22 Ideas to Fix the World: Conversations with the World's Foremost Thinkers

3. JOSEPH STIGLITZ: “We can have faster economic growth if we reduce inequality”

◆ ◆ ◆ 37 3 “We can have faster economic growth if we reduce inequality” JOSEPH STIGLITZ in conversation with Shari Spiegel Joseph Stiglitz is a recipient of the Nobel Memorial Prize in Economic Sciences (2001) and the John Bates Clark Medal (1979). He is a university professor at Columbia University and also chairs the University of Manchester’s Brooks World Poverty Institute. The Nobel laureate and renowned economist Joseph Stiglitz has long been a critic of many aspects of mainstream economic theory and policy. Here he delves into the history and failures of modern macroeconomics , which, most recently, failed to either foresee or address effectively the global economic crisis. He argues that other areas of economics have developed theories, such as behavioral economics and new paradigms of monetaryeconomics,whichcanserveasbuildingblocksforanewframework . Two areas that were not well-addressed in the standard paradigm and need to be addressed in new economic thinking are sustainability and inequality. Professor Stiglitz focuses on the issue of inequality and argues that it impinges both on individuals’ capacity and society’s ability to use best its human resources. In the context of the recent economic Photo courtesy of Columbia University and Joseph Stiglitz. 38 ◆ ◆ ◆ transform how the global economy works slowdown, he argues that policymakers need to focus on both the near term and the medium term simultaneously, since near-term policies have medium-term effects. Policy should focus on stimulating employment and consumption, including investment in small and medium-size enterprises that typically cannot access capital markets and have to rely on banks. Banks, in this view, should be harnessed to serve society’s economic needs rather than simply their own profit motive. Finally, he looks at national policies within a globalized world and calls for greater global governance and coordination of policies, while still allowing for differentiation , especially for developing countries. SS: Let’s start by talking a little bit about the failure of the economic model and how you see economics going forward. What do you think are the problems with existing economic models? Can we still use existing models, or do we need a completely new economic model, or something else altogether? JS: The most obvious problems with economics were in macroeconomics . The standard paradigm didn’t predict the crisis. According to the paradigm, crises, such as the recent crisis, couldn’t even occur. After the bubble broke, it said the problems were contained. It didn’t give a very good set of prescriptions about how to respond when in fact it turned out that they were not contained. It was almost a perfect record of malperformance. Then you have to ask the question: Was it just bad luck, or were there fundamental flaws with the theory? I think the answer is that the theory has fundamental flaws, many of which were raised over a long period of time but to which very little attention had been given. Perhaps one can go back thirty or forty years. Keynesian economics grew out of the Great Depression and was successful in part because it provided an interpretation of that cataclysmic event. In the 1970s the key problem in macroeconomics was inflation, for which the focus of traditional Keynesian economics was not so relevant. There were two fields in economics: micro and macro. Micro was based on assumptions Joseph Stiglitz ◆ ◆ ◆ 39 about well-functioning markets, while macro was based on seemingly simple descriptions of how markets worked. Market failures were pervasive —indeed macroeconomics focused on the market failure of persistent unemployment. The poor economics students had to learn two different disciplines in different courses with totally different perspectives. The economics profession wanted a kind of intellectual coherence between the two fields. There were two ways of brining the two together: to make macro like micro or to make micro like macro (which would imply acknowledging that there were market failures and unemployment ). The main strand of economics took the view that micro theory was right and tried to make macro like micro, with the underlying assumptions of well-functioning markets and no such thing as unemployment. To simplify the analysis, many macroeconomists went even further and used a representative agent model.1 In a representative agent model everybody’s the same person, which means you can have no information asymmetries and no financial markets. Over the years, the economics profession realized that the representative agent model was overly simplistic—to put it mildly. They began a polemic...