Arnold Kling  

Joe Stiglitz. Word!

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I probably am misusing the teenage slang. I mean to say that I agree with what Stiglitz says here. (Fast-forward until you get to the first seated panelist speaking.)

1. He says that macroeconomics of the past 30 years has been a huge detour. The folks that Mankiw would call the engineers were fixated with monetarism. The academics were fixated with representative-agent models. As Stiglitz points out, in a representative-agent model, the borrower and the lender are the same person. Why? Because, as I've been saying, careful thinking about this gives one a headache.

2. Microeconomists didn't foresee the massive market failure that results from adverse incentives in financial markets--people rewarded for short-term gains and not punished for long-term losses.

3. Finance theory assumes lognormal distributions and continuous liquidity. See my thoughts on credit default swaps.

My view of Stiglitz is that he believes that smart people in Washington can correct market failures. Ironic, given that the point of his talk is how mainstream economists in macro, micro, and finance got it wrong.

My own view is that Hayek was an optimist. You can think of Hayek as looking at government and markets trying to solve the same problem, with government working like a mainframe computer and markets working like distributed computing. The distributed model processes information more efficiently.

I think Hayek was an optimist, because he looks at government as trying to solve the problem of allocating resources efficiently. I look at government as concentrated power, subject to manipulation and corruption.

Thanks to Michael Greinecker for the pointer. Even more thanks to the indispensable Mark Thoma for the pointer to Greinecker.


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COMMENTS (14 to date)
Marcus writes:

Stiglitz is, to use his own words, stupid.

He seems to nail it pretty well on the macro front but then falls into what appears to be his own religion.

Jim Gannon writes:

To be fair to Hayek, I think that he was arguing that even if government was "trying to solve the problem of allocating resources efficiently", it would fail because of the information problem.

Grant writes:

I tend to agree with Jim. Mises as well clearly had no illusions as to the goals of politicians, but he chose to fight his battle on the economic front, not the public choice one.

Jacob Miller writes:

Stiglitz? Are you serious? I don't think Sitglitz style protectionism, taxation, regulation, and communism is the answer for the global marketplace. Then again, maybe even a blind squirrel finds a nut every once in awhile.

Alex J. writes:

Arnold, "word" has been passé for a while.

David R. Henderson writes:

Dear Arnold,
I agree with Jim. I don't think you can read The Road to Serfdom without concluding that Hayek thought concentrated government power would lead to very bad things. The Road to Serfdom is public choice through and through.
David

stylized.fact writes:

What's to stop government agencies from using a "shotgun" (randomized) approach to central planning?

floccina writes:

I agree with Joe Stiglitz that markets do not work well but I see no solution, after all Cuba works even less well than the west. Some people, maybe most people need to learn the hard way.

I think that a lot of people in the financial industry knew that these mortgages were bad and that may explain why they distributed and took such huge compensation but he said that they followed flawed models.

I also object to Stiglitz when he says that mortgage writers were giving options on houses to poor people. It was based in the credit card model. A credit card is a loan without collateral or verification of income. It is based on credit scores and the value of credit and credit card in modern America. The reason people pay their credit card debt is to not be cut off. Sure people could walk away from these mortgages if the home price falls but they pay the price of loss of access to credit and credit cards (what a hassle to go into the gasoline station to pay ).

And BTW we do have social housing in the USA but they are crime ridden and the people ruin them so no body likes them.

floccina writes:

I bet that Cuba and North Korea avoided this crisis completely,so what I would rather live in the USA.

ryan yin writes:

This might be tangential to the thread so far, but I'm not sure I understand this particular complaint about representative agent models. (I agree there are problems, but I don't think this is a good example.) Of course the borrower and the lender are the same person in a model with just one representative agent. It's not like the representative agent is an actual person. The actual people in the model can borrow and lend; the framework is just there to tell you that if two people are identical in all relevant ways, then it can't be that one borrows and one lends, and that the whole economy can't borrow or lend. And you can always do a rep-agent model with multiple agents, and then borrowers and lenders are different people (and can exist), but you still have to end up with zero net borrowing.

I'm also a bit confused when he said you can't do asymmetrical information w/ a rep agent model. They've been doing that since at least Hansen's 1985 JME paper on indivisible labor. I mean, you just have to run your finger through Ljungqvist-Sargent's table of contents to find moral hazard and incentive problems. What did Stiglitz mean?

Niccolo writes:

Jacob Miller,

I don't think it's advantageous for free market style economists to call another nobel prize winner a "communist." Do I think that Stiglitz is misguided in some of his thoughts? Yes, but I respect them nonetheless.

some wise guy writes:

Niccolo,
Nobel Prize winners can't be communists? Wait, wasn't Kantorovich one?
Ok, that was pedantic. Stiglitz isn't a communist.

Gary Rogers writes:

Wow! He made some good points, but I kept confusing him with Nancy Pelosi. Everyone is stupid except him. He seems convinced that his models must be great because everyone else put us in this mess and he is obviously much smarter than that. And, by the way, Bush has no brains of course. I find it hard to see how it is worth listening to anything else he has to say.

What I would like to have heard is a good explanation of how his models explain what happened and what alternatives they might have suggested. Was it just the expansionary monetary policy that Greenspan introduced? He mentions the problem of expanding credit without expanding credit worthiness, which I think is profound, but fails to say how his models would have controlled the GSEs or the Community Reinvestment Act and related policies.

My opinion is that Dr. Stiglitz is part of the problem.

Jacob Miller writes:

Niccolo,
Touché. However, to me he has always come across as Smith's "man of system." Maybe he is right on this point though.

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