Interview with Joseph Stiglitz: Theory, Policy, Legacy

Tyler Cowen interviews Joseph Stiglitz.Nobel ’01) From his “Conversations with Tyler” podcast: “Joseph Stiglitz on his pioneering economic theories, policy challenges, and intellectual legacy.” (June 26, 2024). It is impossible to review all of Joe’s monumental professional legacy research in one hour of interview. As Tyler noted, Joe’s resume is now 153 pages long and “it’s not complete and there’s really nothing wrong with it.” But here are a few high points that caught my eye:

(I must remember that I am forever indebted to Joe, because it was he who was chosen as Joe’s first editor. Journal of Economic Outlook In 1986, he hired me as an editor. Joe moved on to other things after six or seven years, but I have been very happy to have stayed on ever since. Joe has a tremendous breadth of economics, and I have learned a great deal from talking to him about JEP-related papers and ideas, and about economics in general. On a personal level, Joe has always been open, friendly, and courteous to me.)

How the principal-agent theory could be formulated by examining the practices of Nigerian peasant farming:

[O]Of course, one of the issues that worried us as public finance economists was the negative incentive effect of taxes. If the government takes 50% of the product, we all say, “Oh, that’s a terrible system. It’s a disincentive to work.” What is common in America even The maximum percentage cannot exceed 40%. I think that’s wrong, but it was definitely an emotion, a very strong emotion.

Well, here we had peasants. In Kenya and many other countries around the world, between half and two-thirds of the produce was taken by landowners. This was equivalent to a 50% to 67% tax, but it was a prevalent form of renting, which was a contract people made with their landlords.

Why is that? How can such a seemingly inefficient system last for thousands of years? That’s what motivated me. One of my most influential papers. The idea was that there was a risk-incentive trade-off. In a situation where there is no perfect information and there is a lot of risk, farmers cannot afford to take the risk of owning land. If they owned the land, or more accurately leased the land, they would have to absorb all the residues, the weather fluctuations, and all the other fluctuations that they would face, diseases.

As tenant farmers, they shared the risk, and much of the risk was borne by the landowner. it later principal-agent problem, which is part of the really fundamental incentive model now. This was the first formulation of the basic incentive model that is now fundamental to modern economics.

On the Impossibility of Information Efficient Markets, a paper written with Sandy Grossman in 1980:

The title of the paper is “On the Impossibility of an Information Efficient Market.” It was an argument against the views held by people like: Eugene Parma The market is informationally efficient, and it efficiently transfers all information from the informed to the uninformed.

we are obvious The observation is that if that were the case, there would be no incentive for anyone to gather information. So the market will transmit information, but it will all be free information. This is probably information that no one has bothered to collect.

In fact, in a different context, that idea worries me very much today. As Google and AI are scraping so much information from newspapers, podcasts, and anything else they can get their hands on, they’re trying to capture the value of knowledge created by others without having to pay for it. If they succeed in doing so, then of course the incentive for others to produce high quality and valuable information will be reduced. That kind of interaction was at the heart of our newspaper in 1980, and the topics we talked about then are still important today.

It’s about how well the economy allocates credit.

The problem here was that we didn’t do a good job of allocating credit, so we thought the market would be ruined. We lowered interest rates. Because we deregulated, we didn’t look at where the credit was going. The banking regulators that the Federal Reserve is supposed to supervise (in reality, there are several other regulators that are supposed to oversee the riskiness of loans) are where the flaws arise.

Now, one of the things I’ve emphasized very much when I was at the World Bank and since then is that one of the signs that there’s a problem with credit allocation is when you see credit growing very quickly in a particular region. This is probably a sign that people aren’t paying enough attention. We had to worry, especially when credit for homes increased.

As a result, the banks were not doing as much as they should have done. They were passing these mortgages to the investors and essentially lying and committing fraud. In many cases, they said, “Well, we were very careful. We checked. These are mortgages that are owner-occupied, that is, they are coming from people with this income.” They didn’t. any All of that contributed to the 2008 financial crisis. So the problem is not the amount of credit. It was an allocation of credit. How much better off our economy would be if they had used that credit for productive purposes.

Joe leaves another legacy in his hometown of Gary, Indiana, which is also home to Paul Samuelson and the Jackson 5. Joe says:

It was impressive. It was an impressive trio at the library in Gary, Indiana. There. mural It was created recently. I went back to Gary a few years ago, and they were very proud to show the mural, with the Jackson 5, Paul Samuelson, and me all on it.

The mural is 50 feet long and depicts 22 people and places associated with Gary, Indiana, where Joe stands in front of a segment that appears behind his likeness.