The Life of Joseph Stiglitz and His Contribution to the Ideas and Theories Used in Economics
Joseph Stiglitzs’ Biography
Joseph Stiglitz is an American Economist who contributions to the ideas have been very instrumental in formulating some of the economic theories of the present day. He was born on the 9th of February 1943 in Gary, Indiana. He went for his professional studies in Amherst College, MIT and Cambridge University in that order. Stiglitz lectured at the Graduate School of Business and Columbia University as his first professional jobs. He has become one of the most contemporary economists that America has ever known. In his life, he has authored many books of Economics and published several others for general readership. As the Chief Economist and the Vice President of the World Bank he is remembered for his great criticism on the International Monetary Fund (IMF) view on Globalization. It was also at this position that he voiced his concern at the economic policies put by the leading world’s financial institutions which he argued did not favor the numerous developing countries in the globe. Upon being kicked out of the World Bank by Lawrence Summers, the then Treasurer Secretary, he founded the IPD (Initiative for Policy Dialogue) which had an objective of ensuring that the developing countries would ensure that they explore maximum policy alternatives and promote civic participation in the economic policy making (Benjamin, 2002, pp. 4).
One memorable research that Stiglitz did was on screening which won him a Nobel Prize [it was a research to the contribution to the Information Asymmetries Theory]. This is where; one economic agent can be mused to extract private information from another. The ideas that he raised have been evident in the current state of the economic status of the developing countries. The plans that he opposed while at the World Bank, but the IMF decided to push for, have done little to improve the economic status for the said countries. His predictions that the policies do not consider the future prospects of the developing world based on their structure of governments, were confirmed right by the failure of these policies to show any significant economic improvement. Stiglitz’s ideas focused on the principle and importance of participatory democracy and collective responsibility.
Stiglitz is currently the senior member of the Columbian Faculty, a position he has held for the past eight years. And thanks to his practical policies, he now chairs Brooks World Poverty Institute of the University of Manchester. He is one of President Barrack Obama’s financial advisers.
Stiglitz’s Contribution to Economics
Apart from the famous screening research, Stiglitz was also involved in a number of other vital contributions to economics. He opposed the literature of the neoclassical economics which had it that all markets are always efficient a part from some isolated cases of well defined market failures. Stiglitz stated hid controversial position that in very rare occasions are markets efficient. He added that it is an economic impossibility for an economy to be sufficient even in a very competitive market. Another economist, Adam Smith, argued that it is possible to reach a situation of efficiency if the respective governments intervene to eliminate the economic hitches to achieve a situation referred to as “Pareto Superior Outcome” where everyone is economically better off. Stiglitz added that is the actions of the individuals in the society that can either act for or against the economy. He further gave a proposal of the Information Economics which he explained that in case they encounter hitches, then both the political and the market economy will be equally affected (Peter, 1999, pp. 8).
The Shapiro-Stiglitz Model
Through this theory, Stiglitz tries to explain the existence of unemployment and why those who are already employed are not satisfied with the wages which they are being paid. He wanted that situation where whoever wanted a job would get it and for those who wanted to shift from one field to another would easily do so. Together with Shapiro in 1984, they explained how the culture of unemployment is being fueled by information Structure of employment. The following fundamental observations exist under this model as found in (Shapiro and Stiglitz, 1984, pp.433-437):-
It is a form of capital where human can choose the amount of effort input
It is expensive for firms to gage the level of effort put by workers.
The model has however suffered some implications (Shapiro and Stiglitz, 1984, pp.440. First is the argument that during recession, wages do not fall much to reflect the state of the economy. Wages only fall if the demand for labor subsides; this in turn leads to the rise of workers who do not deliver (offer limited effort-shrinking effect).If a firm wants to avoid this shrinking effect in times of reduced labor demands, they have no choice but to resort to reducing personnel if they have to keep the wages high. By keeping a huge number of workers while labor has gone down, workers will be idle and therefore will never perform to their full potential, reducing them will be the only good alternative. The second implication is related to wage sluggishness, or simply what can be dubbed, “coordination problem”. This comes in when a firm has to move from one employment rate to another where as much as it has to optimize wages as it makes this change, it is also supposed to keep the excess wages until the rate of unemployment shots sufficiently high.
The third and the last implication of this theorem are related to the theories’ real life implication. It is one questionable fact that is disturbing even Stiglitz himself, prompting him to shift his previous position in his book “Whither Socialism-1994” into that of a political-economic discourse. Stiglitz claim that the, capitalism system tries to justify and support the “Pareto efficiency” which he had earlier refuted; he therefore suggests that socialism will be the sole remedy to cure an ailing economy through what he calls “rational-expectation equilibrium”. In this context, another economist Samuelson had it that market failure is just a simple exemption to an efficient market (Peter, 1999, pp18-21.). The Greenwalt-Stiglitz theory contrast this, by explaining that it is normal to have market failures but the government can chip in and improve this situation through availing market resource allocation…a position which Stiglitz had earlier denied. Further with the combined work with Sappington, (the Sappington-Stiglitz Theory), they say that an ideal government can reach greater economic heights by running its own enterprise than if it resorts to privatization. This position taken by Stiglitz does not seem to be based exclusively on economics, but it was more inclined on socio-political aspect…this leaves us with an open, unanswered and pending questions of which branch of which government institution should be put in charge of coordinating the government activities and the civil society (Peter, 1999, pp.35.
Joseph Stiglitz in Politics
When he moved to Washington in 1992, the move was not just to be a member of the Clinton’s Administration, but as the Chairman of the Council of Economic Advisors. He did spread his activities past the financial docket into the Environmental issues where he helped draft the law on toxic wastes (but the draft was never passed). All the economic research that he had gathered helped him deliver well in this position, with a calculated step-to-step on how he had planned to affect his policies. An important contribution in the Clinton’s administration was the help he gave in designing the new economic philosophy dubbed the “Third Way”. This system gave recommendations to slight involvement of the government in cases where it was required to make some corrections to the limitations in the market. [The government was however not very successful in correcting the market limitations] (Benjamin, 2002, pp.22).
Joseph Stiglitz at the World Bank
Before President Clinton called Stiglitz to continue serving the state in the same position, the World Bank reached for him and asked him to help them with their ten year review of changing the former Communist Nations to the Market Economy. This gave Stiglitz a chance to unearth the failures of the International Monetary Fund (IMF) depicted in the increase of poverty and the decline of the general GDP. Other countries which had followed a different rout had prospered showing evidenced that the concept advocated so hard for by the IMF was just not the best. He raised questions and publicly criticized the US Treasury Department of their bid to protect the IMF policies that do not tend to go by their real purpose i.e. to help economies of the developing countries. The policies are just worsening the economic situation and according to Stiglitz, the IMF was turning economic slowdowns into recession and recessions into depressions through their textbook economic policies which they knew were not practical and in executable in the practical sense. He seeks to prove to the world how impractical these policies have been and how disastrous they have been for those countries that decided to follow them. The stringent rules that the IMF had set for countries to go by before they qualify for loans he says are so intimidating, he added that the process that the IMF follow to verify if a country is credit worthy was unfair.
Initiative for Policy Dialogue(IPD)
Once out of the World Bank, Joseph Stiglitz with the support of Rockefeller, Ford, Mott Foundations and McArthur together with the Swedish and Canadian governments, founded the IPD in 2000. The main purpose of starting this organization was to ensure that the democratic process is enhanced in the developing countries for the purpose of decision making by availing a wide range alternatives from which they can chose to counter market ills.
Stiglitz on Globalization
In the year 2006, Stiglitz presented the results of a survey that he had been carrying out on Globalization effect on the developing world. His findings pointed accusing fingers to the inequities of the global economy and the excessive pressure/influence that the developed countries which he said were derailing their development. He argued that globalization has done more harm that good to the developing world; through subsidies and tariffs and over-emphasized patent system, globalization has led to the environmental degradation, and to political and the economic disability (Benjamin, 2002, pp.21-22).
In his book “Making Globalization Work”. He explains how globalization has been used as a tool by the developed countries to exploit the resources of the developing nations instead of addressing their problems. He further went ahead to give recommendations on how the so called developing countries could get out of the financial hole and be independent if they put right their choices. He explained that such countries lack is the information to help them make the best choices regarding the market matters. He added that when the available information is inadequate, and the market is imperfect, then the invisible hand will definitely rules with imperfection. The governments of such ailing states can come in and correct the situation by acting to counter recession or depressions by employing the use of expansionary fiscal and monetary policies…this will increase the demand for goods and services in case of low purchases. He further suggested the importance of the involvement by the governments in question at the microeconomic field. Through this, the governments can keep the financial institutions operating within their boarders active. In order to counter the international competition posed by more developed countries, the governments of the developing countries can initiate more friendly tax policies to attract investors to their country and allow their own local industries to grow. The government can also look for a strategy to fight the issue of unemployment through welfare assistance and manpower training (Benjamin, 2002, pp.23).
The life of Joseph Stiglitz has been surrounded by economics, economics and more economics in the global look out since he started his professional work as a lecturer. His works have impressed the world not only because he is one of the leading economists in the world, but because of who he is. The sense of humane in him reaches great heights…he is a courageous “whistle blower” economist going by his viable criticism to the IMF unhealthy privatization policies. He gave numerous living scenarios of how individuals can survive in this time of unpredictable market simply by following the rule of “consult an economist of what to do, then do the exact opposite”. The proposals he gave to the IMF to try incorporating globalization to up to its former standards would be so viable.
Globalization is here to stay, and Stiglitz knew that so well. He was well aware that there was no way it could be wished away despite its ill outcomes. So he proposed a way to deal with the” vice”. He said that just like globalization, governments are also here to stay and therefore to deal with the ills brought about by globalization, we could focus our hope on good governance and the spirit of communal responsibility.
Joseph Stiglitz Bibliography
Stiglitz the Economist has written more than Three Hundred Articles, which have been used for lectures, address at conferences and some as references in different economics books. The following list is an assortment of some of his work(http://en.citizendium.org/).
l A Re-Examination of the Modigliani-Miller Theorem, American Economic Review, 59(5), December 1969.
l Some Aspects of the Pure Theory of Corporate Finance: Bankruptcies and Take-Overs, Bell Journal of Economist, 3(2), Autumn 1972
l Approaches to the Economics of Discrimination, American Economic Review, 62(2), May 1973.
l On the Irrelevance of Corporate Financial Policy, American Economic Review, 64(6), December 1974.
l The Theory of Screening, Education and the Distribution of Income, American Economic Review, 65(3), June 1975.
l The Efficiency Wage Hypothesis, Surplus Labor and the Distribution of Income in L.D.C.’s, Oxford Economic Papers, 28(2), July 1976.
l Credit Rationing in Markets with Imperfect Information, The American Economic Review, Vol. 71, No.3 (June 1981)
l Information and Capital Markets, in Financial Economics: Essays in Honor of Paul Cootner, William F. Sharpe and Cathryn Cootner (eds.), Prentice Hall, New Jersey, 1982.
l Risk, Incentives and Insurance: The Pure Theory of Moral Hazard, The Geneva Papers, January 1983, 8(26)
l Economics of Information and the Theory of Economic Development,” Revista de Econometria, 5(1), April 1985
l Competition and the Number of Firms in a Market: Are Duopolies More Competitive Than Atomistic Markets? Journal of Political Economy, 95(5), 1987
l Development Strategies: The Roles of the State and the Private Sector, in Proceedings of the World Bank’s Annual Conference on Development Economics 1990.
l Some Theoretical Aspects of the Privatization: Applications to Eastern Europe,” Revista di Politica Economica, December 1991
l Introduction: S;L Bailout, in The Reform of Federal Deposit Insurance: Disciplining the Government and Protecting Taxpayers’, J. Barth and R. Brumbaugh, Jr. (eds.), Harper Collins Publishers, 1992
l Some Lessons from the East Asian Miracle, World Bank Research Observer, 11(2), August 1996.
l Towards a New Paradigm for Development: Strategies, Policies and Processes. 9th Raul Prebisch Lecture delivered at the Palais des Nations, Geneva, UNCTAD, October 19, 1998.
l Whither Reform? Ten Years of the Transition, Proceedings of the Annual Bank Conference on Development Economics 1999, Washington, D.C.: World Bank, 2000.
l Challenges in the Analysis of the Role of Institutions in Economic Development, Villa Borsig Workshop Series 2000: The Institutional Foundations of a Market Economy. Gudrun Kochendorfer-Lucius and Boris Pleskovic (eds.), German Foundation for International Development (DSE), 2001.
Boettke J. Peter. (1999). “What Went Wrong with Economics?: Critical Review:” Vol. 11, No.1. pp. 8-35.
Carl Shapiro and Joseph Stiglitz. (1984). “Equilibrium Unemployment as a Worker Discipline Device. The American Economic Review”, Vol. 74, No. 3. pp. 433-444.
Friedman M. Benjamin. (2002). “Globalization: Stiglitz’s Case. The New York Review of Books, Volume 49, Number 13. pp. 4-23.