Nobel Prize-winning economist Joseph Stiglitz joined Tyler for a discussion that weaves through Joe’s career and key contributions, including what he learned from giving an 8-hour lecture in Japan, how being a debater influenced his intellectual development, why he tried to abolish fraternities at Amherst, how studying Kenyan sharecropping led to one of his most influential papers, what he thinks today of Georgism and the YIMBY movement, why he was too right-wing for Cambridge, why he left Gary, Indiana, his current views on high trading volumes and liquidity, the biggest difference between him and Paul Krugman, what working in Washington, DC taught him about hierarchies, what he’ll do next, and more.

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Recorded April 22nd, 2024

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This transcript is sponsored “in tribute to my father Jim Watson, who like his favorite blogger, Tyler Cowen, is enormously curious and optimistic.”

TYLER COWEN: Hello, everyone, and welcome back to Conversations with Tyler. Today I’m with Joseph Stiglitz. He has won a Nobel Prize in economics, and if they did such things, he could have won several Nobel prizes in economics. He has a 153-page vitae online, which is neither complete nor really has any chaff. Most notably today, he has a new book out called The Road to Freedom: Economics and the Good Society. Joe, welcome.

JOSEPH STIGLITZ: Nice to be here.

COWEN: I’d like to talk about just how your career has evolved. There’s an anecdote I read, your breakthrough piece. We’re going back now to about 1970. You’re writing with Michael Rothschild on the issue of increasing risk, and I read that these two pieces actually came from an eight-hour lecture you gave in Japan. Is that true?

STIGLITZ: Well, actually, not those two pieces, but a series of pieces on corporate governance and market value maximization came from an eight-hour lecture I gave in Hakone, Japan.

COWEN: How can you lecture for eight hours?

STIGLITZ: It’s easier to lecture than to listen for eight hours. I didn’t understand that then, but I now understand it a little bit better. Easier to talk than to listen.

COWEN: Did your audience even understand you? Did you have that sense?

STIGLITZ: Oh, I did. I did have a sense they understood me. They understood the major themes. Much of what I was talking about was mathematical, and it was a more mathematically trained audience, so they could follow the scribbles, but I also think they could follow the ideas. One of the ideas was whether a firm that maximized its value — if all firms did that, would that lead to the well-being of society, the well-being of welfare? The result of that was that shareholder value maximization did not, in general, lead to welfare maximization.

COWEN: In those talks, did you outline what’s sometimes called the unanimity theorem in a way shareholders agree?

STIGLITZ: Yes, that was one of the ideas in that long lecture. The lecture then got published in about four or five different papers, and one of the papers with Sandy Grossman was an articulation of that unanimity theorem. That theorem said, what were the conditions under which all shareholders would agree with each other, regardless of what their beliefs were or perceptions, just like if they knew what prices were? The answer was very, very restrictive conditions.

COWEN: When you’re presenting ideas to an audience, do you find that as you talk about the idea, that you actually develop the idea itself? Or is it simply something pre-packaged and it stays as it was?

STIGLITZ: No, every lecture is a learning experience for me. I learned that often, questioning will stimulate me to think of other developments of the idea, other aspects I hadn’t thought of. Most importantly, I come to understand better the mindset of the listener, how they think about the topic, and then what are the difficulties, the obstacles they have to understanding my perspective. In future lectures, then, I can adapt my presentations to better reflect how they’re seeing the world and hopefully do a better job of explaining. This is really part of the art of pedagogy, the art of teaching.

COWEN: How did being a debater earlier in your life influence your intellectual career?

STIGLITZ: It had an enormous influence. Debating was a very valuable skill in terms of organizing ideas and making you see both sides of the topic because the peculiar way that debating is organized in our high schools is, you have to take both sides. You don’t know until you go to a debating tournament, are you on one side or the other? Of course, after you study a topic, you may wind up on one side, but you have to be able to think, to understand the other side so well that you can even present their argument. That’s a really important skill.

The other aspect of debating that was really important for me as I was growing up is, it really got me interested in economics and public policy issues. I still remember one of the issues that we debated way back in the ’50s was, should the government be providing support to the agricultural sector, subsidies? That’s an issue that we are still debating 60 years later.

COWEN: You were a debater, and when you were at Amherst, you were also head of student government, right?

STIGLITZ: That’s right.

COWEN: You voted to abolish fraternities. Isn’t there good evidence that fraternities raise wages?

STIGLITZ: [laughs] That was unions raise wages. Fraternities — I was opposed to fraternities because Amherst was a small college, a thousand boys, men, and they had the effect of dividing the community. The philosophy that I had was that we should be one community. The fraternities tended to interfere with that. Students from one fraternity would always sit at dinner at the same tables with the members of their fraternity. There were class aspects of fraternities.

They were just, I thought, very divisive in a small community, and it turned out that my perspective eventually prevailed. A number of years later, Amherst did abolish the fraternities. It’s an important lesson to me in my political life. Sometimes you begin a campaign knowing that in the next year, two years — while you’re actually there — you may not succeed, but sowing the seeds of discussion, debate, maybe in 5, sometimes 10, sometimes 15, 20 years, things turn out and you wind up winning the debate.

COWEN: You didn’t think it was efficient Tiebout clustering for networks? If you hang out with a bunch of people, you get to know them very well; they recommend you for jobs. That’s why the wage is higher.

STIGLITZ: Well, my view is, you can hang out, you can form networks, but the way that fraternities were organized was more divisive than the positive benefits that you talk about. Amherst with 1,000 kids, 250 in a class, our objective was to have a network of all the kids working together. Of course, within that, there’ll be tighter clusters. There are the physics majors, there are the kids that are interested in sports. There are multiple networks within that small group, and it was trying to foster that kind of diversity of networks that we wanted to emphasize.

COWEN: The late 1960s — for how long are you in Kenya, and where are you spending your time?

STIGLITZ: The late 1960s — I got invited by the Rockefeller Foundation to go to Kenya just a few years after it got independence. In fact, if you remember the history before independence, there were the Mau Mau attacks. A lot of European colonialists got killed. One night I looked under the bed I was sleeping in at Karen, which was a suburb of Nairobi, and found a machete underneath there that the people who had lived there had kept to protect themselves.

It was striking. It was an eye-opening visit, teaching research, because I saw the colonial heritage, the fact that there weren’t enough civil servants, people trained to run the government, that the “colonial masters” had failed in their duty to enable it to be a well-functioning government, and the legacy of colonialism was very present. But it was also very interesting to see what it was like to live in a developing country and to think very deeply about what one could do to promote development.

I went back to Nairobi 50 years later to give a lecture at the University of Nairobi, and what had happened in those 50 years was so striking. Nairobi had grown from a small city to a huge metropolitan area, one of the largest in Africa. The university had grown to be a very large university. It was a really heartwarming event — my lecture, the response, the engagement of the students. Fifty years — it was a big transformation.

COWEN: What was it that had puzzled you about Kenyan sharecropping back then?

STIGLITZ: Back then, one of the issues that, of course, as public finance economists, we worried about was the adverse incentive effect on taxation. If a government takes 50 percent of your product, we all say, “Oh, that’s a terrible system. It discourages work.” General sense in the United States is that even the top rate shouldn’t be higher than 40 percent. I think that’s wrong, but that was certainly a sentiment, a very strong sentiment.

Well, here you had sharecropping — not only in Kenya but many other countries around the world — where one-half to two-thirds of the produce was taken by the landlord. That was equivalent to a tax of 50 percent to 67 percent, and yet this was a prevalent form of tenancy, the arrangement that people had with a landlord.

One had to ask, why was that? How could this seemingly inefficient system persist for thousands of years? That was what motivated one of my most influential papers. That was the idea that there was a risk-incentive tradeoff, that in the absence of perfect information and the presence of a lot of risk, farmers couldn’t bear the risk of land ownership. If they owned the land, or rented the land more accurately, they’d have to absorb all the residual, the fluctuations in the weather, and all the other fluctuations, disease, that they would confront.

With sharecropping, they divided that risk, and a lot of the risk was borne by the landlord. That was a model of what came to be called the principal-agent problem, and it’s part of the incentive model that now is really fundamental. It was a first formalization of that basic incentive model that is now basic to modern economics.

COWEN: Is some of that that the landowner was providing fertilizer, machinery — that that’s the principal-agent problem on both sides, and you need to weigh off the marginal incentives? Or was it just monopolization of the land?

STIGLITZ: No, I had a separate paper where I looked at this issue. Several papers where I looked at the role of the landlord in providing seed, fertilizer, and credit and what was called interlinking of markets. You might ask again, why not have separate markets for credit, separate markets for seed, for milling the grain at the end of the harvest?

The answer was that in the presence of these incentive problems, it turned out to be efficient to have this integration of these various activities. For instance, by providing the right kind of seed, subsidizing the seed, maybe subsidizing the fertilizer, the landlord could elicit more effort on the part of the tenant. And that was a good thing because on his own, the tenant had less incentive to work because he was being taxed effectively by 50 percent because 50 percent of his effort went to the benefit of the landlord. So, it became a whole theory of rural organization.

COWEN: What is it you think of Henry George and George’s economics today?

STIGLITZ: Well, that was another set of articles that I wrote in the late ’70s concerning the land rents associated with the cities. You have a city; it has transportation costs. It’s expensive to go from the fringes of the city to the center where economic activity occurs, and people want to pay more for being closer to the center. I developed a whole theory of the rents that would arise in that kind of context, as people facing costly transportation would bid up the price of land.

Then I asked the question, what is the relationship between the optimal size of the city, the optimal spending on public goods by the city, and the rents that were generated in the way I just described? There was a remarkable theorem that came out, which was that if you have optimal-size cities and you tax the rents 100 percent, that would be exactly the right amount to finance the optimal amount of public goods.

It was a very theoretical idea, but it captured an important idea that Henry George, who was one of the great economists of the 19th century, had enunciated, which was, taxing land rents was the most efficient way for raising revenues.

COWEN: Is that true today? For a given level of taxation, do you think we should take more of it from landlords?

STIGLITZ: Yes, I think the ownership of land still provides one of the most important bases of taxation, and we almost surely do not tax it as much as we should. When the government, say, in New York City, builds a subway, those near the subway have an enormous increase windfall gain from the value of their land. You can actually document the land goes up. The city is paying, all the citizens are paying for it, and yet the owners of the land get a windfall.

Now, one of the difficulties in practice is the following, that the theory applies to the ground rent, the real value of the land, and property taxes apply both to the land and the buildings that are built on top of them. Differentiating between the two is not always an easy matter. This is a general principle in taxation, again, something my economics of information tried to clarify, that one of the principles of taxation is it’s often difficult to identify the real variables that you would like to tax, and this is an example of that.

COWEN: Do you favor the deregulations of the current YIMBY movement — allow a lot more building?

STIGLITZ: No. That goes actually to one of the themes of my book. One of the themes in my book is, one person’s freedom is another person’s unfreedom. That means that what I can do . . . I talk about freedom as what somebody could do, his opportunity set, his choices that he could make. And when one person exerts an externality on another by exerting his freedom, he’s constraining the freedom of others.

If you have unfettered building — for instance, you don’t have any zoning — you can have a building as high as you want. The problem is that your high building deprives another building of light. There may be noise. You don’t want your children exposed to, say, a brothel that is created next door. In the book, I actually talk about one example. Houston is a city with relatively little zoning, and I have some quotes from people living there, describing some of the challenges that that results in.

COWEN: Now, when you’re young, you spend some time at Cambridge University. What was it like being tutored by Joan Robinson?

STIGLITZ: Joan Robinson was one of the great economists of the last century. She was, you might say, very idiosyncratic. She had a peculiar set of beliefs that got more peculiar as she got older. When she was younger, she did some fantastic economic work — theory of monopoly — trying to understand the role of monopolies in our economy. But as she got older, she was very supportive of the Cultural Revolution in China.

You could imagine: When I went to Cambridge as a Fulbright scholar, she was assigned as my tutor. One of the reasons she was assigned as my tutor was that when I went to Cambridge on this Fulbright, the department of economics had to discuss whether I would be accepted, and her view was that my mind had been ruined by two years at MIT, and that I —

COWEN: You were too right-wing for her.

STIGLITZ: I was too right-wing. I had to start not as a graduate student. I had to be deprogrammed by beginning as a first-year undergraduate. There had been a fierce fight in the faculty at Cambridge about whether I should be accepted as a Fulbright graduate student. Those arguing that I should prevailed, but the quid pro quo was that she would be my tutor. Well, you could imagine, I learned a lot from her. I came to understand better her way of thinking, but after eight weeks, we parted, and I got another tutor, Frank Hahn.

COWEN: One thing that’s striking to me about the arc of your career, if I think geographically where you’ve been — you start in Gary, Indiana. There’s Amherst, there’s MIT, there’s Kenya, there’s Yale, there’s Cambridge, there’s Oxford, there’s Princeton, there’s Boston University, there’s Columbia, there’s seven years in Washington. I’m sure I’ve left some out. Being in so many different places — how has that influenced what you’ve produced and what you’ve thought? And why didn’t you just stay at MIT your whole life? Surely you had that option.

STIGLITZ: Yes, but you could have asked why didn’t I just stay in Gary? As a young person, I read about this big world outside of Gary, and I just wanted to see it. As I went to Amherst, my eyes opened up more, and I wanted to see more. I just had this thirst for seeing more and more of the world, and the more I saw it, the more I wanted. That had an enormous influence.

I think coming from Gary, Indiana, gave me empathy for those who didn’t start at the top in life. It certainly made me much more interested in development. Gary was beginning to go through the process of de-development that we see over the next 30 years after I left. It was the epitome of de-industrialization in the United States.

I think it affected me, made my career very different. It affected my economics in a lot of ways. I was more concerned about inequality than most of my colleagues. I wrote my thesis on inequality. It’s been a thread throughout my career. I wrote in 2012 the book The Price of Inequality, and a couple of years later, The Great Divide.

The good news is, with that long arc, the economics profession, our society is finally catching up on, coming to terms, recognizing the importance of studying inequality and the important role that inequality plays in creating the great divides in our society.

COWEN: Paul Samuelson also was from Gary, right? And the Jackson 5.

STIGLITZ: That’s right. It was impressive, you might say an impressive trio in the library in Gary, Indiana. There’s a mural that they made recently. I went back to Gary just a few years ago, and they were very proud to show me the mural in which the Jackson 5, Paul Samuelson, and I are all on that mural.

COWEN: Something else striking about your career that I noticed reviewing for this podcast. This is especially at a time when co-authorship is not nearly as normal as it is now. The number of distinct co-authors you have — and they’re each famous in their own right — there’s Michael Rothschild, Avinash Dixit, Sandy Grossman, Tony Atkinson, Carl Shapiro, Andrew Weiss, [Bruce] Greenwald, I’m sure there are others I’ve forgotten about.

I don’t see anyone else doing that. There are people who have standing co-authors, like there’s Sargent and Wallace for a while, but what led you to have this pattern of co-authorship? And how has that shaped your thought?

STIGLITZ: Well, quite frankly, I like interacting with other people. I think I’m a social person, and I’ve been lucky, you might say, to bubble up with ideas. I share those ideas with other people over dinner, over lunch, in the coffee room, and then we start talking, and those ideas start jelling, and we wind up writing a paper together.

I’ve always felt that each of us has something to contribute. Many of my co-authors bring a lot of mathematical skills to the table, but many of them bring other skills, empirical skills. So, I’ve been just very, very lucky.

Some of these, like Andy Weiss and Avishay Braverman, were students of mine, and we would start talking about ideas as I try to guide them in their PhD. And when they finish their PhD, there are a whole set of other ideas that we haven’t fully developed in their thesis, so we start working together in a whole set of papers that follow on.

COWEN: If I think about your 1980 piece with Sandy Grossman, what are your current views on why trading volume is so high? It seems to violate a lot of rationality theorems. Well, if someone’s trading with you, you might plausibly assume they know at least as much as you do. Fischer Black famously said, “We just need to put trading in the utility function.” That’s a kind of deus ex machina. What do you think now, 44 years later?

STIGLITZ: Well, I think the basic idea of that paper is still obviously correct. The title of that paper was “On the Impossibility of Informationally Efficient Markets.” It was an argument against the view that was held by people like Eugene Fama that markets were informationally efficient, that they transmitted efficiently all the information from the informed to the uninformed.

We made the obvious observation that if that were the case, there would be no incentive for anybody to gather information. So the market might be transmitting information, but it would be all free information. It would be information that nobody had done any work to collect.

That idea, actually, in another context worries me very much today, that with Google and AI scraping so much information off of our newspapers, off of our podcasts, off of everything they can get a hold of, they’re trying to appropriate the value of the knowledge that’s been created by other people without paying for it. If they succeed in doing that, of course, that will decrease the incentives for others to produce information of high quality and of value. It’s that kind of interaction that was at the heart of our 1980 paper, and the themes that we talked about there are still the critical themes that we’re talking about today.

COWEN: You think today that liquidity from market makers is oversupplied or undersupplied relative to a social optimum, say, in New York?

STIGLITZ: Well, the issue here turns out to be, the measurement of liquidity is very difficult. A lot of the liquidity are these fast traders, flash traders, people who are in the market for a moment. We saw that in a couple of the crashes that we’ve had. It seems like there’s a lot of liquidity, but then all of a sudden, when you have a big event, that liquidity dries up.

Part of what is going on — let’s be frank — is computers trading with other computers, so it’s not informed people trading with uninformed people. It’s really computers with one body of data trying to make a micro cent from another trader, and they each are going back and forth very fast. They’re trying to elicit information. It’s not trading for holding a position, it’s trading to elicit information.

COWEN: But as the spreads widen, why doesn’t someone with a lot of capital just step in and earn that spread? It would seem there’s a self-correcting aspect to this if you have high enough capitalization.

STIGLITZ: What I was going to say is, what happens is that at those critical moments when we really need liquidity, the market freezes. We’ve had some very bad days of that kind. And at that particular moment, markets may not even clear, and actually, they cease to function, and when they cease to function, nobody wants to come in. So it’s not just that there’s a spread — they’re just not functioning.

You don’t know when you make a trade whether it actually will be . . . you think you made a trade, but it may not actually, eventually, be executed. We are in this very precarious world where most of the time, the market works — a lot of seeming liquidity, but it’s a liquidity that can dry up just when we need it.

COWEN: You have a very famous 1977 paper with Dixit, and one of the things you show in that paper is, there’s a coherent way to model firms that (a) face downward-sloping demand curves but (b) don’t have to worry very much about what other firms are doing — a kind of monopolistic competition. People have since used that as a rationale for strategic trade policy. Do you agree with that use of the model? Or what qualifications would you add?

STIGLITZ: Well, I think that model is a way of thinking about, as you said, a world in which there’s some market power, but limited market power. Each of the firms themselves doesn’t have to worry about strategic interaction. In my mind, the more critical issues in strategic trade policy that we’re facing today are not those that Paul Krugman argued for based on our monopolistic competition model some quarter-century ago, and for which he got the Nobel Prize working off of our model. It’s really about dynamics, learning, and resilience.

Today, the critical issue in trade policy is US CHIPS Act and the IRA. The CHIPS Act was, we had lost the ability to make chips. That meant that if anything happened to Taiwan or Korea, we were in a very vulnerable position. Markets don’t take into account that kind of defense concern, or even the resilience. That goes back to some of my earlier work that markets aren’t very good at assessing risk and pricing risk into the decision-making process.

Here we are — 2023, 2024 — and we feel very vulnerable because of this potential lack of resilience, which would be disastrous if there were a war between Taiwan and China. That is the argument for our current industrial policies, which are almost a clear violation of the WTO rules.

Then, the IRA Act is another example where we have a strategic trade policy to help move the economy toward a green transition and worry that we were falling behind in learning about the new green technologies. Now, there are a couple of important issues on this that are very much related to the themes of my book, and that is, what one person does or one country does can harm another person or another country.

Here, we’re trying to grab more jobs for us in this green transition, but the developing countries and emerging markets don’t have the resources to engage in that kind of policy. Even Europe has complained about the fact that we seemingly are succeeding in getting firms that were going to build factories in Europe shifting to the United States, so our success in some of these areas comes at the expense of others. The old model of trade was, everybody can benefit. Some of the things we’re doing are clearly benefiting us at the expense of others, and that’s why you need a rules-based order.

COWEN: This point about trade aside, at a conceptual level, what do you think would be the biggest difference between you and Paul Krugman? Two very well-known writers — broadly you would each be placed on the left, but how do you two think about the world differently?

STIGLITZ: I think that he thinks that monetary policy has a bigger role than I think it does.

COWEN: You think it’s credit? Or you think it’s real factors at this point in time?

STIGLITZ: I think what matters is not the money supply, not the interest rate; it’s the credit availability of monetary policy, so it’s the mechanism. What we saw in 2008 — that providing so much liquidity to the banking system didn’t help that much, that the banks were very reluctant to lend out that money. Therefore, the recovery was a very slow recovery. We would have been better off if we had relied more on fiscal policy than on monetary policy. That, I think, is maybe, from an analytic point of view, the main distinction that I think I’ve discovered in our work.

COWEN: Now, your best-cited piece is your 1981 article with Andy Weiss on credit rationing, which is a macroeconomic idea. But do you think that since then, the real problem has more often been that we’ve thrown too much credit at things? So, the housing bubble, the student loan crisis — wouldn’t we have been better off with a lot more credit rationing?

STIGLITZ: The issue here was that we weren’t very good at credit allocation and that we thought, let the market rip. We lowered interest rates. We deregulated, so we didn’t look at where the credit was going. The bank supervisors the Federal Reserve is supposed to oversee — and there are actually several other supervisors that are supposed to oversee the riskiness of the lending — that’s where the fault came.

Now, one of the things that, when I was at the World Bank and since then, I’ve emphasized very heavily: One of the signs that there’s a problem in the credit allocation is when you see a very rapid increase in the credit in one particular area. It’s a sign that, probably, people aren’t paying enough attention. Particularly, when we saw the increase in credit to housing, we should have been worried.

As it turned out, the banks weren’t doing the kind of diligence that they should have done. They were passing these mortgages on to investors, effectively lying, committing fraud. There have been a lot of cases of this, where they said, “Well, we’ve been very careful. We’ve inspected. These are mortgages originating in owner-occupied homes, people with this income.” They hadn’t done any of that, and all of that contributed to the financial crisis of 2008. So, the issue isn’t the amount of credit. It was the allocation of credit. If they had used that credit for productive uses, how much better our economy would have been.

COWEN: Well, we built a lot of homes, right? It’s turned out we’ve needed them. The home prices that looked crazy in 2006 now seem somewhat reasonable.

STIGLITZ: A lot of them were built in the wrong place and were shoddy. I used to joke that there were a huge number of homes built in the Nevada desert, and the only good thing about them is they were built so shoddily that they won’t last that long.

COWEN: Your 1984 piece with Carl Shapiro on efficiency wage theory — looking back at that now, 40 years later, you think of that mainly as a contribution to understanding organizations, an explanation of unemployment, a claim about sticky wages? Or how do you frame that article? Because in the piece itself, the wage is actually flexible, at least the real wage is.

STIGLITZ: Actually, it really is an argument that to understand how labor markets work — or any market for that matter, because we look at the labor market, but we point out, it’s through product markets — one has to take on board the fact that there’s imperfect information, and in that particular case, imperfect monitoring of what workers are doing, and that you have to have an incentive to make sure that they work well. One aspect of the incentive is that there have to be consequences when they don’t work well.

One of the theses of that paper is that the standard articulation of what free markets are like are just wrong. For instance, the standard view was that demand for labor was equal to the supply of labor; there’s no unemployment.

What we point out is, if you couldn’t monitor labor at every moment of time, workers would have an incentive to shirk. The worst that could happen to them is they would be fired. But if they were fired, with no unemployment, they’d be hired the next moment, so there’d be no incentive to work. So, part of that equilibrium, there had to be some unemployment to induce people not to shirk.

Now, there are many other mechanisms, and later work would try to talk about — there are other aspects of what was called the efficiency wage model, where you have to pay enough to induce people to produce and to work hard. There are other aspects of the labor market as an institution where the rewards are done over the long term. I think I maybe overemphasized the role of unemployment as an incentive device, but the critique of the standard model, I think, is still there, and the importance of taking a broader view of the labor market is still there.

COWEN: From 1986 until about 1990, you wrote a series of papers with[Raj Kumar] Sah on information architectures, hierarchies versus polyarchies, Type-I versus Type-II errors. Then the 1990s come, and you spend, I think, about seven years working in different roles in Washington, D.C. How did that cause you to revise what you had done with Sah?

STIGLITZ: [laughs] Well, I had never been in a real hierarchy at the time I wrote those papers. Those papers were asking the question, what are the relative merits in decision-making when you have a hierarchy where a decision has to be approved by one person after another, versus what we often think of as the merit of a decentralized economy where you have many, many, many different decision-makers, and you let each of them take their chance.

Underneath this was the idea that all humans are fallible. There are going to be some cases of disapproving good projects and some cases of approving bad projects. How do you balance the two? And how do different systems strain out bad projects without straining out good projects?

When I came to live in a world of hierarchy, which was what I saw in Washington, I came to appreciate why, in some circumstances, you had that hierarchy. But I think I came to appreciate even more the virtues of decentralization, of what I call polyarchy. I guess I became more of a critic of hierarchy. I saw too many cases where there was too much fallibility built in, and too many good ideas got screened out by the hierarchy, and hierarchies when the guys at the top are not good decision-makers are particularly problematic.

COWEN: Should the World Bank right now be emphasizing climate change, as they seem to be doing? A lot of the poorer nations have complained. They say it’s not their priority. They actually want to use more energy, some of which will be dirty energy. What’s your view on that?

STIGLITZ: I think the World Bank’s emphasis on climate change is important, is critical. Climate is a public good. It’s a global public good from which all of us will benefit, and most especially those in the developing world and emerging markets, which disproportionately are located along the tropics, and those are going to be most adversely affected if we have the kind of climate change that will occur if we don’t curb the emissions of carbon, of greenhouse gases. So, it’s in their interest that these be curbed.

Now, we are at a lucky time for them because over the last 15 years, the price of renewable energy has come down 90 percent or more. In fact, at the current time, by moving to renewable energy — which is actually more decentralizable; you have fewer of these big mega projects — developing countries actually, I think, can do more smaller projects better. I think they’re really advantaged by going more and more towards renewable energy.

A more recent paper that I’ve written with Nick Stern, head of the Stern Review — written at the UK about moving them along to green transition — was that growth and a green transition are very compatible, that making an early move to the green transition is actually a pro-growth move for developing countries in emerging markets.

To me, that kind of tension which they argue, I think is a misframing of the issue. I understand their view that the whole issue is inflicted on them because the advanced countries put so much carbon into the atmosphere, beginning with the Industrial Revolution. So, I understand their sense of grievance. But right now, actually, the developing countries in emerging markets are the larger emitter of greenhouse gases, so they really have a responsibility, and we’re not going to address climate change unless they’re on board.

Climate change is a real example of the major theme of my book, On the Road to Freedom. It’s a real case where one country’s freedom imposes a cost on others, where the freedom to pollute really does constrain what others can do. If we have more pollution, we’re going to get more desertification. We’re going to get more floods, more droughts. It is probably one of the most important examples of how the expansion of freedom by some constrains that of others.

COWEN: What’s your current view of Hugo Chávez, who is not himself, in every way, pro-green?

STIGLITZ: Well, he’s no longer on the scene, but —

COWEN: Should we be glad he’s gone? I’m very glad he’s gone. I think he was terrible. He contributed to ruining a whole country.

STIGLITZ: That’s right, I think he has. It’s the cost to his society, particularly even more of his successor, has been enormous. I actually think it’s had an enormous cost to the whole, I would say, Western Hemisphere because of the flood of migrants from Venezuela. Just finding a place to live a decent life has created problems of migration and affected the politics of much of North and South America.

COWEN: Poland is now converging on Western European living standards. Does that show that shock therapy simply can work if you stick with it? That would be my conclusion.

STIGLITZ: No, I think it shows quite the opposite, and I’ve had a lot of discussions with the architects of Poland’s you might call “miracle.” The reason Poland is the most successful of the Eastern European countries are several, but it wasn’t the shock therapy that had such a negative macroeconomic effect. It was the fact that after that moment of shock, they began a gradualistic policy of reform, of creating the institutional infrastructure that is the basis of the market economy.

They were lucky that the EU embraced them, and as they became part of the EU, they got, you might say, the legal framework that is necessary for a well-functioning market from the EU. They had a lot of migrants from Poland that went to the UK and around Europe that then brought skills and money back to Poland. It was really their walking away from shock therapy after a very short period and moving to this gradualist policy that was the foundation of their success in this now three decades since the beginning of the transition from communism to a market economy.

COWEN: You’re known as a big fan of reading fiction. Is there a work of fiction you would care to recommend to us all, something you’ve been reading lately?

STIGLITZ: That’s a good question. Most recently, I’ve been busy writing this book. [laughs] As you may know, writing a book takes a lot of time. I suppose I’ve always found reading books from the Third World authors writing about Kenya, about Nigeria, ones that I find particularly interesting because they give me insights into the countries that I’ve been so engaged in, in another way through my economics.

COWEN: Final question: what will you do next?

STIGLITZ: Almost surely write another book.

[laughter]

COWEN: On what?

STIGLITZ: I think there are many themes in this book and in my previous book, People, Power, and Profits, where I didn’t have time or space to fully articulate my views. I think the problem of rent-seeking, which I talked about in The Price of Inequality and I talk about in People, Power, and Profits, has become an increasingly important issue.

It has meant that there’s a big divergence of what gives rise to the wealth of nations, and what gives rise to the wealth of particular individuals. Trying to understand what is, in the 21st century, the basis of the wealth of nations, and what gives rise in the 21st century to the wealth of individuals, and how they’re similar and how they’re different, seems to me a very interesting question that I want to think about.

COWEN: Just to repeat for our audience, the new book is The Road to Freedom: Economics and the Good Society. Joe Stiglitz, thank you very much.

STIGLITZ: Nice to be here.