Joseph E. Stiglitz

Joseph Eugene "Joe" Stiglitz (born February 9, 1943) is an American economist and a member of the Columbia University faculty. He is a recipient of the John Bates Clark Medal (1979) and the The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (2001). Former Senior Vice President and Chief Economist of the World Bank, he is known for his critical view 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 held the rank of 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 the most cited economist in the world, as of June 2008.

Stiglitz was born in Gary, Indiana, to Jewish parents, Charlotte and Nathaniel Stiglitz. From 1960 to 1963, he studied at Amherst College, where he was a highly active member of the debate team and President of the Student Government. He went to the Massachusetts Institute of Technology (MIT) for his fourth year as an undergraduate, where he later pursued graduate work. His undergraduate degree was awarded from Amherst College. From 1965 to 1966, he moved to the University of Chicago to do research under Hirofumi Uzawa who had received an NSF grant. He studied for his PhD from MIT from 1966 to 1967, during which time he also held an MIT assistant professorship. The particular style of MIT economics suited him well - simple and concrete models, directed at answering important and relevant questions [2]. From 1969 to 1970, he was a Fulbright research fellow at the University of Cambridge. In subsequent years, he held professorships at Yale University, Duke University, Stanford University, Oxford University and Princeton University. Stiglitz is currently a Professor at Columbia University, with appointments at the Business School, the Department of Economics and the School of International and Public Affairs (SIPA), and is editor of The Economists' Voice journal with J. Bradford DeLong and Aaron Edlin. Stiglitz is generally considered to be a New-Keynesian economist.

In addition to making numerous influential contributions to microeconomics, Stiglitz has played a number of policy roles. He served in the Clinton Administration as the chair of the President's Council of Economic Advisors (1995 – 1997). At the World Bank, he served as Senior Vice President and Chief Economist (1997 – 2000), in the time when unprecedented protest against international economic organizations started, most prominently with the Seattle WTO meeting of 1999. He was a lead author for the Intergovernmental Panel on Climate Change.
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 asymmetries that he shared the Nobel Memorial Prize in Economics[2] in 2001 "for laying the foundations for the theory of markets with asymmetric information" with George A. Akerlof and A. Michael Spence.

Traditional neoclassical economics literature assumes that markets are always efficient except for some limited and well defined market failures; Stiglitz et al. more recent studies reverse that presumption: it is only under exceptional circumstances that markets are efficient. Stiglitz (and Greenwald)[3] 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 everyone better off [3]. Although these conclusions, and the pervasiveness of market failures, do not at all warrant the state intervening broadly in any economy, it makes clear that the "optimal" range of government recommendable interventions is definitely much larger than the traditional "market failure" school recognizes [4] For Stiglitz there is no such thing as an "invisible hand" [5].

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. [6]

In the opening remarks for his prize acceptance "Aula Magna" [7], Stiglitz said:

"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, Aula Magna

In an interview, Stiglitz explained further:

"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."

Stiglitz also did some research on efficiency wages, and helped create what became know as the "Shapiro-Stiglitz model" to explain why there is unemployment, why wages aren't 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 employment.[9] The answer to these puzzles was proposed by Shapiro and Stiglitz in 1984: "Unemployment is driven by the information structure of employment" [9]. 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.

The mathematical analysis of the "Shapiro-Stiglitz model" is beyond the scope of this article. A full model description can be found at the links provided [10]. Some key implications of this model are:

* 1. Wages don’t fall enough during recessions to prevent unemployment from rising. If labor demand shifts inward, 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 [ w∗ > e' ] in all cases.

* 2. There are also negative externalities. Each firm increases the asset value of unemployment for all other firms by hiring. But the first problem clearly dominates since the 'natural rate of unemployment' is always too high.

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 debates and disagreements [11]. Stiglitz himself seems to be continuously adapting his own political-economic discourse, [12] 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.[13]

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"[14] (Stiglitz 1994, 179).[13]

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 to question great constitutional questions such as how the coercive institutions of the state should be constrained and what is the relation between the state and civil society.

Stiglitz moved to Washington in March 1992 to join the Clinton Administration, first as a member, and then as Chairman of the Council of Economic Advisers, 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). Some of the ideas that Stiglitz had helped formulate, like adverse selection and moral hazard, are now part of the every day language of the policy debate in health care.

Stiglitz's most important contribution in this period was helping define a new economic philosophy, a "third way", which recognized 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 twenty-five 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 pushed [16] [17].

Stiglitz always had a poor relationship with Treasury Secretary Lawrence Summers. 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" (Mallaby, The World's Banker, p. 266).

Stiglitz resigned a month before his term expired at the World Bank, and left the Bank on January 2000.[17] 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".[18]

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 on the IMF:

"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, yet this time Wolfensohn was worried for his second term, which Summers had threatened to veto. Stanley Fisher, deputy managing director of the International Monetary Fund, 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 (see US Hegemony and the World Bank, pp 222-223, by Wade in 2002, Review of the International Political Economy).

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 government, to enhance democratic processes for decision making in developing countries, to ensure that a broader range of alternatives are on the table and more stakeholders are at the table.

Along with his technical economic publications (he has published over 300 technical articles), Stiglitz is the author of several books in which he 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.

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 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 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 Neoclassical, Keynesian, and heterodox perspectives. The third part presents a similar analysis for capital market liberalization.

Making Globalization Work

Making Globalization Work (2006) 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 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 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 globalization to favour the world's poorest, and to address the democratic deficit that is so keenly felt across the world. He shows how an examination of incomplete markets can make corrective government policies desirable.

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 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. Making Globalization Work[20] 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."

Globalization and Its Discontents

Stiglitz considers a pressing economic problem of our time when he argues that what we usually call "developing economies" are, in fact, not developing at all. Stiglitz, in Globalization and Its Discontents (2002), offers his views both of what has gone wrong and of what to do differently. But the book also focuses on who is 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 prescriptions. 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. 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.

Whither Socialism?

Description

Whither Socialism? is based on Stiglitz's Wicksell Lectures, presented at the Stockholm School of Economics in 1990 and presents a convenient and well-written summary of the central themes of the new information economics and is as an excellent primer on 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 Smith's notion of invisible hand, along the lines put forward by Walras and encapsulated in the general equilibrium model of Arrow-Debreu) , which has dominated economic thought over the past half century, 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, that provides greater theoretical insight into the workings of a market economy and offers a clearer guidance for the setting of policy in transitional economies.

One of the reasons Stiglitz sees for the critical failing in the standard neoclassical model, on which market socialism was built, is its assumptions concerning information, particularly 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. [21]

Critique

Whither Socialism? has been subject to various critiques such as those of the Yale professor John E. Roemer (An Anti-Hayekian Manifesto - 1995) [22], the one written by Peter Boettke, the Deputy Director of the James M. Buchanan Center for Political Economy (1996) [23], as well as the critique by David L. Prychitko, a professor of economics at Northern Michigan University, which was published in The Cato Journal (fall 1996). Prychitko says that "the book hopes to go beyond the confines of pure technical economic theory, as its title implies. Stiglitz makes efforts to join the dialogue in political economy, and wonders "whether the insights of modern economic theory and the utopian ideals of the nineteenth century can be brought closer together?" (p. 277). It is precisely this comment that invites criticism, not so much because he wants to save some socialist ideals (incredibly, however, through a "people's capitalism" [p. 265]), but rather because of his unexamined presuppositions regarding how to do so." "Stiglitz insists that we should not ask whether or not the state has a role to play in the economy, but rather how large a role, and in what specific tasks (p. 231). For Stiglitz, the problem is posed correctly only when we seek an "appropriate balance between markets and government" (p. 267)," but he fails to indicate what an "appropriate balance" would be. "Stiglitz formally demonstrates the potential efficiency-enhancing properties of the state based on the Greenwald-Stiglitz theorems (establishing the - constrained - Pareto inefficiency of market economies with imperfect information and incomplete markets), and "believes that solutions to worldly problems can become illuminated by this new set of mathematical theorems, to replace the old theorems of Arrow-Debreu and Lange-Lerner (pp. 4-6, 231-32)." [15]

Stiglitz mentions that economics must be recast as something more than a constrained maximization problem, and proposes his own alternative--a mathematical theorem that encompasses more complex, nonlinear vectors.

"Stiglitz's main insight is generally correct -- that the state cannot be ruled out or that it should be ruled in --, but leaves open the grand constitutional questions: How will the coercive institutions of the state be constrained? What is the relation between the state and civil society? His book fails on these political aspects because it has not addressed the broader constitutional concerns that James McGill Buchanan Jr. [24] (1975) and other economists have raised."

Papers and conferences

Dr. 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, Dr. 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.

Stiglitz's book Whither Socialism, was criticized by David L. Prychitko of the Cato Institute. Prychitko criticized the book for failing to address the "constitutional concerns" voiced by James M. Buchanan, insufficiently examining historical evidence and context, and not addressing work by figures like Hayek, Claus Offe, and Jurgen Habermas. Ultimately, Prychitko regards the book as a good informal introduction to modern information economics but "despite its great merits, however, I think the book has not come to terms with the fundamental historical, political, and philosophical issues implied by its own provocative title."

Stiglitz married for the third time on October 28, 2004, to Anya Schiffrin, who works at the School of International and Public Affairs at Columbia University. Before that, he married and divorced twice.