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Interview with Joseph Stiglitz: Theory, Policy, Legacy

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Tyler Cowen interviews Joseph StiglitzNobel Prize ’01) said on the podcast “Conversations with Tyler.” “Joseph Stiglitz’s Pioneering Economic Theory, Policy Agenda, and Intellectual Legacy” (June 26, 2024). It’s impossible to encompass Joe’s monumental professional legacy research in a one-hour interview — Joe’s resume now runs to 153 pages, and as Tyler says, “it’s neither complete nor truly exhaustive” — but here are some highlights that caught my eye.

(I am forever indebted to Joe because he Economic Outlook Journal In 1986, he hired me as editor-in-chief. Joe left the position after six or seven years to pursue other adventures, but I’ve been delighted to serve in that position ever since. Joe has an extraordinary breadth of knowledge across the field of economics, and I’ve learned an enormous amount from talking about JEP-related papers and ideas, and about economics in general. On a personal note, Joe has always treated me openly, friendly, and with basic civility.

How principal-agent theory was formalized by observing tenant farming practices in Nigeria:

[O]Of course, one of the issues we were concerned about as fiscal economists was the perverse incentive effect of taxation. When the government takes 50% of what you produce, we all say, “Oh, that’s a terrible system. It disincentivizes people to work.” In the United States, generally, flat The top tax rate should not exceed 40%. I think that’s wrong, but it was certainly a very strong feeling.

Yes, there was a system of sharecropping here. Not just in Kenya, but in many countries around the world, half to two-thirds of the harvest went to the landlord. This amounted to a tax of 50 to 67 percent, but this was still the common form of tenancy that people had with landlords.

Why? How could this seemingly inefficient system survive for thousands of years? That was the motivation. One of my most influential papersThe idea was that there’s a risk-incentive tradeoff. When you don’t have perfect information and there’s a lot of risk, farmers can’t take the risk of owning land. If a farmer owns the land, or more accurately, if he rents the land, he has to absorb all the residuals, the weather variability, all the other variability, disease that he’s going to face.

In the tenant system, the risk was shared, with the landlord bearing much of the risk. This was the model for what later came to be called the “tenant system.” Principal-agent problemThis is now part of a really fundamental incentive model. This was the first formalization of the fundamental incentive model that is fundamental to modern economics.

The impossibility of informationally efficient markets was described in a 1980 paper co-authored with Sandy Grossman:

The title of the paper is “On the impossibility of informationally efficient marketsThis was a rebuttal to the views held by people such as: Eugene Pharma Markets are informationally efficient, efficiently transferring all information from the informed to the uninformed.

we clear The observation is that if this were the case, no one would have any incentive to collect information. So while markets may transmit information, it would all be free information; it would be information that no one makes the effort to collect.

Actually, in a different context, that idea is something that worries me a lot today: Google and AIs collecting huge amounts of information from newspapers, podcasts, and whatever else they can get their hands on, and then trying to monopolize the value of the knowledge that other people have created without paying for it. If they succeed in that, then of course there will be less incentive for other people to create high-quality, valuable information. That kind of interaction was at the heart of the 1980 paper, and the themes that we talked about there are still important themes that we’re talking about today.

How well or poorly the economy allocates credit.

The problem here is that we didn’t do a very good job of allocating credit and we let the market run wild. We lowered interest rates, we deregulated, and we didn’t look at where credit was going. The bank regulators that the Fed is supposed to oversee, and there are several other regulators who are actually supposed to oversee the risks of lending, and that’s where the problem arose.

Now, one of the things I have emphasized when I was at the World Bank, and ever since, is that one of the signs that there is a problem with credit allocation is a sudden increase in credit to a particular area. That’s a sign that maybe people are not paying enough attention. In particular, when credit to housing increased, we should have been worried.

Ultimately, the banks didn’t do their due diligence. They gave these mortgages to investors and they were, in effect, lying and committing fraud. They said, “Well, we’re very careful. We did inspections. These mortgages are for owner-occupied homes, and these are people with this income,” and yet they didn’t actually do anything. Any And all of that contributed to the financial crisis of 2008. So the issue is not the amount of credit, but the allocation of credit: how much better off our economy would be if we had put that credit to productive uses.

Joe left another legacy in his hometown of Gary, Indiana, also the home of Paul Samuelson and the Jackson 5. Joe said:

I would say it was a great trio at a library in Gary, Indiana. Mural They recently did this. I went back to Gary a few years ago and they proudly displayed a mural of the Jackson 5, Paul Samuelson and me.

The mural is 50 feet long and features 22 people and places with ties to Gary, Indiana, but here Joe is standing in front of a section where he can be seen reflected behind him.

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