much of the blame on the IMF.
Stiglitz bases his argument on the themes that his decades of theoretical work have emphasized: namely, what happens when people lack the key information that bears on the decisions they have to make, or when markets for important kinds of transactions are inadequate or don’t exist, or when other institutions that standard economic thinking takes for granted are absent or flawed. Stiglitz stresses the point: “Recent advances in economic theory” (in part referring to his own work) “have shown that whenever information is imperfect and markets incomplete, which is to say always, and especially in developing countries, then the invisible hand works most imperfectly.” As a result, Stiglitz continues, governments can improve the outcome by well-chosen interventions. Stiglitz argues that when families and firms seek to buy too little compared to what the economy can produce, governments can fight recessions and depressions by using expansionary monetary and fiscal policies to spur the demand for goods and services. At the microeconomic level, governments can regulate banks and other financial institutions to keep them sound. They can also use tax policy to steer investment into more productive industries and trade policies to allow new industries to mature to the point at which they can survive foreign competition. And governments can use a variety of devices, ranging from job creation to manpower training to welfare assistance, to put unemployed labor back to work and cushion human hardship.
Stiglitz complains bitterly that the IMF has done great damage through the economic policies it has prescribed that countries must follow in order to qualify for IMF loans, or for loans from banks and other private-sector lenders that look to the IMF to indicate whether a borrower is creditworthy. The organization and its officials, he argues, have ignored the implications of incomplete information, inadequate markets, and unworkable institutions—all of which are especially characteristic of newly developing countries. As a result, Stiglitz argues, the IMF has often called for policies that conform to textbook economics but do not make sense for the countries to which the IMF is recommending them. Stiglitz seeks to show that these policies have been disastrous for the countries that have followed them.
[edit] Whither Socialism?
Whither Socialism? is based on Stiglitz’s Wicksell Lectures, presented at the Stockholm School of Economics in 1990 and presents a summary of information economics and the theory of markets with imperfect information and imperfect competition, as well as being a critique of both free market and market socialist approaches (see Roemer critique, op. cit.). Stiglitz explains how the neoclassical, or Walrasian model (“Walrasian economics” refers to the result of the process which has given birth to a formal representation of Adam Smith’s notion of the “invisible hand”, along the lines put forward by Leon Walras and encapsulated in the general equilibrium model of Arrow-Debreu), may have wrongly encouraged the belief that market socialism could work. Stiglitz proposes an alternative model, based on the information economics established by the Greenwald-Stiglitz theorems.
One of the reasons Stiglitz sees for the critical failing in the standard neoclassical model, on which market socialism was built, is its failure to consider the problems that arise from lack of perfect information and from the costs of acquiring information. He also identifies problems arising from its assumptions concerning completeness.[39]
[edit] The Three Trillion Dollar War
The Three Trillion Dollar War examines the full cost of the Iraq War, including many hidden costs. The book also discusses the extent to which these costs will be imposed for many years to come, paying special attention to the enormous expenditures that will be required to care for very large numbers of wounded veterans. Stiglitz was openly critical of George W. Bush at the time the book was released.[40]
[edit] Freefall: America, Free Markets, and the Sinking of the World Economy
In Freefall: America, Free Markets, and the Sinking of the World Economy (2010), Stiglitz discusses the causes of the 2008 recession/depression and goes on to propose reforms needed to avoid a repetition of a similar crisis, advocating government intervention and regulation in a number of areas. Among the policy-makers he criticises are George W. Bush, Larry Summers, and Barack Obama.[41]
This book does not require an economics background in order to be of value to the reader. Rather it explains Stiglitz’s views on the recent economic crisis in terms which make it relevant to the average homeowner, retirement investor, and voter in the United States. He explains how without fundamental changes in economic policy and regulation the position of the US in the world political and economic arena may deteriorate significantly.
Papers and conferences
Stiglitz wrote a series of papers and held a series of conferences explaining how such information uncertainties may have influence on everything from unemployment to lending shortages. As the chairman of the Council of Economic Advisers during the Clinton Administration and former chief economist at the World Bank, Stiglitz was able to put some of his views into action. For example, he was an outspoken critic of quickly opening up financial markets in developing countries. These markets rely on access to good financial data and sound bankruptcy laws, but he argued that many of these countries didn’t have the regulatory institutions needed to ensure that the markets would operate soundly.
He co-authored a paper titled “Implications of the New Fannie Mae and Freddie Mac Risk-Based Capital Standard” with Peter Orszag in 2002 in which they concluded “on the basis of historical experience, the risk to the government from a potential default on GSE debt is effectively zero.”[42]
The next few blogs will overview more of his thinking.
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