Modern Economical Thinkers: Joseph Stiglitz

Modern Economical Thinkers: Joseph Stiglitz

Joseph Stiglitz (1943 - ) [9] is an American economist who is today one of the most influential writers in development economics. Stiglitz early work was on economics theory and macroeconomics. He wrote on the economics of information, the imperfection of markets, how markets allocate risk, or fail to allocate risk correctly. For this work he won the Nobel Prize in Economic Sciences in 2001. Stiglitz 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". Neoclassical economics literature assumed that markets are efficient except for some limited and well-defined market failures. Stiglitz has shown that “whenever markets are incomplete and/or information is imperfect. The "optimal" range of government recommendable interventions is definitely much larger than the traditional "market failure" school recognizes. For Stiglitz, there is no such thing as an invisible hand, in the sense that free markets lead to efficiency as if guided by unseen forces. “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. 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 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. 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'. By creating hypercompetitive labour markets, all firms (the winners when labourers compete) experience an increase in value. His career took a shift in the late 1990s, when for 3 years he served as chief economist for the World Bank. From that time on his attention turned to development economics and he has written a large array of popular works, putting forward a definite view of economic development. He has put forward the idea that the global rules of the economic gains are systematically unfair to poorer countries, more specifically he has argued that the richer nations impose a regime of intellectual property rights on the poorer nations which is too strict for the interest of poorer nations. This would mean a too strict enforcement of pharmaceutical patterns, and Stiglitz believes that this intellectual property rights should be looser, which would mean lower prices for pharmaceuticals for the poorer nations. Stiglitz believes in trade reduction, but he also thinks we should allow for differential tariffs and trade agreements. The Wealth Nations should lower their tariffs unilaterally and not exist on reciprocity from the poorer nations. Stiglitz has also raised the prospect of unilateral debt relief for the poorer nations and he has argued there is a systematic democracy deficit in international and multilateral institutions. For instance, he has argued for giving poorer nations a greater shares of voting rights in the IMF and World Bank. Taking together all of these attempts would try shift the current global rules and move them closer to an arrangement which suits the interests of poorer nations, or so Stiglitz has argued. He is best-known for his critique of the IMF. The IMF is well for its insistence on economic policy reforms and lends money to the poorer nations of the world. Stiglitz has argued that the IMF goes too far or imposes conditions on these nations which are not appropriate. In particular Stiglitz has opposed the continual use of the IMF advocating: a. Financial Market Liberalization b. Insistence on Debt Repayment c. Fiscal Austerity and cuts in government spending d. Privatization of developing country assets. He is associated with the political left. He is seen as an advocate of the interests of developing nations, but not all economists have agreed with his ideas. In general, the notion of giving developing nations a greater say in the international economic order does have a possible problem: developing nations are not as well run as the wealthier nations. Giving developing nations a greater say in the world economic order, may not make that order more efficient or more just. I am a great fan of Joseph Stiglitz. He has been one of the first to comment on the Euro Crisis, predicting it was heading towards Doomsday due to austerity measures dictated from Berlin. He also investigated the case of the Argentinian recovery after 2001, which some people argue could be a good solution for Greece. He is right in the fact that pressure on austerity and debt handling from the IMF has led to disastrous results. However, it is my opinion economic formulas don’t contemplate cultural issues or country specifics. I will be retaking his concepts and discussing these issues and more in later chapters.