Tag Archives: Joseph Stiglitz

Economist pride

There is no denying that we economists are hardly everyone’s favorite characters. Our discipline is known as “the dismal science”; we are accused, in a more or less implicit fashion, of supporting the worst excesses of rogue capitalism; some of the most senior and best known members of the profession are known by the media with comic books supervillain nicknames like “Doctor Doom” (Nouriel Roubini) or “The Black Swan” (Nassim Taleb). This does not happen to linguists or astronomers.

Just like science in general, economic science has its share of skeletons in the closet: ideologies that were given a coverage of objectivity; wildly off-the-mark forecasts; policy prescriptions that failed to prevent, and even caused, much suffering and poverty. But just as many were the intellectual victories, the extraordinary inventions, the valuable contributions to human prosperity. I think this dualism is inevitable, because political economy is the offspring of moral philosophy: Adam Smith, that many regard as the father of the discipline, wrote a Theory of moral sentiments that he cared for just as much as for the more famous Wealth of nations. And moral philosophy is no walk in the park: it is a minefield, in which you have to make terrible choices with every step you take. Liberty or equality? Meritocracy or stability? Like Jedi Knights in Star Wars, moral philosophers and their cousins, economists, are always exposed both to the light and the dark side of the Force.

Recently I chanced to read Joseph Stiglitz’s Towards a General Theory of Consumerism: Reflecions on Keynes’s Economic Possibilities for Our Grandchildren (in this book and Elinor Ostrom’s Governing the Commons. Stiglitz deploys standard neoclassical theory like a true master to illuminate a problem we don’t think enough about: why is it that, though they could in principle afford to, modern societies do not choose to work less, exchanging some consumption for leisure time. Among other things, Stiglitz shows how elementary extensions to the standard model lead to reverting its result: for example, in a two-sector model it is not always true that increasing salary in one of them leads to an overall reduction of labour supply. To me, that inspires awe for the power and the flexibility of the model, and not a little embarassment for the unsophisticated way it is often wielded in common political discourse.

Ostrom tells of the efforts of several human communities, from Switzerland to the Philippines, in coordinating to manage common resources like fisheries, forests or irrigation systems. Successes, failures, institution provision through self-organization and reform attempts from outside are analyzed with theoretical rigor, explanatory power, radical thinking and empathy.

Joseph, Elinor, thanks. This is the Light Side economics, the one I wanted to study as a young man and that makes me proud of being somehow related to great thinkers like yourselves. If you organize a parade to affirm the pride of being economists – modeled on the Gay Pride, which seems to have worked well – you can count on me to show up.

Are young people embracing globalization?

The Fondation pour l’innovation politique 2011 report on World Youth contains the graph reproduced above. Opinion polls need to be taken with a very large pinch of salt (people tend to lie when responding), but it is enough to give you pause. It’s gone full circle: ten years ago the establishment was pro-globalization and the young protested against it. Now the establishment gives signs of uneasiness about globalization, and the young embrace it. What gives?

Quite possibly, Joseph Stiglitz was prophetic in his 2002 book: globalization has been seriously mismanaged, but over and above mismanagement it is generally beneficial, as it provides for previously unthinkable opportunities. Youths worldwide – significantly, more so in the developing countries – are simply recognizing this.

Yet there may be another, more unsettling explanation: that the young (especially the educated ones) are switching their allegiance away from their countries – less and less able to give them a meaningful life, less and less interested in doing so – and over to their peers. The globalized economy and society is where the opportunities are: where will the young stand if it comes into conflict with the old nation states?

Nation states vs. feral finance: the final battle?

The financial crisis has broadened the scope of the economic policy debate. Pressed by their respective public opinions, world leaders need new ideas, fast. Despite this, one might be surprised by the way German Chancellor Angela Merkel and French president Nicholas Sarkozy dusted off the idea of a levy on financial transactions. Nowadays journalists are calling it Robin Hood tax, but in the 90s it was called Tobin tax and it was part of the intellectual arsenal of the anti-globalization movement. Even then, it was old news: Nobel laureate James Tobin first proposed it in 1972 (the original formulation was aimed at transactions of foreign currency).

The idea is to tax sales of financial assets (equity and/or bonds and derivatives) with a low rate (0.01-0.05%). That’s meant to be too low to discourage the migration of capital from low-yield to structurally higher yield assets (such as from equity in a stagnating company to equity in a highly profitable one), because such a shift happens only once, and the cost of the levy is quickly offset by the increased yields: this way, the market maintains its efficiency property. But such rate is high enough to discourage speculation, that is based on buying and quickly reselling the same assets.

The main practical problem with a Tobin tax is that, unless it is introduced everywhere at the same time, speculators can elude it simply moving to a financial market that does not levy it. In fact, some variants have been tried out in Sweden in the 80s. Results: low revenue, a sharp drop in transaction volume and eventual migration of many of the most active titles from the Stockolm to the London stock exchange. The tax was eventually abolished. So it does not work, right? Why bring it back into the debate?

It’s not quite that simple. It (probably) does not work to stop speculation and generate fiscal revenue. But it could work well for a different goal: driving the more instability-generating fringes of the financial sector (the same ones that make money off that instability, as Nicholas Taleb reminds us) off the country. Their flight can be painful: these are wealthy taxpayers, who supposedly bring prosperity. But it also could be liberating, because the financial sector has become politically very powerful: this (1) makes it very difficult to make economic policy, because the super-rich veto any move that does not imply benefits for them (as Nobel laureate Joseph Stiglitz reminds us); (2) enhances economic inequality, exasperating the non-super-wealthy 99% of the population; and finally (3) it is not even clear that having these rich guys around does bring much prosperity. They sure don’t pay much taxes: Warren Buffett recently declared that his tax rate is lower than his cleaning lady’s.

Are we looking at a cultural shift? Granted, the man in the street never trusted finance, and never understood it. But this is news to me: two world leaders of the standing of Merkel and Sarkozy aligning with people like tax expert and progressive blogger Richard Murphy – who applauded their joint proposal as “a welcome and overdue move […] if the feral banking economy is to be brought under control” (with the Guardian’s blessing). Why, in the 90s Attac’s militants campaigning for the Tobin tax during G8 meetings were treated as a disturbance by the police forces of those same states.

I am tempted to read this story as the final battle between two different organizing principles, nation states and global finance. Am I seeing ghosts?