Nobel laureate in Economics, Professor at Columbia University, and member of the Barcelona GSE Scientific Council Prof. Joseph Stiglitz delivered the 25th Barcelona GSE Lecture on November 5, 2012 at Banc Sabadell Auditorium.
Barcelona GSE faculty, alumni and current students from the master programs and reference PhD programs at UAB and UPF crowded the auditorium to hear the lecture on “Restoring Growth and Stability in a World of Crisis and Contagion: Lessons from Economic Theory and History.” Representatives from the Catalan government, professionals from the financial sector and journalists also attended the conference.
Diagnosing the underlying problems of the crisis
Professor Stiglitz outlined five interrelated issues underlying the current economic crisis: structural transformation, inequality, high oil prices, globalization, and the buildup of global reserves.
In terms of structural transformation, Prof. Stiglitz looked back at the Great Depression, which he states was caused in part by a structural transformation from the agricultural to the manufacturing sector, while today’s crisis comes after a transformation from manufacturing to services.
“In a way, we were the victims of our own success,” Prof. Stiglitz said. “Productivity increases can have large distributive consequences, and standard models ignore these consequences.”
Although he discussed the Great Depression at length, Prof. Stiglitz cautioned again mapping today’s situation onto the studies of the earlier crisis. “Be careful using empirical findings from other periods to analyze the current situation,” he said, citing unique circumstances such as World War II that acted as “a massive Keynesian stimulus” and a de facto industrial policy that shifted people from the rural to the urban sector and the manufacturing sector and helped stimulate recovery in the 1940s.
Professor Stiglitz argued today’s interconnected economic systems are more prone to system-wide failures, with huge costs. “An analogous problem would be an integrated electrical grid,” he said. “The excess capacity required to prevent a blackout can be reduced by integrating the system. However, a failure in one part of the system can lead to system-wide failure. Well-designed systems have circuit breakers to prevent the contagion of failure of one part of the system to others.”
In the case of economic systems, Prof. Stiglitz said that restrictions on capital flows should act as these circuit breakers. Due to the lack of such controls, the contagion spread unchecked throughout the global economy, leading ultimately to economic blackout.
Because of the large consequences that even small perturbations can have across the global economic system, Prof. Stiglitz believes that understanding the complex interactions between systems and designing optimal networks with the necessary circuit breakers should be major topics for the research agenda in Economics in the coming years.
A crisis for Economics itself
“The crisis is not only a crisis in the economy, but also should be a crisis in economics,” Prof. Stiglitz said at the conclusion of his lecture. “Standard models have contributed to policies that led to the crisis and have provided us with little guidance on how to respond.”
He again emphasized that all models are simplifications and called for a move away from the traditional orthodoxy that is prevalent in economic research and education.
“The building blocks for alternative theories are already available,” Prof. Stiglitz said. “One of the main challenges going forward will be to integrate microeconomic insights into macroeconomic models.”
Joseph Stiglitz is the second Nobel laureate and Barcelona GSE Scientific Council member to give a Barcelona GSE Lecture in the past year, following Prof. Kenneth J. Arrow (Stanford) who also drew a standing-room-only crowd for his lecture, “The Economy as an Interactive Information System.”