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Home , Joseph Stiglitz

PROFILES OF WORLD 24

JOSEPH STIGLITZ

doc. Ing. Marta Martincová, Ph.D., University of in Bratislava

Joseph Stiglitz, professor at Colum- 2001 for research into „information bia University and convinced Neo-Key- asymmetry in the market“ and analysis nesian, received the jointly of „moral hazard“ in economics. with G. A. Akerlof and A. M. Spencer in

Joseph Stiglitz was born on 9th Februa- with instability and ineffectiveness only if ry 1943 at Gary, Indiana in the USA. It is we consider a variant of the assumption of interesting that , another , if we create simple very important winner of the Nobel Prize models with a long time horizon. for economics, was born in the same city. Stiglitz’s work on uncertainty in economics led him Joseph E. Stiglitz attended state schools. From to research on and more 1960 to 1963, he studied at , a small generally to work on the imperfect informedness of university in New England. He directed his attention to actors in the market. Stiglitz pointed to the results of economics in his third year of study. He left Amherst the economic behaviour of actors in the market. The College in his last year of study, because he got first course he taught was on statistics, and specifi- a grant to study at the Massachusetts Institute of cally on the use of the theory of probability to explain Technology (MIT). He was only later awarded an addi- statistical inexactness. tional degree diploma and still later, an honorary doc- Afurther key work was a book on torate. “Economics of the Public Sector”, in which he clarifies Study at the MIT was important for the development the principles of the functioning of a correctly mana- of his profession as an . He spent two years ged and cautious state. In his lecture on the occasion at the MIT as a student and then continued to study of receiving the Nobel Prize, he stated that from vari- there for a doctorate. He was taught by outstanding ous points of view, information is a public commodity, teachers, including at least four winners of Nobel Pri- and so it is improbable that a private market will secu- zes: Samuelson 1970, Solow 1987, Modigliani 1985 re effective allocation of resources, when information and Arow 1972. His first paper presented at an aca- is an endogenous factor. His further works were direc- demic event was compiled jointly with George Aker- ted towards more exact definition of the origin of failu- lof, with whom he also shares the Nobel Prize. After re of the market. completing his first year of study at the MIT, he was His stay in Kenya was important for the develop- offered the chance to critically review Paul Samuelso- ment of J. Stiglitz’s thinking on the economics of infor- n’s articles. Even after leaving the MIT, he was long mation. It helped him to understand the basic pro- known as the best critical reviewer of blems a poor country has to struggle with. He also Samuelson’s articles. had a chance to learn about the problems of an eco- In 1965-1966, Stiglitz gained a grant to study at nomy, which differs very much from a functioning mar- Cambridge University. From Cambridge he returned ket economy. Similarly, the fact that he grew up in to the MIT, but after a year he left to teach at Yale Uni- Gary, Indiana, helped him to understand problems versity. One reason for this was to delay being drafted such as wage discrimination, which led to him reali- for the war in Vietnam. During this period, he continu- zing that certain pre-conditions for the functioning of ed to work on the dynamic of economics, and he the market were not consistently fulfilled in practice. began to concern himself with the problem of uncer- Although J. Stiglitz devoted the majority of his profes- tainty in economics, which led him to work on the role sional effort to teaching economics and to economic of information in the economics. research, he also briefly devoted his attention to con- The main subject of J. Stiglitz’s in resear- sultancy activity. He attached great importance to the ching dynamics was the stability of the market econo- problems of public policy. His first great consultancy my.Together with Karl Shell, he pointed to the fact that project was a direct result of his work on imperfect infor- a competitive economy with future, still growing mar- mation. It was oriented to information , which kets will generally be exposed to an unstable dyna- happened at the time of the oil boom. Further consul- mic. According to Stiglitz, we will not find problems tancy, connected mainly with violations of anti-trust

BIATEC, Volume XI, 10/2003 PROFILES OF WORLD ECONOMISTS JOSEPH STIGLITZ 25 rules or with questions of the role of the central govern- architects of the basic question: Why ment gave Stiglitz stimuli for clarification of how markets does the USA, when threatened by react really function and how companies behave in these with appropriate relaxation of monetary and fiscal markets. Joseph Stiglitz now teaches economics and policy, while the IMF advises or even forces develo- finance at . He received the Nobel ping countries to do exactly the opposite? Prize for analysis of “moral hazard” in economics. Stiglitz’s arguments have evoked much discussion in In 1993, he became the chief economic advisor to the ranks of both the supporters and opponents of glo- . He promoted reduction of the public debt balization. and budget deficit. In 1997, he was appointed to the J. Stiglitz argues that the private owner looks after position of chief economist and vice president of the property better than the state, so removal of restricti- , which gave him direct access to informa- ons on the economy supports development. However, tion about . He gave up this position it is necessary to bear in mind that in countries, where in 2001. the market system is only emerging and beginning to J. Stiglitz also thought about the new challenges operate, this principle has many exceptions. Joseph and problems of globalization. He has written the book Stiglitz is a person, who knows very much about these “Globalization and its Discontents”, which asks the exceptions.

Information asymmetry in the market classical model of the market did not pay attention to the pre-condition of access to information, and it also Stiglitz’s scientific work on uncertainty in economics completely ignored technological progress. He beca- led him to knowledge about information asymmetry me a supporter of , emphasizing and the general imperfect informedness in the mar- the importance of innovations, but he pointed to the ket, which was only a short step from the generaliza- fact that an established monopoly may persist, it does tion, that the market is not ideal. Stiglitz and his colle- not have to be a short-term matter. agues G.A. Akerlof and A.M. Spencer are convinced At the beginning of the 1970s, Stiglitz took an inter- that even small deviations from rationality in the rela- est in alternative approaches to the functioning of the tions between individual actors in an economy cause market founded on the evolutionary basis of Hayek. macro-economic break downs. In classical or neo- He was interested in evaluation of the evolutionary classical economic models, a key element is the process. He considered that the key question was assumption that the market is perfect. Buyers and sel- whether freely functioning markets can achieve the lers have equal power and opportunity to achieve a effective desired evolution without external interventi- satisfactory price. They have perfect information, they on, and whether it is possible to intervene in these know who sells cheaper and who buys at a higher markets in ways, which would lead to better results. price. However, the real market is not perfect, on one According to Stiglitz, this question has still not been side are privileged actors, on the other disadvantaged sufficiently researched. He stated in his lecture on participants. Some companies can wait before selling receiving the Nobel Prize that there are limits to the because they have reserves, while others must sell at evolution of the . Only part of this problem any price. Some know much about the and lies in the imperfections of the capital market. conditions in the market, others know nothing. Stiglitz’s views on the inadequacy of the standard According to Stiglitz and the neo-Keynesians in model were fully expressed in the discussion of the general, unequal access to information and the une- process of transformation of the former socialist eco- qual position of actors are typical of real markets. nomies into market economies. In this process, he If we take this assumption into account, it is entire- emphasized the importance of , the cent- ly clear that the market does not contribute to the opti- ral government, finance and more widely also the mal redistribution of the resources available to socie- institutional including the legal infrastructure. Howe- ty. In other words, the theory of economics needs to ver, he did not place much emphasis on privatization. be supplemented. The balance of supply and demand He belonged to the group of experts sometimes cal- as the basic thesis of every standard economics text- led “gradualists” in contrast to the supporters of the book is only a theoretical hypothesis. Well managed theory of shock therapy, who concentrated on rapid companies employing highly qualified workers should changes with rapid privatization. The transformation clearly prosper in the market, but the reality is much strategy supported by Stiglitz was clearly different to more complicated. The company wins by illegally that promoted by the IMF and its supporters. The fai- destroying the ethics of trade, because by doing so it lure of many countries in the attempt to successfully eliminates the competition. change to a provided a new view of Joseph Stiglitz realized that the classical or neo- what influences the functioning of market economies.

BIATEC, Volume XI, 10/2003 PROFILES OF WORLD ECONOMISTS 26 JOSEPH STIGLITZ

Stiglitz had the possibility to research one of these views as if they were Pareto dominant, that is, the views during the period he worked as chief economist policies, which should raise the living standards of all, of the World Bank. However, wide agreement was so there should be no compromises. gradually reached on the importance of the institutio- Short-term capital is especially harmful. It prefers nal infrastructure and the danger of rapid privatization countries, which guarantee high profits. The result is in the process of transformation to a market economy. that the domestic strengthens unhealthily, Stiglitz was deeply convinced that government has to but capital immediately leaves the country, because it play an important role in the economy. In his work on does not want to pay for a . the economy of the public sector, he attempted to cla- Stiglitz points out that foreign capital most prefers rify how the government can perform this role as the areas where it is least needed. Economic booms effectively as possible. One of the important questions especially attract investors. When begin, he was concerned with in this context, was the pro- capital leaves, the crisis deepens and capital strengt- blem of how to achieve the redistribution of income in hens the economic cycle. a way, which minimizes loss of effectiveness, which The IMF mainly analyses macro-economic indica- cannot be prevented and are connected with bre- tors: , budget deficits and balance of pay- akdowns. ments deficits. If crisis threatens a country, the fund A further important point in Stiglitz’s scientific work recommends introduction of a restrictive anti-inflation in the area of imperfect information is the organizati- policy of reduced expenditure and reform of the finan- on of markets. Markets with imperfect information are cial system. Stiglitz considers this recipe harmful. also usually described as . According to him, the protective activities of the fund are the most harmful. Assistance to threatened count- The economics of the public sector ries enables them to maintain a high exchange rate until rich investors have removed their and A new stage in the professional life of J. Stiglitz deposited it in safer places. The crisis in the East began at the beginning of the 1990s. He became a Asian economies further sharpened Stiglitz’s disagre- member of the administration of the American Presi- ement with the policies of the IMF. The approach of dent Clinton, and later chairman of the council of eco- the IMF to solving this crisis was not in harmony with nomic advisors. The extent of the legal power conne- his findings from the areas of information asymmetry cted with this position included not only macro-econo- and bankruptcies, central government and finance. mic measures, but also policy in every sphere of the J. Stiglitz analysed the causes of the origin of the economy. He was also concerned with the details of financial crisis in Argentina and also criticized the environmental problems. According to his own words, recommendations of the IMF in this case. He critici- one of the important achievements of this stage of J. zed the introduction of the “currency board” system for Stiglitz’s career is his definition of the new economic the following reasons: philosophy of the so-called “third way”, which empha- • Fixation to a currency such as the dollar is a very sized the important, but limited role of the govern- risky policy. Argentina already had to abandon this ment, and that unsatisfied markets often do not func- method of currency fixation years ago, tion well, but the government was not always able to • A one-sided emphasis on inflation, without regard correct limitations of the market. The research in for or is risky, which Stiglitz participated over 25 years provided the • Argentina was praised for enabling foreign entities intellectual background for this “third way”. His work to own banks. A more stable banking system was cre- about information asymmetry also emphasized the ated in the short term, but it did not lend to small and importance of stimuli and contradictions between middle-sized companies. Growth does not happen government officials and especially professional poli- without financial institutions, which lend to domestic ticians and those they have to serve – the citizens. companies, When Clinton was elected president for the second • The IMF bears a large part of the blame for the time, he asked Stiglitz to remain chairman of the Argentinian crisis by insisting on a restrictive policy. council of economic advisors for a further period. Stiglitz also predicts the reaction of the IMF – accu- However, Stiglitz accepted the offer of the World Bank sations of corruption and failure to implement the to become “senior vice president” for development necessary measures. policy, as well as chief economist. A further idea, which J. Stiglitz brought into the dis- cussion of the search for new innovative approaches Stiglitz’s contribution to monetary theory to financing economic development, is a new form of global currency, similar to special drawing rights Stiglitz criticizes the IMF for mechanically promoting (SDR). SDR is global money issued by the IMF. The the liberalization of capital flows and applying its member countries receive it and exchange it for the

BIATEC, Volume XI, 10/2003 PROFILES OF WORLD ECONOMISTS JOSEPH STIGLITZ 27 dollar and other hard . According to Stiglitz A conclusion could state that the scientific research the essence of the system would be simple: The of J. Stiglitz was strongly influenced by his experience countries of the world deposit financial reserves every of life. The dominant theme of his scientific works is year for unforeseeable events. These resources can- the implications of economic information for the not be used to finance the the poor count- macro-economics and especially for monetary theory. ries need. If a new “global currency” was introduced, Another important area of his research is his still countries could hold their reserves in this currency continuing analysis of the appropriate role of the state instead of in dollars. According to Stiglitz, this money in the economy, especially the combination of measu- could be transferred to developing countries to finan- res of the government in the areas of economic effec- ce development programmes. The IMF, which also tiveness, social justice, individual responsibility and issues SDR, or a new institution should issue this other liberal values. “global money”. A group of administrative funds for the He does not consider himself to be an enemy of the areas of education and health would be created at the free market. He also defends his spiritual father John same time. Countries would compete for projects Maynard Keynes against such accusations. He writes: This scheme would not be inflationary. Global Keynes was above all a radical conservative. He fun- money would compensate for inflationary prejudices, damentally believed in the market, although with the which are a result of the fact that the part of state reservation that the market will be effective only when revenue deposited as a reserve is never reflected in the government can correct its mistakes. overall global demand.

The most important works of J. Stiglitz: • The Roaring Nineties, W. W. Norton & Company, forthco- • Economics, Third Edition, with Carl E. Walsh, W.W. Norton ming in October 2003. & Company, April 2002. • Towards a New Paradigm in , with • Principles of , Third Edition, with Carl E. , Cambridge University press, forthco- Walch, W.W. Norton & Company, March 2002. ming in May 2003. • The Rebel Within. Josepf Stiglitz and the World Bank, eti- • Globalization and Itś Discontents, W.W. Norton & Compa- ded by Ha-Yoon Chang, Authem Press, February 2002. ny, June 2002.

BIATEC, Volume XI, 10/2003