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.
In addition to being awarded the Nobel Memorial prize, Stiglitz has over 40 honorary doctorates and at least eight honorary professorships, as well as an honorary deanship.
In 2011, he was named by Foreign Policy magazine on its list of top global thinkers. In February 2012, he was awarded the Legion of Honor, in the rank of Officer, by the French ambassador in the United States François Delattre. Stiglitz was elected a Foreign Member of the Royal Society (ForMemRS) in 2009.
Joseph Eugene Stiglitz (/ˈstɪɡlɪts/; born February 9, 1943) is an American Economist and a professor at Columbia University. He is a recipient of the Nobel Memorial Prize in Economic Sciences (2001) and the John Bates Clark Medal (1979). He is a former senior vice President and chief Economist of the World Bank and is a former member and chairman of the (US president's) Council of Economic Advisers. He is known for his support of Georgist public Finance theory and for his critical view of the management of globalization, of laissez-faire economists (whom he calls "free market fundamentalists"), and of international institutions such as the International Monetary Fund and the World Bank.
Creating a Learning Society, (co authored with Bruce C. Greenwald), cast light on the significance of this insight for economic theory and policy. Taking as a starting point Kenneth J. Arrow's 1962 paper "Learning by Doing," they explain why the production of knowledge differs from that of other goods and why market economies alone typically do not produce and transmit knowledge efficiently. Closing knowledge gaps and helping laggards learn are central to growth and development. But creating a learning society is equally crucial if we are to sustain improved living standards in advanced countries.
Stiglitz was born in Gary, Indiana, to Charlotte (née Fishman), a schoolteacher, and Nathaniel David Stiglitz, an insurance salesman. Stiglitz graduated from Amherst College in 1964, where he was a highly active member of the debate team and President of the student government. During his senior year at Amherst College, he studied at the Massachusetts Institute of Technology (MIT), where he later pursued graduate work. 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. Stiglitz stated that the particular style of MIT economics suited him well, describing it as "simple and concrete Models, directed at answering important and relevant questions."
From 1966 to 1970 he was a research fellow at the University of Cambridge. Stiglitz initially arrived at Fitzwilliam College, Cambridge as a Fulbright Scholar in 1965, and he later won a Tapp Junior Research Fellowship at Gonville and Caius College, Cambridge which was instrumental in shaping his understanding of Keynes and macroeconomic theory. In subsequent years, he held academic positions at Yale, Stanford, and Princeton. Stiglitz is now 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.
After getting his PhD from M.I.T in 1967, Stiglitz co-authored one of his first papers with Michael Rothschild for the Journal of Economic Theory in 1970. Stiglitz and Rothschild extrapolated on previous works by prominent economists such as Robert Solow to work on the concept of Risk Aversion, which is the behavior in humans to lower the uncertainty presented in the risk situation. Stiglitz and Rothschild’s paper’s primarily focus was on defining “When is a random variable ‘Y’ more variable than another random variable ‘X’.” In this mathematically complex paper, Stiglitz and Rothschild showed four plausible answers to this question, which led them to write the second paper, in which they analyzed the likely economic effects of increasing risk. They examine an individual’s return on savings, portfolio Problem, portfolio-savings Problem and a firm’s production Problem. These papers allowed Stiglitz to earn the John Bates Clark Medal in 1979.
Stiglitz also did research on efficiency wages, and helped create what became known as the "Shapiro-Stiglitz model" to explain why there is unemployment even in equilibrium, why wages are not 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 unemployment. The answer to these puzzles was proposed by Shapiro and Stiglitz in 1984: "Unemployment is driven by the information structure of employment". Two basic observations undergird their analysis:
The preceding claim is based on Stiglitz 1986 paper, "Externalities in Economies with Imperfect Information and Incomplete Markets", which describes a general methodology to deal with externalities and for calculating optimal corrective taxes in a general equilibrium context. In the opening remarks for his prize acceptance at Aula Magna, Stiglitz said:
Whither Socialism? is based on Stiglitz's Wicksell Lectures, presented at the Stockholm School of Economics in 1990 and presents a summary of information economics and 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 Adam Smith's notion of the "invisible hand", along the lines put forward by Léon Walras and encapsulated in the general equilibrium model of Arrow–Debreu), 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.
Stiglitz joined the Clinton Administration in 1993, serving first as a member during 1993–1995, and was then appointed Chairman of the Council of Economic Advisers on June 28, 1995, 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).
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, and he assumed that position after his CEA successor was confirmed on February 13, 1997.
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 governments, to enhance democratic processes for decision-making in developing countries and to ensure that a broader range of alternatives are on the table and more stakeholders are at the table.
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 asymmetry that he shared the Nobel Memorial Prize in Economics in 2001 "for laying the foundations for the theory of markets with asymmetric information" with George A. Akerlof and A. Michael Spence.
Stiglitz co-authored a paper with Peter Orszag in 2002 titled "Implications of the New Fannie Mae and Freddie Mac Risk-Based Capital Standard" where they stated "on the basis of historical experience, the risk to the government from a potential default on GSE debt is effectively zero." However, "the risk-based capital standard ... may fail to reflect the probability of another Great Depression-like scenario."
Stiglitz married Jane Hannaway in 1978; the couple later divorced. He got 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. He has four children, Siobhan, Michael, Edward (Jed), and Julia, and three grandchildren.
He also gives classes for a double-degree program between Sciences Po Paris and École Polytechnique in 'Economics and Public Policy'. He has chaired The Brooks World Poverty Institute at the University of Manchester since 2005. Stiglitz is widely considered a New-Keynesian Economist, although at least one economics Journalist says his work cannot be so clearly categorised.
In Stability with Growth: Macroeconomics, Liberalization and Development, Stiglitz, José Antonio Ocampo (United Nations Under-Secretary-General for Economic and Social Affairs, until 2007), 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 challenges 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 third part presents a similar analysis for capital market liberalization.
In Freefall: America, Free Markets, and the Sinking of the World Economy, Stiglitz discusses the causes of the 2008 recession/depression and goes on to propose reforms needed to avoid a repetition of a similar crisis, advocating government intervention and regulation in a number of areas. Among the policy-makers he criticises are George W. Bush, Larry Summers, and Barack Obama.
In 2009, Stiglitz chaired the Commission of Experts on Reforms of the International Monetary and Financial System which was convened by the President of the United Nations General Assembly "to review the workings of the global financial system, including major bodies such as the World Bank and the IMF, and to suggest steps to be taken by Member States to secure a more sustainable and just global economic order". Its final report was released on September 21, 2009.
In 2010, Professor Stiglitz acted as an advisor to the Greek government. He appeared on Bloomberg TV for an interview on the risks of Greece defaulting, in which he stated that he was very confident that Greece would not default. He went on to say that Greece was under "speculative attack" and though it had "short-term liquidity problems... and would benefit from Solidarity Bonds", the country was "on track to meet its obligations".
In 2011, he was named by Foreign Policy magazine on its list of top global thinkers. In February 2012, he was awarded the Legion of Honor, in the rank of Officer, by the French ambassador in the United States François Delattre. Stiglitz was elected a Foreign Member of the Royal Society (ForMemRS) in 2009.
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, the IMF has often 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 these policies have been disastrous for the countries that have followed them.
Contrary to most economists historians, who argue that tariffs have played only a minor role or not at all in the Great Depression , Stiglitz thinks that the United States should not protect its economy because tariffs contributed to the Great Depression: «Following that, U.S. exports fell by some 50 percent—contributing to our Great Depression» .
In 2016, he believes that the economic situation of the United States is critical : «As the economists Anne Case and Angus Deaton showed in their study published in December 2015, life expectancy among middle-age white Americans is declining, as rates of suicides, drug use, and alcoholism increase. A year later, the National Center for Health Statistics reported that life expectancy for the country as a whole has declined for the first time in more than 20 years».«With the incomes of the bottom 90% having stagnated for close to a third of a century (and declining for a significant proportion), the health data simply confirmed that things were not going well for swaths of the country». Finally in 2017 he changes his mind and thinks that the effect of globalization on the American economy is not so serious today: «Yes, America faces a variety of problems—it always has, and what nation doesn’t?».
Early 2017, he writes that «the American middle class is indeed the loser of globalization» and «China, with its large emerging middle class, is among the big beneficiaries of globalization». Then he changed his mind and arges that the fall in wages and the disappearance of well-paid jobs are not due to globalization but are only inevitable collateral damage to the march of economic progress and technological innovation: «The United States can only push for advanced Manufacturing, which requires higher skill sets and employs fewer people. Rising inequality, meanwhile, will continue[...]». Finally, at the end of 2017, he changed his mind and writes that the drop in wages is not a normal process and is solely due to the actions of multinational companies and not to the trade account imbalances between countries caused by free trade: «It was an agenda written by and for large multinational companies, at the expense of workers». So it is no longer the surplus countries that have benefited from free trade, but only companies.
According to him, it's not China (which has a large trade surplus) that makes «trade war» but the United States (which has a large trade deficit) if they try to rebalance trade account through tariffs. He defends China's trade surpluses at the expense of the United States and believes that China will «respond with strength and intelligence», and hit the United States, «where it hurts economically and politically» if the United States try to protect their industry. «For Example, cutbacks in purchases by China will lead to more unemployment in congressional districts that are vulnerable, influential, or both». «China can retaliate anywhere it chooses, such as by using trade restrictions to target jobs in the congressional districts of those who support US tariffs». «China may be more effective in targeting its retaliation to cause acute political pain».«It’s anybody’s guess who can stand the pain better. Will it be the US, where ordinary citizens have already suffered for so long, or China, which, despite troubled times, has managed to generate growth in excess of 6%?».
