The Institute Blog

Joseph Stiglitz in the Financial Times on the Need for a New Economic Paradigm

Joseph Stiglitz, noted economist, Nobel Laureate and Institute advisor, had a letter published in the Financial Times yesterday. In it, he noted the need for new ways of thinking about economics, and how this can be achieved.

The need for a new economic paradigm, and how to go about realizing this, is core to the Institute's mission. Many in our network believe that the old paradigm of economic thought has led us astray, and to some extent led to the financial crash of 2008.

Joe Stiglitz made the case better than anyone in his letter to the Financial Times. In trying to determine who was responsible for one of the worst economic collapses since the Great Depression, he writes “the economics profession bears more than a little culpability. It provided the models that gave comfort to regulators that markets could be self-regulated, that they were efficient and self-correcting.”

“Bad models,” he continues, “lead to bad policy.”

Stiglitz also notes that beyond the models, some underlying assumptions of economic theory, such as Adam Smith’s invisible hand and the efficiency of markets, might have to be addressed. “Even the sacrosanct assumption of rationality has been attacked,” he notes, and “there are systemic deviations from rationality and consequences for macroeconomic behavior that need to be explored.”

However, Stiglitz makes it clear that not all is lost: “a new paradigm, I believe, is within our grasp,” he writes, “the intellectual building blocks are there and the Institute for New Economic Thinking is providing a framework for bringing the diverse group of scholars striving to create this new paradigm together.”

These are our hopes as well, and through our conferences, interactive online forums, and our grants program, we are confident that a new paradigm will emerge over time. Before our inaugural conference, we interviewed Joseph Stiglitz, in which he discussed these issues in more detail:

Comments

+1

Which microeconomics textbook is the closest to the New Economic Thinking?

+2

Since we are at the dawn of this new economic era I would have to say that the textbook does not exist yet, but we do have a collection of work that will be the foundation of such a book. My suggestions are as follows:

1) The Black Swan
2) Soros Lecture Series
3) Capitalism 4.0
4) The Great Reset
5) The Road Ahead for the FED
6) Essays on the Great Depression by Uncle Ben
7) And of course the Journal of International Central Banking

0

Which modern paradigm will fall in this new economic world order?

+1

 Which paradigm ought to fall, as opposed to which will fall?   Cartesian thinking.    Enough of spreadsheet wizards who can think marvelously (in their own closed system) but do not know what soil is,  what old trees provide or that the result of bidding up wheat  hammers two billion.  In its place we must allow our thinking to 'touch down' to physical context, to cultural context, to the biotic context that supports life of which economic behavior is a subset.   .... Yet Cartesian thinking will likely not fall, however because it is so easily comprehensible, it is so institutionalized  and its models so beautiful.

 

 

0

David, You make a great and important point because in economics and in finance we are plagued by the "model". Being able to predict non-linear systems is hard and impossible to completely understand. Having models coupled with good human judgement is critical to this new paradigm. Thank you for your philosophical thoughts, very interesting and enlightening.

Paul Cottrell, MBA
Walden University
paul.cottrell@waldenu.edu

0

 Paul,  thank you.     Count Korzbsky said the map was not the territory.   Well today we have maps that are more alluring than the territory.  Plus folks claiming turf.... on the map!  Have you ever noticed how the economics school is at the other end of campus from the agricultural economics school?  And how finance and banking are tucked away in the Business School, usually in a different building.

Perhaps I ask too many questions.  Yet we are so concerned about dividing up intellectual property these days and have no regard for geography, and regional prosperity.    This carpenter-economist says, better to see how a dollar circulates in a locale, than how many disciplines that it can divided between.      

 

 

 

 

+1

 I would add

The Great Crash by J Kenneth Galbraith

and Web of Debt by Ellen Hodgson Brown

0

However, in INET, etc, what we do is we almost always concentrate on the macro blunders (and they are grave!) in government  and central bank policies. This is becoming unhelpful. Government agents will not be able to change much if we do not have deeper and more articulated changes in BEHAVIOR EXPECTATIONS of individiuals, hoseholds, businesses - microeconomic agents, in short.

 

0

Since you included mostly macro approaches, I am surprised that you did not mention "ANIMAL SPIRITS" by Profs Akerlof and Shiller:)

0

What will fall is the view that economics can be guided by deterministic, almost Newtonian laws that are eternal.

0

Microeconomic paradigms that need to be studies more intensely include the knowledge-based agent behavior. Rather than the traditional classical approach that concentrates on labor and capital factors (with all the short-termism entailed in the new classical approaches, atc), the new approach should study the important implications of microeconomic agents' behavior under the conditions of the global knowledge economy and the crucial roles of economic information usage and interpretation. Prof. Stiglitz was awarded the Nobel Prize in 2001 for studying the fundamental roles of information in the economy but it seems that, despite Nobel, this line of research still does not command enough attention among new age economists; perhaps Prof. Stiglitz should be less shy about promoting this kind of research.

0

Comment to a paper by Professor STIGLITZ

Sir,

Maybe I am not particularly well qualified to present an opinion on how to (re)New Economic Thinking, since my Master in Financial Economics Diploma dates only from two years. However I would like to submit to your judgment the following contribution: The basic idea of John Maynard Keynes was to stimulate private spending in order to restart the Economy. Why not consider a more direct way, distributing (some) public money directly to the consumer through a Minimum Income System (MIS)?

If fixed at a level of 60% of the median income for a household in the respective territory, it would guarantee adequate protection from poverty, since this value has been named by the EU Council at Laeken in 2001. At this level of income an incentive to earn more by jobbing would still remain. Such a guarantee by the Government would probably avoid consumers restricting their expenses during market downturns and could avoid Keynesian-style interventions altogether. Ailing companies could then be allowed to restructure, without paying undue attention to job losses. Moral hazard would no longer be favored: "too big to fail" convictions would be avoided.

By suppressing the Biblical aphorism "He who does not work, neither shall he eat" (Wikipedia), the labor offer on the market would be granted a new elasticity: an overall increase of wages would result. While some will not be pleased, most will be, since the difference between high and low incomes, on the increase since the 1980s, will probably be reversed.

Financing the system can be shown not to be excessive: either within the framework of the revenue tax system, similarly to the Negative Income Tax coined by Milton Friedman or through a tax on corporate profits, made possible by allowing the companies more market-near restructuring. Plenty of public money would also be saved if huge Government interventions in the market can be avoided,

Obliging the respective Governments to raise the money needed to finance a MIS through a tax mechanism in their own countries would create a new discipline that can easily be supervised by public bodies. This would work for developed as well as for developing nations. Instead of donating money to poor countries with the risk of it disappearing in the pockets of a few, it would be raised in the country itself. Rising incomes would automatically yield rising contributions to the social transfers necessary because of rising median income. Foreign aid could be restricted to participating in the financing of infrastructure projects.

Adolphe FABER
adolphe@pt.lu

 

0

Virtual Network Organizations

 

 

I believe that we should study emerging Virtual Network Organizations (VNO) for clues on the future behavior of economic agents. Crucial to that behavior is knowledge management (KM). KM will determine main parameters of the behavior of most future organizations: big, medium, small or individuel households.

 

0

i would like to add the books that i read and enjoyed (and published Book Reviews)relating to "new economic thinking":

"Complexity Economics" by Beinhocker
"Why most things fail" by Ormerod

0

Tax structure has a major influence on economic rewards and therefore behavior.

If a company lays off workers, even if it's because of a recession which is beyond its control, its future contributions to the unemployment fund rise. It will be better if each business' contribution is based on the difference between its total expenses and its U.S. labor expenses, thereby incentivizing it to hire American and supporting the unemployment benefit system to the extent that it doesn't so hire.

The corporate income tax incentivizes business decisions which would not otherwise be made, some of which include offshoring to nations with little or no corporate tax, as well as keeping profits offshore. It taxes the small investor's shares as heavily as the billionaire's. It also taxes the shares held in IRA and 401k accounts, which are supposed to be tax-deferred until withdrawn. The corporate income tax should be eliminated. Instead, each corporation's profits should be taxed to its shareholders, either by passing them through as in a partnership, or by marking shares (and options given as bonuses) to market at the end of each year and recognizing the gain or loss as taxable. Tax-deferred accounts should remain tax-deferred. This will correct the problems I noted above, plus it will reduce the incentive for share buy-backs and cause many shareholders to demand dividends in order to cover their tax liabilities, which will shift the investor mentality away from demanding only unending growth. In a planet of limited capacity, this may be a necessary change in investor psychology anyway. To compensate for the government's loss of corporate tax income, it will be necessary to make the investors' tax progressive and no lower than that on earned income.

Those of you who know far more than I do of the tax scheme will think of other reforms or will modify these suggestions.

0

David, You make a great and important point because in economics and in finance we are plagued by the "model". Being able to predict non-linear systems is hard and impossible to completely understand. Having models coupled with good human judgement is critical to this new paradigm. Thank you for your philosophical thoughts, very interesting and enlightening.

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