Joe Stiglitz. Word!
By Arnold Kling
I probably am misusing the teenage slang. I mean to say that I agree with what Stiglitz says here. (Fast-forward until you get to the first seated panelist speaking.)
1. He says that macroeconomics of the past 30 years has been a huge detour. The folks that Mankiw would call the engineers were fixated with monetarism. The academics were fixated with representative-agent models. As Stiglitz points out, in a representative-agent model, the borrower and the lender are the same person. Why? Because, as I’ve been saying, careful thinking about this gives one a headache.
2. Microeconomists didn’t foresee the massive market failure that results from adverse incentives in financial markets–people rewarded for short-term gains and not punished for long-term losses.
3. Finance theory assumes lognormal distributions and continuous liquidity. See my thoughts on credit default swaps.
My view of Stiglitz is that he believes that smart people in Washington can correct market failures. Ironic, given that the point of his talk is how mainstream economists in macro, micro, and finance got it wrong.
My own view is that Hayek was an optimist. You can think of Hayek as looking at government and markets trying to solve the same problem, with government working like a mainframe computer and markets working like distributed computing. The distributed model processes information more efficiently.
I think Hayek was an optimist, because he looks at government as trying to solve the problem of allocating resources efficiently. I look at government as concentrated power, subject to manipulation and corruption.