Interview with Joseph Stiglitz: Theories, Policy, Legacy

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 impossible to go over Joe’s monumental professional legacy research 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.” But here are a few of the high spots that caught my eye.

(I should note that I am eternally in Joe’s debt, because when he was chosen to be the first editor of the Journal of Economic Perspectives back in 1986, he hired me as the Managing Editor. Joe rotated off as editor after six or seven years and went on to other adventures, but I’ve been very pleased to hold the job ever since. Joe has extraordinary breadth across fields of economics, and I learned an enormous amount from talking about JEP-related papers and ideas, and economics in general. him. On a personal level, Joe always treated me with openness, friendliness, and fundamental decency.)

How looking at sharecropping practices in Nigeria led to a formalization of principal-agent theory:

[O]ne of the issues that, of course, as public finance economists, we worried about was the adverse incentive effect on taxation. If a government takes 50 percent of your product, we all say, “Oh, that’s a terrible system. It discourages work.” General sense in the United States is that even the top rate shouldn’t be higher than 40 percent. I think that’s wrong, but that was certainly a sentiment, a very strong sentiment.

Well, here you had sharecropping — not only in Kenya but many other countries around the world — where one-half to two-thirds of the produce was taken by the landlord. That was equivalent to a tax of 50 percent to 67 percent, and yet this was a prevalent form of tenancy, the arrangement that people had with a landlord.

One had to ask, why was that? How could this seemingly inefficient system persist for thousands of years? That was what motivated one of my most influential papers. That was the idea that there was a risk-incentive tradeoff, that in the absence of perfect information and the presence of a lot of risk, farmers couldn’t bear the risk of land ownership. If they owned the land, or rented the land more accurately, they’d have to absorb all the residual, the fluctuations in the weather, and all the other fluctuations, disease, that they would confront.

With sharecropping, they divided that risk, and a lot of the risk was borne by the landlord. That was a model of what came to be called the principal-agent problem, and it’s part of the incentive model that now is really fundamental. It was a first formalization of that basic incentive model that is now basic to modern economics.

On the impossibility of informationally efficient markets, a paper written with Sandy Grossman back in 1980:

The title of that paper was “On the Impossibility of Informationally Efficient Markets.” It was an argument against the view that was held by people like Eugene Fama that markets were informationally efficient, that they transmitted efficiently all the information from the informed to the uninformed.

We made the obvious observation that if that were the case, there would be no incentive for anybody to gather information. So the market might be transmitting information, but it would be all free information. It would be information that nobody had done any work to collect.

That idea, actually, in another context worries me very much today, that with Google and AI scraping so much information off of our newspapers, off of our podcasts, off of everything they can get a hold of, they’re trying to appropriate the value of the knowledge that’s been created by other people without paying for it. If they succeed in doing that, of course, that will decrease the incentives for others to produce information of high quality and of value. It’s that kind of interaction that was at the heart of our 1980 paper, and the themes that we talked about there are still the critical themes that we’re talking about today.

On how well the economy allocates credit–or not.

The issue here was that we weren’t very good at credit allocation and that we thought, let the market rip. We lowered interest rates. We deregulated, so we didn’t look at where the credit was going. The bank supervisors the Federal Reserve is supposed to oversee — and there are actually several other supervisors that are supposed to oversee the riskiness of the lending — that’s where the fault came.

Now, one of the things that, when I was at the World Bank and since then, I’ve emphasized very heavily: One of the signs that there’s a problem in the credit allocation is when you see a very rapid increase in the credit in one particular area. It’s a sign that, probably, people aren’t paying enough attention. Particularly, when we saw the increase in credit to housing, we should have been worried.

As it turned out, the banks weren’t doing the kind of diligence that they should have done. They were passing these mortgages on to investors, effectively lying, committing fraud. There have been a lot of cases of this, where they said, “Well, we’ve been very careful. We’ve inspected. These are mortgages originating in owner-occupied homes, people with this income.” They hadn’t done any of that, and all of that contributed to the financial crisis of 2008. So, the issue isn’t the amount of credit. It was the allocation of credit. If they had used that credit for productive uses, how much better our economy would have been.

Joe has left a different legacy in his hometown of Gary, Indiana, which is also the hometown of Paul Samuelson and the Jackson 5. Joe notes:

It was impressive, you might say an impressive trio in the library in Gary, Indiana. There’s a mural that they made recently. I went back to Gary just a few years ago, and they were very proud to show me the mural in which the Jackson 5, Paul Samuelson, and I are all on that mural.

The mural is 50 feet long and includes 22 people and places associated with Gary, Indiana, but here’s Joe standing in front of the part where his image appears behind him.