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Joseph E. Stiglitz

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Joseph E. Stiglitz, born February 9, 1943, Gary, Indiana, U.S., is an American economist, author, and professor at Columbia University. He is one of the most prominent and controversial economists of his era. He chaired US president Bill Clinton's Council of Economic Advisors, sat as chief economist at the World Bank, and shared the 2001 Nobel Prize for Economics [1] "for laying the foundations for the theory of markets with asymmetric information" with A. Michael Spence and George A. Akerlof.

Stiglitz studied at Amherst College (B.A., 1964) in Massachusetts and the Massachusetts Institute of Technology (Ph.D., 1967). The particular style of MIT economics suited him well - simple and concrete models, directed at answering important and relevant questions. [1] He was awarded a Fulbright fellowship to Cambridge for 1965-1966. Stiglitz taught at several universities, including Yale, Harvard, and Stanford. He was a member of President Bill Clinton's economic policy team; a member of the U.S. Council of Economic Advisers (1993–97), of which he became chairman in June 1995; and senior vice president and chief economist of the World Bank (1997–2000). In 2001 Stiglitz became professor of economics, business, and international affairs at Columbia University in New York. Stiglitz has made seminal and fundamental contributions to every subfield of economic theory – microeconomics, macroeconomics, industrial organization, international economics, labor economics, financial economics and development economics. He has published more than 300 papers, as well as a dozen books, in a 35-year career.

A critic of "free-market fundamentalists", Dr Stiglitz has repeatedly challenged what he sees as the "ideological basis" to much of the world's economic decision-making. This is most notable in his battles with the International Monetary Fund (IMF) over developing countries being pushed to open their markets before they have stable, democratic institutions to protect their citizens. For Stiglitz there is not such a thing as an "invisible hand" [2].

"For much of the world, globalization as it has been managed seems like a pact with the devil. A few people in the country become wealthier; GDP statistics, for what they are worth, look better, but ways of life and basic values are threatened (...) This is not how it has to be." Joseph E. Stiglitz [3] [4]

The focus on development and spending to draw economies out of downturns will see comparisons drawn with both Amartya Sen and Keynes. His argument for a global reserve currency to avoid the US dollar's present problems is truly innovative, and will no doubt meet staunch opposition from the same economists and politicians who reject his support for the gradual opening of a country's markets to volatile capital flows.

Some of Stiglitz analysts, such as Gerald Houseman (a professor of political economy at Washington State University, who is writing a book on Stiglitz) even consider that: "The formidable myth of 'free enterprise', a major crutch for the belief systems of those who see market economics as a be-all and end-all, has been dead since at least 1986 [5], and a rather modest economist, Joseph E. Stiglitz, along with two fellow Nobel Prize winners in economic science, George Akerlof and Michael Spence, drove the final stake through its heart in the Stockholm Nobel Prize lecture of December 2001. Stiglitz's accep- tance speech [6] proved to be a singular and remarkable event in which he effected the internment in quiet and reflective tones, a marked contrast with the shrill decibels of the defenders of this defunct idea" [7].

For more information, see: Keynesians.
For more information, see: John Maynard Keynes.

The Prize

The Academy noted that Stiglitz "clarified the opposite type of market adjustment, where poorly informed agents extract information from the better informed, such as the screening performed by insurance companies dividing customers into risk classes by offering a menu of contracts where higher deductibles can be exchanged for significantly lower premiums. In a number of contributions about different markets, Stiglitz has shown that asymmetric information can provide the key to understanding many observed market phenomena, including unemployment and credit rationing." [6]

(...)Market economies are characterized by a high degree of imperfections (...) Older models assumed perfect information, but even small degrees of information imperfections can have large economic consequences. Our models took into account asymmetries of information, which is another way of saying 'Some people know more than others. (...) Our global system is characterized by a lot of inequities (...) It seems increasingly important to try to redress these inequities. (...) Joseph E. Stiglitz at a press conference held at Columbia.

Stiglitz comments that "economics can make a difference" in improving peoples lifes by "focusing on the difference between the haves and have-nots."

While the traditional literature assumes that markets are efficient except for some well defined market failures, more recent studies reverse the presumption: it is only under exceptional circumstances that markets are efficient [6] Stiglitz (and Greenwald) [5] show 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, there almost always exists schemes of government intervention which can induce Pareto superior outcomes, thus making every one better off [5]. Although the pervasiveness of market failures doesn't warrant the state in thrusting its nose into everything, the "optimal" range of government interventions is definitely much larger than the traditional "market failure" school recognizes.[8] [9]

The prize lecture

On December 8, 2001, at Aula Magna, Stockholm University, Joseph E. Stiglitz held his Prize Lecture Information and the Change in the Paradigm in Economics [6], a 69 page lecture summarizing his findings in an event that some analysts [7] consider to mark a major turning point in the Economic science.

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. Stiglitz, The Prize Lecture

Formal modeling in economics has focused on models in which information was perfect. Everyone recognized that information was in fact imperfect, but the hope, following Marshall's dictum "Natura non facit saltum" was that economies in which information was not too imperfect would look very much like economies in which information was perfect. One of the main contributions of Stiglitz's research was to show is that this was not true; even a small amount of information imperfection could have a profound effect on the nature of the equilibrium. The paradigm of the twentieth century, the "neoclassical model", ignored the warnings of the nineteenth century and earlier masters on how information concerns might alter the results of their analyses.

Under the standard neoclassical paradigm, markets are Pareto efficient, except when there is one of a limited number of market failures occurs. Under the imperfect information paradigm, markets are almost never 'Pareto efficient. While information economics thus undermined these long standing principles of economics, it also provided explanations for many phenomena that had long been unexplained.

An exhaustive review of the Prize Lecture is beyond the scope of this article. A very good abstract of Information and the Change in the Paradigm in Economics, by "The American Economist", can be read online at the links provided. [10]

Stiglitz on the effciency of market equilibrium and role of the State

The most important central idea in traditional economics is that competitive economies lead, as if by an invisible hand [2], to a (Pareto) efficient allocation of resources, and that every Pareto efficient resource allocation can be achieved through a competitive mechanism, provided only that the appropriate lump sum redistributions are undertaken. It is these (fundamental theorems) of welfare economics which provide both the rationale for the reliance on free markets and cause issues of distribution to be viewed as completely separate from issues of efficiency. It is this methodological "separation" which allows the economist to push for reforms which increase efficiency, regardless of their seeming impact on income distribution.

The Economics of Information showed that neither of these results was, in general, true. To be sure, economists over the preceding three decades had identified important market failures – such as the externalities associated with pollution – which required government intervention. But the scope for market failures was limited, and thus the arenas in which government intervention was required were limited. Stiglitz early work had laid the foundations for the idea that economies with information imperfections would not be Pareto efficient, even taking into account the costs of obtaining information. There were interventions in the market that could make all parties better off. He had shown, for instance, that incentives for the disclosure and acquisition of information were far from perfect; imperfect appropriability meant that there might be insufficient incentives, but the fact that much of the gains were rents, gains by some at the expense of others, suggested that there might be excessive expenditures on information. One of the arguments for unfettered capital markets was that there were strong incentives to gather information; if one discovered that some stock was more valuable than others thought, if you bought it before they discovered the information, then you would make a capital gain. But the issue was, while the individual who discovered the information a nano-second before any one else might be better off, was society as a whole better off: if having the information a nano-second earlier did not lead to a change in real decisions (e.g. concerning investment), then it was largely redistributive, with the gains of those obtaining the information occurring at the expense of others. Stiglitz illustrates with this simple classroom example:

Assume hundred dollar bills were to fall, one each at the left foot of each student in my class. They could wait to the end of the lecture, then pick up the money; but that is not a Nash equilibrium. If all students were to do that, it would pay any one to bend down and quickly scoop up what he could. Each realizing that immediately picks up the dollar bill at his foot. The equilibrium leaves each no better off than if he had waited – and there was a great social cost, the interruption of the lecture. There are potentially other inefficiencies associated with information acquisition (...) [6]

Stiglitz described earlier how the existence of asymmetries of information can destroy markets. Earlier work had established that when markets are absent or imperfect, market equilibrium might be "constrained Pareto inefficient", that is, taking into account the absence of the market, everyone could be made better off. [11] [12] [13] Individuals sometimes have incentives to obtain information (creating an asymmetry of information), which then leads to the destruction of insurance markets ( Stiglitz uses insurance markets in a broad sense, see Aula Magna), and an overall lowering of welfare. Welfare might be increased if the acquisition of this kind of information could be proscribed, as it happned in the arena of genetic testing. Recently, such issues have become sources of real policy concern. [6]

Books published

Stability with Growth: Macroeconomics, Liberalization and Development

In Stability with Growth: Macroeconomics, Liberalization and Development (2006) Stiglitz, José Antoni Ocampo (United Nations Under-Secretary-General for Economic and Social Affairs) 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 share the belief that the Washington consensus has advocated for narrow goals for development (with a focus on price stability), 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 challenge 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 second part examines the central issues of macroeconomics, presenting an analysis of economic models and policy perspectives on stabilization from conservative, Keynesian, and heterodox perspectives. The third part presents a similar analysis for capital market liberalization.

Making Globalization Work

In one of his latest books, Making Globalization Work [14] (2006), Stiglitz surveys the iniquities of the global economy, and the mechanisms by which developed countries exert an excessive influence over developing nations. Dr Stiglitz argues that through recourse to various measures – be it overt trade tariffs, subtler subsidies, a patent system that developed countries are far better prepared to navigate, or the damage done to poor countries by global pollution – the world is being both economically and politically destabilised, from which we will all suffer. Making Globalization Work [15] exposes the problems of how globalisation is currently being managed, the vested interests behind many decisions and the prospects for negotiating fairer terms for those worst affected. Dr Stiglitz tackles the problems immediately facing the world, arguing that strong, transparent institutions are needed to turn globalisation to favour the world's poorest, and to address the democratic deficit that is so keenly felt across the world.

Stiglitz uses his command of economic logic to good effect, offering clear discussions of dozens of complex issues, from patent law to abuses in international trade. Many critics complain that drug companies overcharge poor countries, but Stiglitz goes further and makes a convincing case that this is not only immoral but also economically inefficient. Poor countries should be charged less than rich countries: if people willing to pay for medicines are unable to buy them, an existing demand goes unmet, which, in economic terms, is wasteful. Drug companies' pursuit of private gain results in an inefficient allocation of resources and a social loss. Stiglitz won the Nobel for exploring how uncertainty and poor information can make markets fail. Here shows how an examination of incomplete markets can make corrective government policies desirable.

Many of Stiglitz's criticisms are uncontroversial. He is hardly alone in believing 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 is an optimistic book, offering the hope that global society has the will or the ability to address global problems and that international economic integration will ultimately prove a force for good. Certainly Stiglitz is right that the world would benefit from a concerted effort to address problems of the environment, poverty and disease. However, his proposals are almost utopian in their reliance upon good will, enlightened public opinion and moral imperatives to overcome selfish but deeply entrenched private or national interests that do not share his goal of making globalization work for as many countries and as many people as possible. [16] At last count Making Globalization Work [14] had sold more than two million copies.

Fair Trade for All: How Trade Can Promote Development

During the 1990s, the so-called Washington consensus of officials from the International Monetary Fund, World Bank and United States Treasury Department thought the best way to spur growth in developing nations was for them to quickly lower their trade barriers and deregulate their markets. But that prescription has not worked especially well, even though it still shapes American trade policy. Apart from China and India, the gap between rich and poor nations has continued to widen

In Fair Trade for All: How Trade Can Promote Development (2005) Stiglitz and his co-author Andrew Charlton, a research officer at LSE's Centre for Economic Performance, question how can the poorer countries of the world be helped to help themselves through freer, fairer trade and address one of the key issues facing world leaders today and put forward a radical and realistic new model for managing trading relationships between the richest and the poorest countries. Their approach is designed to open up markets in the interests of all and not just the most powerful economies, to ensure that trade promotes development, and to minimise the costs of adjustments.

Beginning with a brief history of the World Trade Organisation and its agreements, the authors explore the issues and events which led to the failure of Cancun and the obstacles that face the successful completion of the Doha Round of negotiations. Finally they spell out the reforms and principles upon which a successful agreement must be based. Stiglitz and Charlton show that standard economic assumptions are wrong when it comes to many developing economies. When markets in sub-Saharan Africa and elsewhere are opened, people often can't move easily to new industries where the nation has a comparative advantage.[17]

The Roaring Nineties: A New History of the World’s Most Prosperous Decade

In The Roaring Nineties (2003) Professor Joseph Stiglitz delivers a forceful and largely effective attack on U.S. economic policy during the Presidency of Bill Clinton. Stiglitz’s critique of "Clintonomics" becomes increasingly focused and passionate as the book proceeds. The basic message of The Roaring Nineties is straightforward: from day one, the Clinton Administration’s economic agenda was set by Wall Street, through its main spokespersons, Federal Reserve Chair Alan Greenspan, and Robert Rubin. Stiglitz states repeatedly, Clinton was elected to office on a platform of “Putting People First” and “Jobs, Jobs, Jobs.” But the actual Wall Street agenda became clear immediately. It was deficit reduction, low inflation,and deregulation. Stiglitz argues that this program was responsible for the stock market bubble and bust, and the assorted accounting scandals. As Stiglitz writes in the preface, deficit reduction was not the platform on which Clinton had been elected, but he was persuaded that without deficit reduction, financial markets would punish him, and without the support of finance, he could not accomplish the rest of his agenda.

The core of The Roaring Nineties are its substantive discussions in three major areas: 1) Fiscal policy, in which he develops his view that the administration’s focus on deficit reduction was a significant error; 2) Monetary policy, in which he attacks the Greenspan on a number of fronts; and 3) Regulatory policy, where he considers at some length the deregulation of telecommunications, electricity, banking and accounting and devotes a full chapter to Enron, in which the various strands of deregulatory practice—in electricity, banking and accounting—converged in one place to disastrous effect. He also discusses globalization in one chapter, reviewing here from his perspective as a Clinton administration policymaker the major themes of his previous book, Globalization and its Discontents.

The book contains some significant gaps and deficiencies, such as its subtitle, A New History of the World’s Most Prosperous Decade for which factual assertion Stiglitz offers no solid evidence, even while he does make comments occasionally in behalf of it. A full 17-page review of The Roaring Nineties, by Economics Professor Robert Pollin (University of Massachusetts-Amherst), is available online at the link provided. [18]

Globalization and Its Discontents

Stiglitz has always been concerned with one of the most pressing economic problem of our time: so many of what we usually call "developing economies" are, in fact, not developing at all. Stiglitz, in Globalization and Its Discontents (2002), offers his informed views both of what has gone wrong and of what to do differently. But the main book also focus in who to blame. According to Stiglitz, the story of failed development does have a villain, and the villain has been the IMF.

In Globalization and Its Discontents Stiglitz bases his argument for different economic policies 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. The implication of each of these absences or flaws is that free markets, left to their own devices, do not necessarily deliver the positive outcomes claimed for them by textbook economic reasoning that "assumes that people have full information, can trade in complete and efficient markets, and can depend on satisfactory legal and other ". 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. (Whether any given government will actually choose its interventions well remains open to questions.) At the level of national economies, 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, at the same time, cushion the human hardship deriving from what— importantly, according to the theory of incomplete information, or markets, or institutions—is no one's fault.

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, time and again the IMF has 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 the consequences of these misguided policies have been disastrous. not just according to abstract statistical measures but in real human suffering, in the countries that have followed them. [19]


References

  1. 1.0 1.1 Joseph E. Stiglitz: The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2001
  2. 2.0 2.1 Stiglitz, Joseph E. There is no invisible hand. London: The Guardian Comment, December 20, 2002.
  3. Stiglitz, Joseph E. The pact with the devil. Beppe Grillo's Friends interview
  4. Crotty, James. Slow Growth, Destructive Competition, and Low Road Labor Relations: A Keynes-Marx-Schumpeter Analysis of Neoliberal Globalization. PERI- Political Economy Research Institute, PERI Publications, 11/1/2000
  5. 5.0 5.1 5.2 Greenwald, Bruce and Stiglitz, Joseph E. 1986 Externalities in Economies with Imperfect Information and Incomplete Markets, Quarterly Journal of Economics, no. 90.
  6. 6.0 6.1 6.2 6.3 6.4 6.5 Stiglitz, Joseph E. Prize Lecture: Information and the Change in the Paradigm in Economics. Joseph E. Stiglitz held his Prize Lecture December 8, 2001, at Aula Magna, Stockholm University. He was presented by Lars E.O. Svensson, Chairman of the Prize Committee.
  7. 7.0 7.1 Houseman, Gerald. Joseph Stiglitz and the Critique of Free Market Analysis. Challenge, vol. 49, no. 2, March/April 2006, pp. 52-­62.
  8. J. Bradford Delong, Review of Stiglitz book proposal: The Economic Role of the State, University of California at Berkeley, May 20 1999 In: Unpublished Book Reviews
  9. Wang, Shaoguang. The State, Market Economy, and Transition. Department of Political Science, Yale University
  10. Stiglitz, Joseph E. Applications of the new paradigm. Article Excerpt, American Economist, 22-MAR-04
  11. Stiglitz, Joseph E. On the Optimality of the Stock Market Allocation of Investment, Quarterly Journal of Economics, 86(1), February 1972a: pp. 25–60.
  12. Stiglitz, Joseph E. The Inefficiency of the Stock Market Equilibrium, Review of Economic Studies, XLIX, April 1982b: pp. 241–261.
  13. Newbery, David and Stiglitz, Joseph E.,The Choice of Techniques and the Optimality of Market Equilibrium with Rational Expectations, Journal of Political Economy, 90(2), April 1982, pp. 223–246 and Pareto Inferior Trade, Review of Economic Studies, 51(1), January 1984, pp. 1–12.
  14. 14.0 14.1 Stiglitz, Joseph E. Making Globalization Work ISBN 0-393-06122-1, Penguin Books, August 2006.
  15. Stiglitz, Joseph E. Making Globalization Work ISBN 0-393-06122-1, Penguin Books, August 2006.
  16. Frieden, Jeffry A. To Have and Have Not, a Review on Stiglitz's Making Globalization Work. New York Times. Published: December 24, 2006.
  17. Reich, Robert B. A case for tailoring - and slowing - free trade in poor nations. A review of Stigitz's Fair Trade for All. The New York Times, March 31, 2006. In: Culture, International Herald Tribune.
  18. Pollin, Robert. Review of 'The Roaring Nineties: A New History of the World’s Most Prosperous Decade' by Joseph E. Stiglitz. Challenge Magazine, March 2004
  19. Friedman, Benjamin M. Globalization: Stiglitz's Case. A review on Stiglitz's Globalization and Its Discontents, The New York Review of Books, August 15, 2002.