Tag Archives: joseph stiglitz

My problem with TEDx

Battle of the Beards: Paul Krugman eyes his sometime bête noire, Ben Bernanke. TEDx talk at Columbia University’s School of International and Public Affairs. Friday, February 15, 2013.)

It wasn’t until after all the speeches had ended and everyone was mingling around the makeshift bar outside that I finally made the connection: TEDx is just like church.

I can’t remember the first time I heard about TED, the conference series that emerged into the spotlight rather suddenly several years ago and has become a staple of the socially conscious set ever since. But I distinctly recall feeling mounting skepticism with each new mention of the organization, which was often expressed in near-mythic terms and was almost always unqualifiedly positive.

The first full talk I recall actually watching myself was Dutch General and then-Chief of Defence Peter van Uhm’s TEDx speech in the Netherlands in 2011. I’d been assigned the video for a graduate class in January of last year. The course was on the American military, and the TEDx talk I’d been instructed to watch was titled “Why I Chose the Gun.” Here’s how it started:

Well, ladies and gentlemen, first of all, thank you for giving me an applause before I even started. As the highest military commander of the Netherlands, with troops stationed around the world, I’m really honored to be here today. When I look around this TEDx Amsterdam venue, I see a very special audience: you are the reason why I said yes to the invitation to come here today. When I look around, I see people who want to make a contribution. I see people who want to make a better world — by doing groundbreaking scientific work, by creating impressive works of art, by writing critical articles or inspiring books, by starting up sustainable businesses. And you all have chosen your own instruments to fulfill this mission of creating a better world.

This, as I would soon discover, was as perfect a microcosm of the TED experience (TEDxperience?) as one could find. First, the establishment of his credentials; then, the obligatory salute to the audience; and, finally, the ode to the transcendent ideal of “a better world.” Continue reading My problem with TEDx

#50: Animal Spirits

How did John Maynard Keynes know I’m not rational? Or at least, not always rational. According to authors George A. Akerlof and Robert J. Shiller, this is one key precept that vanished somewhere along the line from its initial expression by Keynes to the onset of the Great Recession seventy years later. The duo’s book, Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism, is a concise attempt at its revival.

It is now nearly a foregone conclusion that humans act rationally as pertaining to economic decisions. So in the aggregate, the macro-economy will reflect thousands and millions of minor judgment calls that, taken together, constitute the long-sought-after equilibrium. The problem with this theory (even if this never seemed to bother its creator, Milton Friedman) is in its idealism. Are human beings rational? To an extent, yes. At other times, “people really are human, that is, possessed of all-too-human animal spirits,” the authors write.

What are these animal spirits, and what do they do? The definition given here is “the thought patterns that animate people’s ideas and feelings.” This sounds suitably vague, which is precisely the point. In the rush to transform economics into a science, overweening economists threw the baby out with the bathwater, discarding the very real enigma of human behavior along with the failed economic theories of prior eras. Akerlof, the 2001 Nobel Prize-winner in economics, and Shiller want nothing more than to reintroduce these animal spirits to the field of economics and the public at large.

But first, a re-branding. What was then “animal spirits” is now studied as “behavioral economics.” The authors propose five psychological aspects of this discipline: confidence, fairness, corruption and bad faith, money illusion, and stories. Each of these plays a unique role within the macro-economy, but not always intuitively. Money illusion, for example, describes what takes place when wage cuts are instituted following a deflationary trend. Even when the decrease in pay is commensurate with the drop in prices, employees usually feel cheated. A perfectly rational decision by an employer thus becomes an object lesson in the existence of money illusion (and influences the employees’ perception of relative fairness as well).

This flies in the face of classical economics, in which humans are presumed to be supremely rational. (That such theories persist alongside the ongoing public fascination with the likes of Paris Hilton or, say, the British royal family is its own nifty testament to the inscrutability of the human mind.) So Akerlof and Shiller dutifully document the effects of each of their five factors before launching into eight key questions whose answers only make sense in light of the findings of behavioral economics.

This is an enlightening book, and one made all the more pleasant for its conspicuous lack of angry demagoguery. On a spectrum of bitterness from Joseph Stiglitz to Paul Krugman, the authors of Animal Spirits are clearly more aligned with the former. This is an unexpected reprieve, which understandably lends additional gravitas to their cause. Their case can be summarized thusly: don’t buy too literally into the cult of the “invisible hand.” Markets do fail, which is precisely why government regulation (and occasional intervention) is necessary. Of course, with the benefit of hindsight since Animal Spirits was published, it appears their advice — like that of Stiglitz, Krugman, et al — has gone largely unheeded. What comes next is anyone’s guess.

#8: Freefall

“As the United States entered the first Gulf War in 1990, General Colin Powell articulated what came to be called the Powell Doctrine, one element of which included attacking with decisive force. There should be something analogous in economics, perhaps the Krugman-Stiglitz doctrine.”

Yes, Joseph Stiglitz, the author of Freefall: America, Free Markets, and the Sinking of the World Economy, has a fan. This ardent devotee is not, as one might suspect, a fellow academic scrawling her mark of approval onto the book’s cover, nor a book reviewer writing for a newspaper or magazine. It’s not even Paul Krugman, although presumably he too has fallen victim to the spell of his fellow Nobel laureate.

No, the fan is Joseph Stiglitz himself, the author of both the book Freefall and the above quote, found in its second chapter. And as self-aggrandizing as he can tend to be — he joins the litany of economists, politicians, and pundits who vociferously trumpet their early predictions of the current financial crisis — his words are bolstered by an undeniably credible resumé. As the former chairman of President Clinton’s Council of Economic Advisers, the senior vice president and chief economist at the World Bank, and the 2001 Nobel Prize winner in economics, Stiglitz has combined his enviable pedigree as a top-notch economist with the political savvy gained through spending many years in the halls of power.

In the course of reading Freefall, it soon becomes abundantly clear that Stiglitz is not especially fond of deregulation. However, in a departure from the current American zeitgeist, he does not embrace populist rhetoric or condemn bankers unduly for their greed. (In writing this last sentence, I vacillated between enclosing greed in quotes or not; either choice seems equally prejudiced, so I arbitrarily chose not to.) “Bankers acted greedily because they had incentives and opportunities to do so, and that is what has to be changed,” Stiglitz writes. “Besides, the basis of capitalism is the pursuit of profit: should we blame the bankers for doing (perhaps a little better) what everyone in the market economy is supposed to be doing?”

This is an interesting question, and one that is not normally asked in today’s politically charged environment. And yet Stiglitz is just about the furthest thing from an apologist for the banking industry. Responding to central bankers’ claims that allowing inflation hurts those with low incomes, Stiglitz deadpans, “One should be suspicious when one hears bankers take up the cause of the poor.” Elsewhere, he states that “there is an obvious solution to the too-big-to-fail banks: break them up. If they are too big to fail, they are too big to exist.”

Obviously, large-scale problems in the financial sector led to the collapse of the markets and the economy at large, but Freefall is not content to stop at causes. The responses by both the Bush and Obama administrations come under heavy fire too: the former for not recognizing the severity of the crisis or forming a coherent rescue, and the latter for choosing the politically safest responses (tellingly, the author dubs this the “muddling through” approach). A key problem, if Stiglitz is to be believed, is the misalignment of private and social benefits. When banking executives’ compensation is based upon short-term stock price gains instead of long-term profitability, when regulators and top government officials at the Federal Reserve and the Treasury turn a blind eye to the mounting risks in the housing bubble to avoid slowing perceived economic growth, when financial innovations that produce high fees and low efficiency are encouraged instead of fined or prohibited, eventually there will be hell to pay, and we as taxpayers will be the ones paying it.

Indeed, this is exactly what we’re doing right now. Regardless of one’s feelings on Stiglitz’s policy prescriptions — some of which, not unlike those of his earlier book, Making Globalization Work, appear more grounded in political idealism than in reality — the fact remains that it has fallen to the taxpaying public to bear the risk created by the masterminds of Big Finance’s increasingly complex securities and other derivatives. To Stiglitz, this is ample reason to hit the reset button on the American financial industry — or perhaps more accurately, the reformat button. His vision is of a world of free markets, yes, but not completely unfettered and left to their own whimsies.

Instead, President Stiglitz would beef up the regulatory framework: ensuring that banks’ leverage ratios do not stray too high, that conflicts of interest (such as banks running their own real estate appraisal subdivisions) cannot occur, that predatory lending is prohibited (or at least heavily restricted), etc. Furthermore, Keynesian economics would experience a renaissance. (Stiglitz has little patience with the Chicago school, which he finds too theoretical and based on fallacious assumptions anyway. In one of the author’s weakest moments, he shamelessly deconstructs a straw man only vaguely resembling actual conservative ideology.) A global reserve currency would be created, similar (but not identical) to the International Monetary Fund’s Special Drawing Rights (SDR), to prevent the contagion of a worldwide crisis started by one currency’s downward spiral.

By the time one has finished this book, it seems that there is not much to look forward to in Joseph Stiglitz’s version of world events. He sees a financial market in disarray, being slowly rebuilt by the same hands that led to its destruction and leading inevitably to another instance of the same shortsightedness followed by more devastation. This is a hard pill to swallow, but it sheds light on why Joseph Stiglitz chose to write this book so soon after the financial earthquake. An undesirable future can be prevented, and we’re in the ideal scenario to start again from the rubble. By the time the economy begins showing serious signs of recovery, all resolve to change course will have evaporated. And so the gods of irony may be leaving us a silver lining after all in this prolonged economic massacre: the longer we suffer from the effects of past miscalculations and neglect, the more time we have to formulate a new, healthy, and safe framework to avoid a recurrence.