Joseph Stiglitz has served as both vice president and chief economist for the World Bank. Stiglitz also chairs at the Brooks World Poverty Institute and is a member of the Pontifical Academy of Social Sciences. Stiglitz, along with George Akerlof and Michael Spence, won the Nobel Prize in Economics in 2001. His latest book is The Three Trillion Dollar War: The True Cost of the Iraq Conflict. Ecological economist Tom Green talked to Stiglitz about the shortcomings of contemporary economics.
On standing up to the economics establishment
Everybody likes to have their articles approved by others in the profession. If you stand outside the mainstream, you’re not going to get the accolades you get when you’re in the mainstream. It’s sort of like a club – it’s a lot easier being a member of the club than not being a member of the club. Part of the difficulty is that the club is trying to focus on the issues of the day: in one period the issue is inflation, in another period it’s unemployment. With that shortsighted focus, there is quite often a failure to see the broader picture. The economics establishment has particular views on “orthodox theory,” and at various times it shifts from one thing to another. Monetarism was the orthodoxy for a while, even though there was no scientific basis for monetarism. It was a big fad; almost everyone was a monetarist. And then, almost as fast as monetarism came in, people discovered it wasn’t working and they abandoned it. When inflation became the big problem in the 1970s, people forgot about the big lessons of Keynesian economics. The lessons hadn’t disappeared, but the world was focusing on inflation.
Now, we’re in another episode where the economy is going through a serious downturn and people are thinking about why economies go into downturns. It turns out that the theories most people have been talking about for the past 15 to 20 years aren’t very helpful in addressing current issues.
On why introductory textbooks continue to teach the old models
I think there are two reasons for that. First, it’s easier. Demand and supply are easier to explain than theories of imperfect information, or at least some people think they are. Second, there is a bit of a political agenda. It’s not a surprise that Mankiw [author of Principles of Economics] was on the Council of Economic Advisors under President Bush and they tried to push forward a particular ideological view that markets work perfectly. I don’t think most people think the economy is functioning perfectly.
Financial markets are dealing with information and risk, and those are topics books like Mankiw’s – the old-fashioned textbooks – simply don’t deal with adequately. And that’s the real danger: if people learn outdated economics and they wind up trying to make a decision about regulation – or another aspect of economic policy – they are simply not equipped to deal with the problem.
On the invisible hand
A simple way to explain why the invisible hand doesn’t work is to ask: Did the top executives’ pursuit of self-interest in the case of Enron lead to global economic efficiency? Did the managers of the big banks – Citibank, Merrill Lynch, all the ones dealing in subprime mortgages – lead to economic efficiency for the American economy? I think it’s pretty clear it didn’t, and one can see why it didn’t. These managers were pursuing their own bonuses, but maximizing their income was not consistent with maximizing societal welfare. Adam Smith said that maximizing self-interest and social interest were coincident, and I think that sort of dramatic illustration shows that they are not.
I think what we’ve realized is the world cannot afford an extension of our lifestyle to the rest of the world. The problem is that India and China are on the way to trying to imitate our lifestyle. These are two countries with 2.4 billion people. Growth in China has been unbelievable, growing close to ten percent for 30 years. China is already the second largest producer of automobiles, and if it continues on that path, the planet is really at risk. But we say, “Oh you can’t do this. It’s alright for us to have this profligate lifestyle but you can’t, because you might damage the planet.” What we have to say is we are changing our lifestyle and there has to be a global compact, a social compact, that we all have to have a lifestyle that treats the planet with the respect that it needs.
A healthy economy involves using our time efficiently and getting enjoyment out of our time. Spending two hours commuting is not a good use of anybody’s time. There are many ways in which we are very inefficient. We have not thought through efficient land management. I was in a meeting recently in France where in the central city they were talking about how to redesign the whole city to make it environmentally more efficient, to make sure there is less waste, that the energy that is put out is captured and used and reused. So there are lots of things we can do to increase our overall efficiency.