SPEAKER 1: Joe Stiglitz needs no introduction anywhere, and especially in New York City, he needs no introduction, of course. As you all know, he is a Nobel Prize winner, he is a university professor at Columbia University, he's the chief economist of the Roosevelt Institute, and only if you are complete absorbed in economics, you will know he has a sense of creativity which is just unbelievable. For me, the works of Joe are scattered over a whole lot of disciplines, are completely fundamental, and an ability to think outside of the box. Everyone is thinking along a particular way that suddenly comes an insight about doing something differently, it's just absolutely marvelous. I know a lot of that work has been very, very influential for my own research.
On just a personal note, I should say that one of my early interactions with Joe Stiglitz was very [INAUDIBLE]. We were setting up a small group called the Center for Development Economics, which now, actually, is quite a big and flourishing group in Delhi. It's me and a colleague of mine at the Delhi School of Economics, we were founding it, and we said that we want a couple of good international advisors.
So we picked on Joe as one of those advisors for the Center for Development Economics. Soon after that, news came that Joe was moving on to be chairman of the Council of Economic Advisors or some prominent force in the US government residency, and that he would have to resign from all advisorial roles that he had.
Time passed. Joe never resigned from the Center of Development Economics' advisory board, and we were very pleased at the Delhi School of Economics. Then when I met Joe and I was thanking him, he was honest enough to say that he had forgotten that he was an advisor.
He remained with us. Also, I [INAUDIBLE] from the lot, which, all of you know, he's just a person, as a human being, just a wonderful person. And for me, that's just very important. This is [INAUDIBLE] small story that illustrates Joe very well.
He has lots of books. One book was-- there are also many pirated editions, but one pirated edition came out from a developing country, Joe Stiglitz's book. When it was about to come out, the publisher wrote to Joe Stiglitz, asking him if he would write a preface to the new edition. This is the pirated edition. Which also shows how property rights are really not understood in different places. The publisher clearly had no sense of guilt in writing to Joe.
And it's typically Joe who felt that a faraway country, they worked hard to produce the book, he agreed to write the preface to the pirated edition. And I heard it from good authority that his publishers came tumbling down on him and said there's no way you can collude with the group that was doing the pirating. So that's Joe Stiglitz for you. And I'm very happy that Joe is with us today. So Joe, the floor is yours.
Well, since Stan is telling me to tell you this. Just after I joined the World Bank, at a public meeting, someone asked what was Joe's biggest impact as World Bank's chief economist, and I had, on the spot, I said, which, actually, in retrospect, is true, that as the chief economist of the World Bank, Joe's biggest contribution was he changed the [INAUDIBLE].
I speak so much. Actually, it's not [INAUDIBLE].
JOSEPH STIGLITZ: OK, well it's really nice to be here. And thank you so much for that introduction, and our long friendship together. So these are some preliminary thoughts, in a way, inspired, you might say, by Trump. I was in a meeting in Davos, a discussion with Mario Monti, who had been the president of Italy.
So he raised the idea that there was, in fact, a silver lining in Trump, and that is Europe was trying to figure out what it stood for. And it understood that Trump was the opposite of what it stood for. So it stimulated a discussion of, OK, what is the antithesis of Trump? What is it that is missing in Trump's view of the world?
So in a way, this talk is inspired by the same concern. Many of us, as we look at Trump's economic policies, they're terrible, trade war and all that. But I think there's a deeper problem, and I want to get at that deeper problem. It's the way that he is undermining our rule of law. And the notion was--so I'm going to talk about the rule of law, economic efficiency, and social justice. But really one of the fundamental issues here is trying to understand, you might say, Trump's epistemology, or what he is doing to our sense of what is the truth.
So I'm going to begin, in my mind-- as I say, these are preliminary thoughts-- in my mind, a way of framing what is going on is that we are in the process of relitigating the Enlightenment. We thought that problem had been solved 250 years ago, that the basic ideas of the Enlightenment had been accepted in Europe and the United States and most other advanced countries and was being accepted around the world. And Trump is-- the mindset is a pre-Enlightenment mindset.
Now what do I mean by that? Well, there are two critical aspects. There are many aspects of the Enlightenment, and in a moment I'll talk about Adam Smith as an Enlightenment figure. He was core in the Scottish Enlightenment, people like Hume, but he played a critical role and I'll use him as framing these ideas. But there are two aspects of it. How do we learn about nature, and that's the scientific method, and how do we learn about social organization, how people act collectively?
And that's a very different study. It's different from ordinary science because in many ways. One of them is that when we study a molecule, our study of the molecule doesn't affect the molecule. Not quite true. But to a first order, if we misunderstand the molecule, the molecule doesn't change its behavior. Society is different. Our understandings of society affect the way society operates. You might say that there is an endogeneity, and I'm going to be talking more about that endogeneity later.
But the key idea in the Enlightenment was that it was a social organization not based on inherited authority. So before that, you had a king and the king would dictate, and the framework was that there was something coming from God that determined who knew what, and then that was passed down. So it was a social organization where decision making was not only hierarchical, but the source of knowledge was associated with the person at the top. And he was, you might say, the determiner of what happened.
So what we're thinking about here is the development of the basis of social organization not dependent on authority. And once we leave authority, we go into the rule of law. Now I oversimplify, that even kings were subject to constraints, so there was a sense of the rule of law, but it was very limited. And a core part of the Enlightenment was the importance of reasoned discourse and deliberation.
And you see-- what I want to do-- you see the US constitution as a product of the Enlightenment. So the same period, 1776, The Wealth of Nations was the same date as our Declaration of Independence. And so it was interesting-- I haven't studied closely that aspect of globalization-- but it was very clear in those early days-- Thomas Jefferson spent time in France-- that ideas did move across borders, and the Enlightenment ideas certainly did have an important effect in shaping the ideas of those who wrote the Constitution.
So what I want to argue is that really, the basis of The Wealth of Nations was not what actually Smith said in his book, but actually the ideas that came out of the Enlightenment. So in other words, growth was not based on the exploitation of others-- sustained growth-- now, it is true that at that particular period a lot of the growth was based on colonialism, but that was only a shift of resources from one person to another. So I could become wealthier by stealing money from others. Spain got wealthy for a while as it took gold from Latin America, but it didn't lead to sustained economic growth.
So when I talk about the wealth of nations. I mean the wealth of the total world community. And that is not based on the exploitation of others, but it's based on the accumulation of knowledge. It's based on learning. So this understanding both of science on the one hand and social organization, how people can work together, these two things were the basis of the increase of the wealth of nations.
So effectiveness can be seen very dramatically in this kind of chart, where you see that basically-- this only goes back to 1000, and, of course, the data isn't very good going back there. But I'll give you some other data that's a little bit better. What you see is that there are not any significant changes in standards of living going back before 1750. And then beginning with the Industrial Revolution, which I think is not an accident, associated with the Enlightenment, we got very marked increases in standards of living. It was led by the West, and then we are in a process now of countries like China going through the same process.
And this is maybe a little bit better data set. Real wages of London craftsman. In the UK, people like to collect data, and so I'm not going to tell you how they did this because I don't really know, but they had wages going way back and they had price levels going back, and therefore they can construct real wages. And what is interesting about the chart is that it has the kind of fluctuations that you would have thought. The Black Plague decreased dramatically the supply of labor, and ordinary laws of supply and demand say that when the supply of labor goes down, real wages would go up, and the chart reflects that.
But apart from that sort of little blip, and it wasn't very much of a blip, what you see is not any changes in real wages until, again, late into the period of the post-Enlightenment period. And that was in part because in the early stages of the Industrial Revolution, there was a lot of exploitation and the benefits of that growth went mostly to the capitalists. And of course, that kind of increase in productivity got reflected in [INAUDIBLE] life expectancies.
So this is another way of saying dramatic changes have occurred in the last 200 years in standard of living, changes that had not happened for thousands of years before. So we see data like this, and in particular, the two previous ones, it begs for an explanation of what happened. And the explanation that I'm putting forward is a very simple one, a set of ideas. A set of ideas that led to that. That set of ideas, science and social organization. And that set of ideas then were to the Industrial Revolution and the ability to implement these within society. So I want to think about, in this context, science, and these ideas underlying advances in technology and advances in social organization that allow the implementation of these advances in technology, and the two together leading to enormous increases in our standard of living.
So the punchline of this, that I'll come to at the end, but I might as well give it away-- and some of you may know, I'm not a big fan of Trump. What he wants us to do is to go back to the world before 1750, and that is a world of stagnation. And hopefully that won't happen. But that is really what is at issue now. So what is at issue now is not just a trade war. Those are little wrinkles in our economic system, and they need to be fought. But the real issue and debate is the underlying structure of our society.
So just to give you a few quotes to reflect on how an Enlightenment thinker, Adam Smith, thought about some of the key issues, key issues that we face today. So he, in many ways, framed many of the major political issues that we're debating. And I should be clear. It wasn't just Adam Smith that was talking about-- these were ideas that were around and were shared by other Enlightenment thinkers.
So one of them is the key idea, but one which has been misunderstood, because he thought of it in a much more limited way. He said pursuit of self-interest leads us as if by an invisible hand to the well-being of society. What he meant by pursuit of self-interest was very different from what some conservatives mean. He meant the pursuit of an enlightened self-interest. And there's a lot of debate about exactly what an enlightened self-interest is, but it was not the narrow, selfish self-interest.
But let's put that aside for a moment. If you look beyond that, Adam Smith didn't believe in the invisible hand, for he argued both in his previous book Theory of Moral Sentiments and The Wealth of The Nation that government intervention was needed in a whole variety of areas, including preventing monopolies, fostering education, and reducing poverty.
So just to illustrate some of this broader law and economics perspective, that he saw that you needed basically a legal framework. There was a need for antitrust. He didn't use those words, but this is my interpretation. "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."
So he was very aware of the fact that the state of competition was not a stable equilibrium, that you could not maintain on its own competitive forces, and that you needed some mechanism, some rule of law, to maintain a stable, competitive market. And the theorems that we now know about when markets are efficient require that there be competition. But competition by itself is not a stable equilibrium.
He also recognized that employers conspire to exploit workers. So he didn't see this as a competitive labor market in any way. He saw this very much as a world in which the various parties engage in exploitation. "Masters are always and everywhere in a sort of tacit but constant and uniform combination not to raise the wages of labor above their actual rate. Masters, too, sometimes enter into particular combinations to sink the wages of labor even below this rate. These are always conducted with the oath of silence and secrecy."
Now one couldn't have a better description of the conspiracy that Apple had to lower the wages of their workers. They got together with Google and the other Silicon Valleys and said we won't poach each other. And the intent was to make sure there was not a competitive labor market in Silicon Valley. And it was done, as he says, with the utmost secrecy. It took a long time to discover it, and government action.
People have not realized that that same kind of conspiracy exists within most contracts, even at the lowest level in franchises. McDonald's-- we've just discovered recently, work of Alan Krueger and others have discovered that most of the contracts that are franchise contracts have anti-poaching provisions designed to lower the wages of workers. So for more than 200 years, employers have been in the business of trying to exploit workers.
And then he went on to talk about the political economy of labor legislation. "When workers combine, the masters never cease to call aloud for the assistance of the civil magistrate, and the rigorous execution of those laws which have been enacted with so much severity against the combination of servants, laborers, and journeymen." These are the anti-union laws, the right to work laws, which undermine-- unions are providing a collective good for workers.
And the only way you have a system of the provision of a public good is to lower the transaction costs. For instance, by collecting dues, by making it easy for people to sign up. And there's been a consistent attempt to increase those transaction costs in order to undermine unions.
So he also recognized the idea that, as I'll put it a little bit later, that markets don't exist in a vacuum. That they are going to have to be structured. There are always going to be regulations, regulations about whether workers can get together, as I just describe, whether firms can get together, regulations about corporate governance. And he went on to say, "when the regulation is in support of the workman, is always just and equitable, but it sometimes otherwise when in favor of the masters."
So he was recognizing, in some sense, that the regulatory system has distributive consequences. And he was making a normative judgment. He didn't write down his social welfare function, but I think it's pretty clear from what he's saying what his social welfare function was. And in that social welfare function he came to the view that there was this battle over regulations and that sometimes the employers won, sometimes the workers did, and the answer to that had very severe distributive consequences.
And finally-- let me say, I've picked out these quotations. So I don't want to say that there might be other quotations on the other side. So I just want to-- so this is a distorted view. But I think it actually is representative. But he also recognized that more than law is needed. One needs trust and norms. I'll try to argue later that law is part of creating trust and norms. Ravi has done a lot of work trying to talk about that.
If trust is too low in a society, savings will be insufficient to sustain positive upward growth. Such a poverty trap is more likely when institutions, both formal and informal, which punish cheaters are weak. So he was realizing here both the role of trust and the role of informal institutions. And I guess I'll come back to that a little bit later.
I'm going to try summarizing some ways what we've learned since the Enlightenment, how we would frame many of these issues as we think about social organization. And there are three particular points that I want to focus on. The first is that whenever you have people working together, you have a problem of coordination. If you have a primitive agriculture economy, these problems wouldn't arise. The problems that Smith and the Enlightenment were dealing with were problems that were beginning to arise as you move from agriculture to a manufacturing economy, and from a rural to an urban society. As you move in an urban society you constantly are interacting with others and you need rules that structure that coordination.
So the simple example of coordination of a regulation is a stoplight in New York City. So what do I mean by coordination? The question is, you're coming into a junction and the question is, who moves? And if you don't have stoplights-- and even sometimes with stoplights, and we have to go beyond stoplights-- but without stoplights you have gridlock. You have no-- but stoplights provide a coordination, to say first this person goes, and then another one.
In France they have another coordination device, but it doesn't always work, which is priority on the right. And they never figured out if all four people are there, everybody is on the right of somebody else. And I don't know how it solves the problem. So it may be a solution for a low-density problem, where you only have two people coming. But if you have four people, that rule doesn't work, and unique stoplights.
So this just illustrates that as we become a more complex society, we do need some form of coordination. And one of the way we understand some of the problems of societal failure, like unemployment, is now described as a coordination failure. So that's the first problem.
The second one is beyond that, there is a necessity of regulation. There are pervasive externalities. In other words, the price system doesn't-- we can never price everything. We never will be able to have-- and there's a good theory behind this, particularly in the presence of imperfect information. So here, the way I want to put it is one person's freedom is another person's unfreedom. So my freedom to pollute the air with carbon dioxide, you might say that right, is somebody else's unfreedom of dying from the pollution. Or my freedom to carry a gun affect somebody else's freedom and the right to live. So the notion in a collective organization, in a society, we need regulation because of these pervasive externalities. And markets can't solve these.
The third point goes beyond this, which is really the nature of our technology means that there are benefits from collective action, and there are two key issues, one dealing with markets. And that is reinforcing the point that markets don't exist in a vacuum. Markets have to be structured. And if you look across countries, and you see different countries with the same market forces, globalization, changes in technology, they structure those markets in different ways and the result is different rates of growth and different levels of inequality.
So Sweden is structured its society in ways that allows it to deal with the challenges of globalization in ways that America has not. And that's why they can be more open, and Leif may want to comment on that a little bit later. But that's an example of structuring markets to make it respond in a more egalitarian way to the forces going on.
So in some ways, when you say law and economics has been-- as if they were two separate subjects, the fact, the law must underlay economics. It has to set the rules of the game. And in primitive economics-- when I say primitive, like [INAUDIBLE] models-- somehow they manage to avoid all those issues. So they've constructed a particular world in which those issues don't arise. But that's a very, very special world. And much of the research of the last 50 years has been to try to understand why that special world has very little relevance to our economy today.
So the key battles today in economic policy are about the rules of the game. And in some ways, the key battles, internationally, about, same thing, the rules of the game. But domestically, they're questions about corporate governance, monopoly power, rights to privacy, regulation today of social media.
And then the second aspect of the necessity of collective action is that many problems where the markets won't suffice, there are public goods, like defense, basic research, where if you left it to the markets, there would be insufficient production. Now once you think, this is just a topology of-- only show you an incomplete topology as you think about social organization, there are various ways that you can solve, address these problems.
And the way you address these is, in turn, based on perimeters, your beliefs about the nature of technology, the nature of the economy, that what would emerge with a particular set of rules, and about the nature of man. And we often forget these underlying assumptions when we go to answering these questions.
So one answer to the question has been provided by the Chicago School of Law and Economics. And unfortunately, it's had a lot of influence in the United States, and increasing in other countries. I think it's a disaster. It's the wrong way of looking at society, it's a wrong way of structuring society, and I've been particularly concerned that that view of law and economics as having influence in developing countries, as countries like China debate the question of what-- everybody says they want to move to the rule of law.
Now every country has a rule of law. The question is what is that rule of law? But what they mean is they want to move to a more formal system of the rule of law. And as they think about that and their primary focus is on raising the living standards of their people, economic growth, the natural question is what legal framework will most facilitate the creation of the wealth of China, make their people better off? So in a very formal sense, this is the issue which is core to Chinese development.
So a few years ago I organized a discussion between Chinese scholars and American scholars, legal scholars and economists, on what should be the right framework for their thinking about law and economics. I have to admit, I had a particular view. So it was not meant to be inclusive. It was meant to reflect my view of the answers. But I just suggest that some of you may find this interesting. It's collected together in a book called Law and Economics With Chinese Characteristics.
And in there, I have a couple of papers with David Kennedy of the Harvard Law School, where we articulate the antithesis to-- our view of the antithesis to Chicago Law and Economics. But we also try to explain what's wrong with the Chicago view. And let me just-- because I think it's useful, again, just like Trump helps us think about what we believe, the Chicago school helps us understand the wrong view, and therefore helps us shape the right view.
So as I said, it's based on a particular view of law and economics and markets and human nature. The first is that the presumption that markets are competitive. Remember, I said before, Adam Smith realized that markets were not stably competitive. Yet they have presumed that the natural state of the market is competitive, putting the burden of proof on showing that things are not competitive on those who are complaining.
And those of you in antitrust know that was particularly prevalent in the Brook decision on predatory pricing, where very hard in America to prove cases of predatory pricing. And just to frame that, you know that's selling goods below cost. If you use the Supreme Court decisions on what is meant by predatory pricing for international trade, because that same issue arises, is a country dumping goods on us. We're claiming many cases, countries are dumping goods on us, selling goods below cost.
If you use the Supreme Court framework for thinking about this, there would be no dumping cases. Yet we know that some cases do exist. On the other hand, if we use the framework that we use in international trade, almost every American company is engaged in dumping. The point is, we weren't interested in creating a fair system. We were interested in bashing foreign companies. So that's an example of a distorted legal framework.
But what has been successful in the United States, from the point of view of Chicago school, they have persuaded the Supreme Court of their view. It's beginning to change, fortunately. So in this view, presumption that the markets are competitive. Even when there's a natural monopoly, competition for the market replaces competition in the market, [INAUDIBLE] efficient solution. Sometimes the words are used, markets are contestable.
Now that particular view, I showed 25 years ago, was wrong. That even if there are epsilon sunk costs-- epsilon, arbitrarily small-- you cannot-- markets won't be contestable.
A second idea that's very related, it was [INAUDIBLE] competition. That monopolies are temporary. Don't worry about the monopolies, they actually are good for innovation. And what happens is competition to the monopolists spurs innovation. Again, each of these presumptions has been shown to be wrong. I showed that there is a presumption that monopolies are persistent, and that you could do epsilon amount of research and deter entry. So it doesn't even spur innovation.
But the implication of the Chicago view was that there was very little need for competition law. Markets were naturally competitive. Very high standards. As I say, the underlying economics has been totally devastated, but it remains very influential.
The second thing is that don't worry about externalities, because there's a presumption that the Coase Theorem, which says that externalities can be addressed without government intervention, are satisfied. So there's little need for regulation of externalities. Now if you think of what is sometimes called the mother of all externalities, global warming, the idea of all of us getting together in a co-solution, their view is just assign property rights. And then all of us are going to get together to figure out what is the optimal condition. And we'll have the coal companies bargaining with us to determine who has higher consumer surplus. It's absurd. So that's wrong.
And the third one, which I think is really important and has not gotten enough attention, and in many ways, Carl [INAUDIBLE] will be talking about this tomorrow, is that preferences are fixed and unaffected by how the economy and society is structured. And in fact, the law is important in affecting norms, and norms are important in affecting who we are.
So what I want to suggest here is a broader view of law in economics. That law is a formalization of norms, but it also helps to shape the norms. There are a lot of evidence, for instance, in developing countries that when you raise the minimum wage, even though you can't enforce the minimum wage, wages go up. That the legal setting of the wages helps frame what people think of is a reasonable wage. And so even though there is very little enforceability, it does have real effects.
Laws and norms reflect and shape who we are as individuals and the nature of our society. And here, what I'm referring to are things-- not only laws and norms but how we structure our interactions. Example is a lot of work in behavioral economics have shown that for instance, if you become a banker-- well, if you become an economist-- for the first point, economists are more like the economics model than ordinary people. That is to say, standard economics model is that people are infinitely selfish, and economists come much closer to achieving that goal.
But what's really interesting is, the longer you study economics, the more selfish you become. So we help create a world that is consistent with our model. But there are other models. If you create cooperative institutions, people become more cooperative. And if you put people-- you know, bankers, whose sole job is making money, they become even worse.
And what's so interesting is, actually, there have been these experiments where you can test whether people lie. I don't know if you know these experiments. Like you roll the dice. And if it's one you get $1, two, $2, three, four, five, except six, you get zero. And you put people in a room and you say roll the dice, tell me what you got, and I'll pay you. What does the economist answer to what you should get? Everybody says five.
Well, the question is, how do whether people are lying? Well, you can't tell whether anybody, particularly, is lying, because you really do this in private. You have no spy here. But you know the statistical properties of their behavior. So we can do--
AUDIENCE: The die's--
JOSEPH STIGLITZ: What?
AUDIENCE: The die's behavior.
JOSEPH STIGLITZ: Oh, the die's behavior. No, but then we observe what they say. And we have an unloaded die, so it should be-- we know if they were honest, it should be one fifth, one fifth-- one sixth, I'm sorry, should be in every one. And it turns out that the world is not as selfish as economists say it-- is not as untruthful as economists say, but not perfectly truthful.
So we try to tell our children to be truthful. One of the arguments for telling them to be truthful is it's the only thing that you can remember easily. It's harder to remember, exactly, lies, and truth is a natural way-- but for whatever reason, we have failed in teaching our children to be honest, but they are still not as dishonest as the economists said.
But then the interesting part of this experiment is you do it with a group of bankers, bankers are less honest. But the behavioral economics part of this is before the experiment you prime them-- it's called priming. You talk about being a banker. You remind them that they're a banker, and then they get really dishonest.
So you know that when they're sitting in their office as a banker, they've gone in the office and it says Goldman Sachs. They're reminded that they're a banker, and that's the point where they become dishonest and nasty. And as Blankfein said, testified before Congress, he said, anybody that trusts us is stupid, is a fool. So these are the norms-- and that affects people.
So the point I'm trying to make is we are malleable. The way we structure our society affects who we are. And that, of course, then affects how we structure society. And the laws and norms are an important part of this process.
Markets are just one form of social organization, one which has certain advantages, but many limitations and disadvantages, including shaping individuals to be more selfish. Successful economies-- and there are many examples of this that I could give-- successful economies and good societies may consist of an ecology of institutional arrangements. And that is to say that-- and what I mean by ecology, you may have some degrees of-- some cooperatives, some market institutions, some non-market institutions.
The most successful, the best American institutions, where we dominate the world are nonprofit universities and state universities. That's a sector where we really do dominate the world. Everybody agrees, and it is not a for-profit. The model of a for-profit university is Trump University. And that is a failure.
And Trump University is just an extreme version of what happens in all the for-profit-- not all, but many of the for-profit institutions, which, in the words of George Eckelhoff and Rob Schiller, excel in one thing, fishing for fools. And you can maximize profits, we always talk about by innovation. But really this story of maximizing profits in many sectors of our economy is being better at fishing for fools and figuring out how to exploit others.
So that leads us to the general question of social organization without inherited hierarchical authority. It has to be based on rules. It has to be undergirded by some version of rule of law. It has to be based on some version of merit. But at the same time, what we've learned, one way of thinking about-- and the Enlightenment began this process, and since then, for 250 years we've been thinking about these problems. And I think we understand them a lot better.
One of them is the nature of human fallibility. As I tell my students, everybody else is fallible.
So you have to recognize that others make mistakes. And you can't decide everything. And so once you recognize that, you ask the question, how do I design organizations that address that fallibility? As we've learn more about behavioral economics and the particular behavioral distortions, biases, we've thought more and more about how we create institutions that undo those behavioral biases. So we can-- one of the innovations is-- these social innovations are as important in this area as technological innovations-- we can create organizations that are better at figuring out the truth.
So one way I did a few models of this, formal models of this, where are you have a simple problem. Choosing, assessing a project. There's a probability of a good project being rated bad or bad project being rated good, type one type two errors. And then you ask the question, how can I maximize the total value, make the best set of decisions, recognizing the human fallibility?
And you have a choice of many organizational forms. You have a hierarchy, a polyarchy, many separate decisions, you could have a hierarchy of polyarchy, a polyarchy of hierarchies, you can have committees, committees with rules of N out of K. And so you open up a space of social structures, and, actually, you can figure out what is the optimal organizational structure dealing with human fallibility.
One of the things that we recognize is the danger of concentration of power. You can use this kind of model, for instance, even talking about variances that result in societal performance. And as we think about the dangers of concentration of power, we begin to think about the importance of checks and balances and separation of power.
Now at one level, as schoolchildren, we always learned about the great virtues of the American Constitution, the separation of powers, and checks and balances. It seems that Trump was absent from school those days. And we all have an intuitive understanding of these ideas. And what I'm trying to say is, actually, behind that intuitive understanding, a lot of research in law and economics has helped bolster and make more precise our understanding of these ideas.
But another area where there's interesting research, but we lose grasp, even by the writers of the Constitution, was the importance of deliberation. That was one of the reasons why they were against direct democracy. They wanted a representative democracy, and in particular a senate where people would deliberate. So they thought that you could not arrive at the truth just from your gut feeling.
And a lot of people in England are feeling very strongly about this, that you cannot make important decisions like Brexit on the basis of just a vote. You need a deliberative process. And voting is not a way to get that deliberative process. So it goes back-- the remark that was made is that democracy is not just voting. And it may be that when you think about good democracy, it's more than just voting for a person, it's structuring a whole deliberative system.
And the final thing that we've come to understand- not final, there are many, many other things, but these are things I want to emphasize-- the dangers of inequality, and the other side, the benefits of equality. Our own view was that there was a trade-off, and that just like there was a trade-off between democracy and growth, there was a trade-off between inequality and growth.
Arthur Okun, who had been chair of the Council of Economic Advisors under President Johnson, wrote a book called The Big Trade-Off highlighting this. But the new view, supported by evidence from the IMF, which is not, as many of you know, a left institution. It's more left than when I arrived in Washington, but it's still not radically left. A centerpiece of a lot of their advice today is the benefits of more equality, both for growth and stability. And there's a whole set of mechanisms by which that occurs. And activists, social activists, emphasize the broader benefits of empowerment that actually changes who people are and the nature of our society.
And let me emphasize, I'm talking about this at many levels, and I've been deliberately vague about this. Some of these ideas apply within the workplace. You can have democracy within the workplace. You're always going to have some hierarchy, but within that structure, you can have a lot of democracy. A lot of these rules still apply. But I also am thinking about this for the society as a whole.
As we think about these various things, a key role here is of our truth-telling institutions. And in a way, this goes back to the point recognizing human fallibility. One person doesn't know everything. If there was one person who knew everything, we would make him the dictator and that would solve Arrow's impossibilities theorem. Just make him make the decision. But we know that that's not true. And we know it's very dangerous to choose one person, because he's likely, or there's some probability that he won't be that benevolent dictator.
So as we think about this, what we were trying to do is ascertain what actually works. And just like science is about trying to ascertain truth, the truth of nature, a lot of our institutions are about ascertaining truth, the truth of our social reality. I should say, sometimes political organizations do try to get involved in ascertaining the truth of nature. Some of you may know, one of our states decided that it was an inefficient use of students' minds to have them learn that pi was 3.1416 dot dot dot, and they legislated that pi would be 3.14.
So you can understand the benefit of pi being 3.14, but it didn't change pi. But I'm here-- where talking here, are not things of that physical nature reality, but the social reality that we live in.
So social organizations can't function without some way of assessing truth of competing claims. It's necessary for deliberations over fairness, resolution of disputes. And we have multiple and complementary truth-telling institutions, which include universities, research institutes, other educational institutions, media, judiciary, administrative bureaucracy, and intelligence agencies.
In the last year, on several occasions I found myself in the very uncomfortable position of being with spooks. You know, the heads of our spy agencies. And when I say uncomfortable, it is because we are on the same side-- most of us think the CIA has been not exactly an institution that has been promoting global social welfare, but they are now on the side of the good guys because they see themselves-- and this is true in UK and other-- as trying to assess intelligence.
What is going on in the world? They are less interventionists now, and they view their main responsibility, the intelligence agencies, what does intelligence mean, finding out about the world. And what they say is, our job is not to make the decision, say, to bomb Syria. Our job is to find out what the world is and then give that intelligence, that information, to the president, to the political process, to make the decisions. So they now frame themselves as a truth-telling institution.
And I think they are. You know they lost their mission for a while as they were trying to remove people in Pinochet-- remove people in Chile, democracies in Chile, and things like that. But they've now gone back to their central function of ascertaining the truth.
While science-- and this is very important-- science emphasizes the inherent uncertainty in what we observe, the Heisenberg principle, there is no alternative reality, no alternative facts. And that is really the major difference between, what I would say, us and Trump, between the universities, the truth-telling institutions, and Trump. He believes there is an alternative reality. And I would argue you cannot function as a society with an alternative reality.
You know, this has always been a problem. Those of us who've been in public service who come from an academic background try to explain to others that there is always inherent uncertainty in what we know and what we assert. They feel uncomfortable with that. They like assertions. They want more confidence in any statement than we are able to assert. So it's always been a problem, but we've never before had somebody who's asserted there is an alternative reality. You see this, but this is not the truth. My reality that I get from God or somewhere else is the true reality. And that is totally destructive of our democracy.
So I want to now go back to the overall framework of making democracy work. I want to suggest that in one way we can think of democracy as part of the Enlightenment project. I know this is sort of a peculiar view. Democracy in one form existed well before in Athens, but it's sort of the intellectual support, our understanding of democracy.
And what I mean by that is democracy arises when you say there is no authority other than the truth. And it's a particular form of social organization where you might have collective action. It's based on principles that I've outlined in the previous slides. But the problem with democracy as we usually think about it-- what I mean by that, you know, where you vote for your representative or the president-- is that it can easily be corrupted by money.
And the reason is there are both incentives and capabilities, which are what are relevant. The rules of the political game are set by-- the economic and the political game are set by the political process. Economic power can translate into political power, and then the political power can be used to perpetuate and reinforce these economic inequalities.
And the result of this simple model that I've written down here, you can formalize this, is that there can be multiple equilibria. There can be a good equilibrium with high levels of economic and political equality, and there is a bad equilibrium marked by political and economic inequality. And what worries me is that the US may be in a bad equilibrium, or moving more so, more closely described by one dollar, one vote than one person, one vote. And other countries like in Scandinavia have managed to get into the good equilibrium.
So the next two sides are sort of the bottom line, where I think the real danger-- where I try to talk about what I think is the real danger of Trump. I think he does represent a threat to our economic and political system and to the Enlightenment project, which has underlay advances in the economy in the past 250 years. In other words, it is a more fundamental threat to our society.
Of course, a lot of people will say, oh, isn't it good to have a businessperson in as president? Well, there are different kinds of businesses. There are businesses that do create wealth, that do create-- when I say wealth, enhance our knowledge, enhance productivity, enhance [INAUDIBLE] society. But what I said before is you can also become rich by exploiting others, by rent-seeking. And so the problem of rent-seeking in the public sector can also be a problem in the private sector. And the difficulty is that Trump and the people who are around him are rent-seekers. And their conception of a market economy is a rent-seeking economy.
You look at one of the major contributors-- two of the major contributors to the Republican Party, Adelson-- the two major gamblers in the world. And those of you who know about gambling institutions know that they are basically exploitative. Their main function is money laundering. The evidence is that we know Trump University was based on exploitation. Trump's business practices were based on exploitation of his workers. But beyond that, the evidence is increasing that even his real estate empire is based on money laundering, and a lot of it money laundering of Russians.
So this understanding is-- you know, you can go, Wilbur Ross made his money out of buying steel companies and then changing the rules of the game. So he and the people surrounding him, view of a market economy is a rent-seeking economy, not a wealth creation economy. And those are two very different economies.
One way of understanding Trump-- this is not meant-- this is not a political speech. This is all descriptive. I want to make that clear. There is no politics here. This is just-- but it is important in understanding what is going on. I was sat next, at a dinner not long ago, to one of the big Russian oligarchs who happens to also do a lot of work in the United States. And his remark about Trump was, you just have to understand Trump. He's a normal Russian businessman.
It just isn't-- Americans have higher standards. Now, remember, when you say higher standards, we're talking about the bankers that I talked about before. But you set that against the others, and you understand there is a continuum here, and you understand the mindset from which the Trump administration is going. When you think about what they're involved in is exploitation, which includes exploitation of bankruptcy laws, the weaknesses in our legal systems, and all of this is markedly different from the real bases of the wealth of nations that I began this talk with.
And worse, there's been an attack on our education and science institutions. And I don't know whether it's well known how deep and pervasive both the attack and the sentiment is. A majority of the Republicans believe that our universities are bad for our society. And that's remarkable. When the wealth of nations really depends on advances in knowledge.
And this is being translated into policy. It is reflected in probably the first tax law ever to tax universities. You know, normally countries try to subsidize universities because they're producing a public good through which others benefit. But we, first time, have taxed some of our universities. Some are universities that produce enormous public goods.
And the strategy of the administration is to say-- they've actually-- I've actually heard them say this-- been in small meetings where they said that we are spending too much on higher education. We need to downsize higher education and go into more vocational education, a mindset that is based on going back to the 1960s, trying to recreate a manufacturing economy. Manufacturing globally is a declining share of the global economy and our comparative advantage is not going to be in manufacturing.
It wants to imitate Germany. You can't do that. And Germany is going to be facing a problem as China goes up the scale to become more competitive in machine goods.
So what has been going on is an exploitation, and bringing out the baser elements, changing who we are as individuals and how our society functions. I think, as I said before, inequality and disempowerment is a serious problem. It was part of the motivation just-- and is caused by the mismanagement of technical change and globalization, and-- and this is very important-- since 1980 we've been rewriting the rules of the economic and political game to favor those at the top and to undermine social protection of the rest. It didn't lead to higher growth. Growth actually slowed, and predictively so, partially because we now realize that more equal societies have better performing economies.
So this piece right here is really where law and economics come in. We've written the laws in ways that have exacerbated forces in economics that would have led to more inequality and we've made it still worse. Trump has attempted to blame others, our trading partners, immigrants, for our failures, when the real blame, as I said is ourselves. Of course, his prescriptions, his policies will only worsen the plight of those who have been doing poorly.
There is an alternative agenda. And I don't have time to go through it. But there is a progressive reform agenda based on promoting shared prosperity. And by that it means a comprehensive, more effective antitrust laws. There's a conference tomorrow on how we get more effective, better corporate governance. Some good people at Cornell been working on those issues. Better labor legislation. The whole gamut of the legal framework.
So this is maybe putting it a little strongly, but I think it's probably true. The Trump agenda threatens to undermine the basis of our civilization. So the most serious threat is to our truth-telling institutions, to our epistemology and to the rule of law, the premises on which our democracy and our economy rests. He has sown doubt about both well-established truths and our truth-telling institutions.
If one can sow doubt about whether cigarettes cause cancer and have other adverse effects, which the cigarette companies did, then one can sell bad products. If one can sell bad products, one can sell bad ideas. And that is the battle that is going on right now. What I am afraid of is that the damage may be long-lasting and that we are just beginning to see these corrosive effects.
SPEAKER 1: I was cutting into this a little bit because I wanted to leave a little bit of time for you to ask questions, Nicole here, and yes, I'm going to go around. Yeah, go ahead.
JOSEPH STIGLITZ: You could try speaking loudly enough, it's--
AUDIENCE: Yes, thank you for the really interesting talk. So I really liked all this stuff of economics, so I want to focus on the overall pictire, in particular, the claim that it's a rejection of the Enlightenment.
SPEAKER 1: Speak loudly so people--
AUDIENCE: I'm trying.
SPEAKER 1: OK, it's coming.
AUDIENCE: All right. Thank you. So I think it's really important to have the right diagnosis of the problem, in order to really address it, and so I'm going to push you a little bit on whether or not-- there might be some things that allow Trump to say the kinds of things that he does that need to be addressed a little bit seriously. About disagreements in values and respect. So I think there's both an anti-intellectualist element in society that's responding to this perceived lack of respect and lack of concern for people who are suffering from inequality, perhaps.
And then also an anti-globalization sentiment that I think you properly characterized the failures of the initial waves of globalization to which people might be responding, and I think just articulating that or educating might kind of alleviate some of the pressure that comes from that. But then there's also something else that's going on that you didn't mention. And so it might not be that people ultimately want to reject the Enlightenment and reasoned debate, but they do think that kind of debate as it's carried out is privileging certain voices, leaving others out of the conversation.
But I think there's a little bit of racism, a little bit of disagreement about the values that we as a society should stand for that really driven this election, and the disagreements that we're seeing. So I think there's some fundamental issues that might be left out of your analysis, but I'm wondering if you could speak to them.
AUDIENCE: Joe, what do you make of the fact that Donald Trump was elected, played by the rules, said everything he would do, and he's doing these things. And so far, up to this morning, his toughest opponent has not invalidated his election. So doesn't the legitimacy of the vote of the American people give him the right to do the things that he's doing? And footnote to that, wouldn't some of the people who don't like his opponent, Hillary Clinton, say some of the same things that you have said about him?
SPEAKER 1: I'll take one more here, and I see lots of hands over there. Yes.
AUDIENCE: I have an easier one for you. It has to do with ESG investing, and what-- sorry. It has to do with ESG investing and whether you think there could be any material impact on our future. I'm not sure if most people understand-- I work for a very large asset management company, and now their certifications, really forcing investment companies to be responsible. And what kind of impact do you think that will have. Thank you.
SPEAKER 1: So Joe, do you want to take--
JOSEPH STIGLITZ: Sure. So I think the issue of values really underlies everything. And really what I was trying to say that in some ways, what is one of our fundamental values? One of our fundamental values is the Enlightenment values. And it's so deeply ingrained in us that we don't talk about it. And in some way what my talk was about is to try to say, an underlying part of this real conflict is that we do differ in our values, and that the group on one side says the Enlightenment values-- and I could list those-- are fundamental.
But I'm also arguing the Enlightenment values are instrumental. So that if you are a materialistic person and you want to do well, you better adopt the Enlightenment values. So it's both foundational, but it's also instrumental. Now there are other values that I would say go the same way, and I didn't articulate in that way. Concern about inequality, I believe, is fundamental in my view. But what I was trying to say is, also, in the extreme that it's come in the United States, it's become instrumental, that it's as materialistic consequences.
I think, among the Enlightenment values, one of them is truth. The other one is democratic participation. I view that as foundational and that we ought to bring it up and talk about what those are-- that value. But again, I think it's instrumental in the sense that-- not articulate quite as precisely, but that because of human fallibility, the notion of the systems of checks and balances that you get when you have democracy is likely to lead to better decisions with less variance than those if you just give it to one person. But it is also foundational.
And that's where I would say that it affects the shape of who we are. So having people be able to participate in the decisions that affect their lives and empowers them really, really makes them different people than they would be if they were just told what to do. So it is a kind of imprecision here, but I think all the things I've been talking about are both value statements, but also instrumental.
On the question-- you know, a lot of the things that are going on are debates about how our economic system-- and I would say, our economic and social system-- works. So there is a debate about, why do we have so much inequality? The fact that a lot of inequality is a fact. There is a debate going on, is it quite as bad as some statistics say? But no one can find any statistics that don't say it's really bad.
And one of the things I like about looking at many data sources, they reinforce your view. So I didn't mention that life expectancy in the United States is going down, and it's particularly going down among those without a college education, dramatically so. That is a symptom that something is going on. So that's a fact. Now we have to talk about, how do we interpret the fact?
And you can write down models, you can can write down theories and empirical test. The fact that there are countries that have dealt with globalization, technological advances in ways that have not led to these adverse consequences is sort of a factoid that leads you to say, maybe it's the way our policies have managed these And it's not the ugly interpretation of immigrants and foreigners.
The idea that he was elected and therefore has the right to do whatever he pleases, is exactly a view that goes beyond the rule of law. The rule of law is that no one is above the law. And the rule of law says that the president is all about constraints. Remember, I talked about checks and balances, human fallibility. We've created social organizations, and thank god we have, that provide a check against the fact, yes, you can do certain things, but very circumscribed.
And unfortunately he doesn't know those limits. And there's not been as good a public discussion as there should have been, I think, of what is within the domain of the president. So for instance, he talks about withdrawing from NAFTA. The best legal advice that I've gotten is he may be able to do that. That's questionable, but he may be able to do that. But the tariffs are set by congressional action.
So we withdraw from NAFTA, but we still have zero tariffs against Mexico. And for those tariffs to change, that has to be an act of Congress, of both houses of Congress. Not likely to happen. So he can withdraw from NAFTA, but it has no consequences other than the symbolic withdrawal. Now that is a discussion of what are within the powers of the president. I think we ought to have more of a discussion and more understanding, and maybe explain to him those lessons that he missed in grade school.
And I think one of the outcomes of Trump may be a rethinking of the adequacy of our system of checks and balances. One of the examples-- and this is where norms come in as well as laws-- we didn't have a law about presidents having conflicts of interest because we assumed that people would have a norm not to have these conflicts of interest.
It goes back-- an example, you can't have laws to cover everything. You just don't-- and then people be-- When I was a student council president at Amherst, and we had a case. When I was in Amherst it was just men, and we had rules that women were only allowed in your rooms when the doors were open and both feet were on the floor. So we had very strict rules, and only for two hours a week.
JOSEPH STIGLITZ: Three feet on-- so we had all these rules. And then an Amherst student was caught taking a shower with a girl. And four feet on the floor. There was no rule about people taking showers together. Because the norm was-- I mean, it was so clear what the expectation was, about what this was all about. But nobody had written down a rule. And the question was, what do we do with this case?
Anyway, so he's breaking all the norms. And we may now have to convert norms into laws.
The question about can ESG investing have effects. And that's an example of using norms, trying to get people behave better in their investment. And the answer is sometimes. So the boycott against apartheid, South Africa, did work. There's clear evidence that that had effect. I think also against Southern Rhodesia worked. I think in other cases, the effects have been more ambiguous.
But I think the effects may be more through political awareness that it brings. So I think it's really important, is the bottom line. Whether it has a significant effect on the macroeconomic allocation of resources is, in my mind, less important than the question of that it raises awareness among the investment community of what is going on, and then spreads.
SPEAKER 1: You know, All I will say-- and we can't take any more questions, I feel very bad, because there are about 12 hands, so I'm being equitable in stopping all the hands [INAUDIBLE]. What I'm hoping a little bit is Joe, if you stay on for a short while over the snacks and all, you can individually corner him and ask him some questions. So thank you very much.
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Joseph Stiglitz, University Professor at Columbia University, gives the keynote address at the April 12, 2018 conference, Contemporary Challenges in Law, Economics, and Conflict, organized by the Cornell Research Academy of Development, Law, and Economics (CRADLE) and the Mario Einaudi Center for International Studies. Introduction by Kaushik Basu, professor of economics and Carl Marks Professor of International Studies, Cornell University.