Tyler Cowen interviews Joseph Stiglitz (Nobel ’01) on his “Conversations with Tyler” podcast: “Joseph Stiglitz on Pioneering Economic Theories, Policy Challenges, and His Intellectual Legacy” (June 26, 2024). It’s unimaginable to go over Joe’s monumental skilled legacy analysis in a one-hour interview. As Tyler mentions, Joe’s CV now runs to 153 pages, which “is neither complete nor really has any chaff.” However listed below are a couple of of the excessive spots that caught my eye.
(I ought to observe that I’m eternally in Joe’s debt, as a result of when he was chosen to be the primary editor of the Journal of Financial Views again in 1986, he employed me because the Managing Editor. Joe rotated off as editor after six or seven years and went on to different adventures, however I’ve been very happy to maintain the job ever since. Joe has extraordinary breadth throughout fields of eocnomics, and I discovered an unlimited quantity from speaking about JEP-related papers and concepts, and economics generally. him. On a private degree, Joe at all times handled me with openness, friendliness, and elementary decency.)
How sharecropping practices in Nigeria led to a formalization of principal-agent concept:
[O]ne of the problems that, after all, as public finance economists, we apprehensive about was the opposed incentive impact on taxation. If a authorities takes 50 p.c of your product, all of us say, “Oh, that’s a terrible system. It discourages work.” Basic sense in the US is that even the highest price shouldn’t be greater than 40 p.c. I believe that’s fallacious, however that was definitely a sentiment, a really robust sentiment.
Nicely, right here you had sharecropping — not solely in Kenya however many different nations world wide — the place one-half to two-thirds of the produce was taken by the owner. That was equal to a tax of fifty p.c to 67 p.c, and but this was a prevalent type of tenancy, the association that individuals had with a landlord.
One needed to ask, why was that? How may this seemingly inefficient system persist for 1000’s of years? That was what motivated one in all my most influential papers. That was the concept that there was a risk-incentive tradeoff, that within the absence of excellent info and the presence of quite a lot of threat, farmers couldn’t bear the danger of land possession. In the event that they owned the land, or rented the land extra precisely, they’d have to soak up all of the residual, the fluctuations within the climate, and all the opposite fluctuations, illness, that they might confront.
With sharecropping, they divided that threat, and quite a lot of the danger was borne by the owner. That was a mannequin of what got here to be referred to as the principal-agent downside, and it’s a part of the motivation mannequin that now’s actually elementary. It was a primary formalization of that primary incentive mannequin that’s now primary to trendy economics.
On the impossibility of informationally environment friendly markets, a paper written with Sandy Grossman again in 1980:
The title of that paper was “On the Impossibility of Informationally Efficient Markets.” It was an argument towards the view that was held by folks like Eugene Fama that markets had been informationally environment friendly, that they transmitted effectively all the data from the knowledgeable to the uninformed.
We made the apparent remark that if that had been the case, there could be no incentive for anyone to assemble info. So the market is likely to be transmitting info, however it might be all free info. It could be info that no one had executed any work to gather.
That concept, really, in one other context worries me very a lot in the present day, that with Google and AI scraping a lot info off of our newspapers, off of our podcasts, off of the whole lot they will come up with, they’re attempting to acceptable the worth of the data that’s been created by different folks with out paying for it. In the event that they achieve doing that, after all, that can lower the incentives for others to provide info of top of the range and of worth. It’s that type of interplay that was on the coronary heart of our 1980 paper, and the themes that we talked about there are nonetheless the important themes that we’re speaking about in the present day.
On how properly the economic system allocates credit score–or not.
The difficulty right here was that we weren’t superb at credit score allocation and that we thought, let the market rip. We lowered rates of interest. We deregulated, so we didn’t have a look at the place the credit score was going. The financial institution supervisors the Federal Reserve is meant to supervise — and there are literally a number of different supervisors which are speculated to oversee the riskiness of the lending — that’s the place the fault got here.
Now, one of many issues that, once I was on the World Financial institution and since then, I’ve emphasised very closely: One of many indicators that there’s an issue within the credit score allocation is if you see a really fast enhance within the credit score in a single explicit space. It’s an indication that, most likely, folks aren’t paying sufficient consideration. Notably, after we noticed the rise in credit score to housing, we must always have been apprehensive.
Because it turned out, the banks weren’t doing the type of diligence that they need to have executed. They had been passing these mortgages on to buyers, successfully mendacity, committing fraud. There have been quite a lot of circumstances of this, the place they stated, “Well, we’ve been very careful. We’ve inspected. These are mortgages originating in owner-occupied homes, people with this income.” They hadn’t executed any of that, and all of that contributed to the monetary disaster of 2008. So, the problem isn’t the quantity of credit score. It was the allocation of credit score. If that they had used that credit score for productive makes use of, how significantly better our economic system would have been.
Joe has left a unique legacy in his hometown of Gary, Indiana, which can be the hometown of Paul Samuelson and the Jackson 5. Joe notes:
It was spectacular, you would possibly say a powerful trio within the library in Gary, Indiana. There’s a mural that they made lately. I went again to Gary only a few years in the past, they usually had been very proud to point out me the mural by which the Jackson 5, Paul Samuelson, and I are all on that mural.
The mural is 50 ft lengthy and consists of 22 folks and locations related to Gary, Indiana, however right here’s Joe standing in entrance of the half the place his picture seems behind him.
