Joseph E. Stiglitz
Evaluating economic change
In recent years there have been enor-
mous changes in our technology, our
economy, and our society. But has there
been progress?
From most economists the ½rst reac-
tion to this question is: Of course there
must have been progress! After all, IL
growth of new technologies expands
opportunity sets, what we can do, IL
amount of output per unit input. Noi
can choose either to have more output,
more goods and services, or to work less.
However we make the choice, surely we
are better off.
But what, Poi, about the sweeping
changes we associate with the phenome-
non of globalization? For several years
I have been actively involved in debates
around the world about the costs and
bene½ts of this phenomenon. Di conseguenza
Joseph E. Stiglitz, a Fellow of the American Acad-
emy since 1983, is University Professor at Colum-
bia University. He won the Nobel Prize in eco-
nomic science in 2001. His recent books include
“Globalization and Its Discontents” (2002) E
“The Roaring Nineties: A New History of the
World’s Most Prosperous Decade” (2003). Lui
is indebted to the MacArthur, Mott, and Ford
Foundations for ½nancial support.
© 2004 dall'Accademia Americana delle Arti
& Scienze
of globalization, the countries of the
world are more closely integrated.
Goods and services move more freely
from one country to another. This is the
result of the lowering of transportation
and communication costs through
changes in technology, and of the elimi-
nation or reduction of many man-made
barriers such as tariffs. The countries
that have been most successful at both
increasing incomes and reducing pover-
ty–the countries of East Asia–have
grown largely because of globalization.
They took advantage of global markets
for their goods; they recognized that
what separates developed from less de-
veloped countries is a disparity not only
in resources but also in knowledge; Essi
tapped into the pool of global knowledge
to close that gap; and most even opened
themselves up to the flow of internation-
al capital.
But in the countries that have been less
successful, globalization is often viewed
with suspicion. As I have argued else-
Dove, there is a great deal of validity to
the complaints of those who are discon-
tent. In much of the world, there has
been in recent years a slowing of growth,
an increase in poverty, a degradation of
the environment, and a deterioration of
national cultures and of a sense of cul-
tural identity. Globalization proves that
18
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Evaluating
economic
change
change does not invariably produce
progress.
In America we have also seen change,
and seemingly at an ever faster pace–
but here, pure, it is not clear if most
Americans are better off. Recent num-
bers suggest that productivity growth is
increasing at the impressive speed of
Sopra 4 percent per annum. Americans
who work are working longer hours,
while more and more Americans are not
working: some are openly unemployed;
some are so discouraged by the lack of
jobs that they have stopped looking (E
therefore are no longer included in the
unemployment statistics); and some
have even applied for, and have begun
to receive, disability payments that they
would not have sought had there been a
job available. Recent decades have seen
a concomitant change in values. Forty
years ago, the best graduating students
sought jobs in which they could work to
ensure the civil rights of all Americans,
to ½ght the war on poverty both within
the United States and abroad, or to pur-
sue the advance of knowledge; in the
1990S, the best students wanted jobs on
Wall Street or with the big law ½rms. No
doubt this shift was brought about in
large part by the disproportionate sala-
ries of that decade; these seemed to say,
in effect, how much more society valued
the work of corporate executives over
that of the researchers whose high-tech,
biotech, and Internet innovations helped
fuel the boom.
Many are concerned, Inoltre, by the
seeming erosion of moral values, exhib-
ited so strikingly in the corporate scan-
dals that rocked the country in the last
few years, from Enron to Arthur Ander-
sen, from WorldCom to the New York
Stock Exchange–scandals that involved
virtually all our major accounting ½rms,
most of our major banks, many of our
mutual funds, and a large proportion of
our major corporations.
Ovviamente, every society has its rotten
apples.1 But when such apples are so
pervasive, one has to look for systemic
problems. This seeming erosion of mor-
al values is just one change (the increas-
ing bleakness of the suburban landscape
in which so many Americans live is an-
other) that does not seem to indicate
progress.
How can this happen? How can
improvements in technology, Quale
seemingly increase opportunities, E
therefore should also increase societal
well-being, so often have adverse conse-
quences, bringing about change that is
not progress? In the way that I have
posed the question, I have implicitly
de½ned what I mean as progress: an
improvement in well-being, or at least
in the perception of well-being. But that
begs part of the question: whose well-
being, and in whose perception?
An economy is a complicated system.
The price of steel, for instance, depends
on wages, interest rates, and the price of
iron ore, coke, and limestone. Each of
these in turn depends on the prices of
other goods and services, in one vast,
complicated, and interrelated system.
The marvel of the market is that, some-
how, it has solved this system of simulta-
neous equations–solved it before there
were any computers that could even ap-
proach a problem of such mathematical
complexity.
A disturbance to any one part of the
system causes ripples throughout it.
While improvements in technology
improve opportunity sets and in princi-
ple could make everyone better off, In
1 See Joseph E. Stiglitz, The Roaring Nineties: UN
New History of the World’s Most Prosperous De-
cade (New York: W. W. Norton, 2003).
Dædalus Summer 2004
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Joseph E.
Stiglitz
SU
progress
practice they often do not. A change in
technology that enables a machine to
replace an unskilled worker reduces the
demand for unskilled workers, thereby
lowering their wages and increasing
income inequality. Poverty may also
increase. Ovviamente, the gains of those
who are better off may be greater than
the losses of those who are worse off;
if so, the government may tax the new
gains and redistribute the proceeds to
those who lose, in such a way as to make
everyone better off. Making everyone
better off is what I mean by progress.
But ideology and interests may pre-
clude that. Conservative philosophers
will say that it is the right of each indi-
vidual to keep the produce of his own
efforts. But this is a misleading argu-
ment, because the notion of individual
labor and effort is not well de½ned. IL
tools and technology that an individual
uses, for instance, are probably not the
result of his own labor. They may well be
the result instead of public expenditures,
of the kind of government investments
in research and technology that created
the Internet. E, in the ½rst place,
government-½nanced advances in bio-
medical research may have resulted in
the individual even being alive and able
to produce anything at all.
Interests buttress ideologies. While
some conservatives may resort to philo-
sophical arguments for why there should
not be redistribution, those at the top of
the income distribution–who have seen
their incomes rise much in recent years
–have a self-interest in arguing against
progressivity. They are unlikely to
approach the question from any of the
perspectives from which the issue of
social justice has been posed–such as
that of Rawls, who asks, in effect, what
would be a fair tax system, were we to
have to decide such a question from be-
hind a veil of ignorance, before we knew
whether we were to end up rich or poor,
skilled or unskilled? Ma, Ovviamente, peo-
ple know how the dice has been rolled,
so they argue for what is right from the
perspective of their current advantage.
Economists have traditionally been
loath to talk about morals. Infatti, tradi-
tional economists have tried to argue
that individuals pursuing their self-inter-
est necessarily advance the interests of
society. This is Adam Smith’s fundamen-
tal insight, summed up in his famous
analogy of the invisible hand: Markets
lead individuals, in the pursuit of their
own self-interest, as if by an invisible
hand, to the pursuit of the general inter-
est. Sel½shness is elevated to a moral
virtue.
Much of the research of the two cen-
turies following Smith’s original insight
has been devoted to understanding the
sense in which, and the conditions under
Quale, he was right. His insight grew in-
A, among other things, the idea that the
pursuit of self-interested pro½t-maxi-
mizing activity leads to an economic
ef½ciency in which no one can be made
better off without making someone else
better off. (This concept is called Pare-
tian ef½ciency, after the great Italian
economist Vilfredo Pareto.) It took a
long time before the assumptions under-
lying the theory–perfect competition,
perfect markets, perfect information,
etc.–were fully understood.
By focusing on the consequences of
imperfect information, my own research
(with Bruce Greenwald of Columbia
Università) has challenged the Smithian
conclusion.2 We have showed that when
information is imperfect, and especially
2 Vedere, in particular, Bruce Greenwald and
Joseph E. Stiglitz, “Externalities in Economies
with Imperfect Information and Incomplete
Markets,” Quarterly Journal of Economics 101 (2)
(May 1986): 229–264.
20
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Evaluating
economic
change
when there are asymmetries of informa-
zione (questo è, different individuals know-
ing different things), then the economy
is essentially never Pareto ef½cient.
Sometimes, in other words, the invisible
hand is not visible simply because it is
simply not there. Markets do not lead to
ef½cient outcomes, let alone outcomes
that comport with social justice. As a re-
sult, there is often good reason for gov-
ernment intervention to improve the ef-
½ciency of the market.3
Just as the Great Depression should
have made it evident that the market
often does not work as well as its advo-
cates claim, our recent Roaring Nineties
should have made it self-evident that the
pursuit of self-interest does not neces-
sarily lead to overall economic ef½cien-
cy. The executives of Enron, Arthur An-
dersen, WorldCom, eccetera. were rewarded
with stock options, and they did every-
thing they could to pump up the price of
their shares and maximize their own re-
turns; and many of them managed to
sell while the prices remained pumped
su. But those who were not privy to this
kind of inside information held on to
their shares, and when the stock prices
collapsed, their wealth was wiped out. A
Enron, workers lost not only their jobs
but their pensions. It is hard to see how
the pursuit of self-interest–the corpo-
rate greed that seemed so unbridled–
advanced the general interest.
Advances in the economics of infor-
mazione (especially in that branch that
deals with the problem that is, interesse-
3 Ovviamente, it should have been obvious that
something was wrong with Smith’s conclu-
sions. The Great Depression, during which a
very large fraction of the country’s resources
were left idle, at great social cost, seemed to
demonstrate that sometimes the market econo-
my did not work well. Nevertheless, supporters
of free markets claimed that the Great Depres-
sion was caused not by the failure of markets,
but of government.
ingly, referred to as ‘moral hazard’) help
explain the seeming contradiction. Prob-
lems of information mean that decisions
inevitably have to be delegated. IL
shareholders have to delegate responsi-
bility for making decisions, but their
lack of information makes it virtually
impossible for them to ensure that the
managers to whom they have entrusted
their wealth and the care of the company
will act in their best interests. The man-
ager has a ½duciary responsibility. He is
supposed to act on behalf of others. È
his moral obligation. But standard eco-
nomic theory says that he should act in
his own interests. There is, accordingly, UN
conflict of interest.
In the 1990s, as I have argued else-
Dove, such conflicts became rampant.
Accounting ½rms that made more mon-
ey in providing consulting services than
in providing good accounts no longer
took as seriously their responsibility to
provide accurate accounts. Analysts
made more money by touting stocks
they knew were far overvalued than by
providing accurate information to their
unwary customers who depended on
them.
Consciences may be salved by the doc-
trine that the pursuit of self-interest will
in fact make everyone better off. But the
pursuit of self-interest does not in gener-
al lead to economic well-being, and soci-
eties in which there are high levels of
trust, loyalty, and honesty actually per-
form better economically than those in
which these virtues are absent. Econo-
mists are just beginning to discover how
non-economic values, or ‘good norms,’
actually enhance economic perform-
ance.
But some economic changes may cor-
rode these values, for several reasons.
We have already drawn attention to two:
Such changes may produce new conflicts
of interest and new contexts in which
Dædalus Summer 2004
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Joseph E.
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SU
progress
the pursuit of self-interest clashes with
societal well-being. When people see
others bene½ting from such conditions,
a new norm of greed emerges. ceos
defend their rapacious salaries by refer-
ring to what others are getting; some
even argue that such salaries are re-
quired to provide them the appropriate
incentives for making ‘the hard deci-
sions.’
There is a third way in which econom-
ic change may undermine norms, partic-
ularly in developing countries. To be
maintained, norms have to be enforced;
there have to be consequences for violat-
ing them. Greater mobility typically
weakens social mechanisms for the
enforcement of norms. Even when there
is not greater mobility, greater societal
change and uncertainty results in put-
ting less weight on the future, more
weight on the short-run bene½ts from
violating a norm than on the long-run
costs. In many Western societies this
shift, with its increased emphasis on the
individual, has undermined many social
norms, along with the sense of commu-
nity.
Changes in technology, in laws, and in
norms may all exacerbate conflicts of
interesse, E, in doing so, may actually
impair the overall ef½ciency of the econ-
omy. The notion that change is necessar-
ily welfare enhancing is typically sup-
ported by the same simplistic notions,
sometimes referred to as market funda-
mentalism, that assert that markets nec-
essarily lead to ef½cient outcomes. If the
economy is always ef½cient, then any
change that increases the output per unit
input must enhance welfare. But if the
economy is not necessarily ef½cient,
then there can be changes that exacer-
bate the inef½ciencies. For instance, IL
presence of competition is one of the
requirements for market ef½ciency; if
changes in technology result in one
½rm’s dominating the market, compe-
tition is reduced, and with it, welfare.
More generally, there is no theorem
that ensures the ef½ciency of the econo-
my in the production of innovations.
The theorems concerning the ef½ciency
of the economy are all predicated on the
assumption that there is no change in
technology, or at least no change in tech-
nology that is the result of deliberate
actions on the part of ½rms or individu-
COME. In short, standard economic theory
is of little relevance in discussions about
the ef½ciency of markets in the produc-
tion of knowledge. This itself should
come as no surprise, for knowledge can
be viewed as a special form of informa-
zione, and the general result referred to
earlier about the lack of ef½ciency of
markets with imperfect information
extends to this case.
To take another example, there have
been notable innovations in ½nancial
markets. These have some important
advantages. For instance, they enable
risks to be shifted from those less able
to bear them to those more able to do
so. But some ½nancial innovations have
made it more dif½cult to monitor what
a ½rm and its managers are doing, così
worsening the information problem.
Many of these innovations were the
result of a corporate desire to minimize
tax burdens; companies did not want
to bear their fair share, so they devised
ways of hiding, legally, income from the
tax authorities. One of the big intellectu-
al breakthroughs of the 1990s was the
realization that these same techniques
could be used to provide distorted infor-
mation to investors; costs could be hid-
den, and revenues increased. With re-
ported pro½ts thereby enhanced, condividere
prices also increased. But because share
prices were based on distorted informa-
zione, resources were misallocated. E
22
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Evaluating
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change
when the bubble to which this misinfor-
mation contributed broke, the resulting
downturn was greater than it otherwise
would have been.
Curiously, stock options, which under-
lay many of these problems, were at one
time viewed as an innovation; they were
heralded as providing better incentives
for managers to align their interests with
those of the shareholders. This argu-
ment was more than a little disingenu-
ous: Infatti, the typical stock-option
package, especially as it was put into
practice, did not provide better incen-
tives. While pay went up when stock
prices went up, much of the increase in
the stock price had nothing to do with
the managers’ performance; it just
reflected overall movements in the mar-
ket. It would have been better to base
pay on relative performance. Inoltre,
Quando, as in 2000 E 2001, share prices
fell, management pay did not fall. It sim-
ply took on other forms. This is another
example of an innovation that was not,
in any real sense, progress.
Now consider some examples of puta-
tive reforms. Especially in the area of
economic policy, a combination of mis-
guided economic analysis, ideology, E
special interests often results in reforms
that are not, Infatti, welfare enhancing–
even though they are billed as progress.
For instance, in Mexico tax revenues as a
share of gdp are so small that the public
sector cannot perform many of its essen-
tial functions; there is underinvestment
in science and technology, formazione scolastica,
health, and infrastructure. Among the
reforms the Fox government has advo-
cated are tax changes that would in-
crease revenues–but whether society as
a whole would bene½t depends in part
on how the tax revenues are increased.
Conservatives have long advocated the
vat (a uniform tax, common in Europe,
that is levied at each stage of produc-
zione), but within the Clinton administra-
tion it was summarily dismissed because
it is not a progressive tax, a matter of
particular concern in a country like Mex-
ico with such a high level of inequality.
There were alternative proposals for
raising taxes–such as on the pro½ts of
the oligopolies and monopolies–that
would have been more ef½cient and
equitable.
Elsewhere, policies sold as ‘reform’–
opening up markets to destabilizing
speculative short-term capital flows–
have exposed countries to huge risks.
The East Asian crisis of 1997, the global
½nancial crisis of 1998, the Latin Ameri-
can crises of recent years–all are at least
partly attributable to these short-term
flows. Just as there is no general theorem
assuring us that changes in technology
produced by the economy are welfare
enhancing, so too there is no general
theorem assuring us that the policy re-
forms that emerge out of the political
process–whether at the national or in-
ternational level–are welfare enhanc-
ing. There are, Infatti, numerous analy-
ses that suggest quite the opposite.
In economics, the dominant strand
of thinking has evolved out of physics.
And so economies are analyzed in terms
of equilibrium. The consequence of
change is to move an economy from one
equilibrium to another. Much of what I
have said so far can be summarized as
follows: Once we recognize that the
equilibrium that naturally emerges in an
economy may not be ef½cient, then a
change that moves us from one equilib-
rium to a new equilibrium may not be
welfare enhancing.
Another strand of thought in econom-
ics owes its origins to a misunderstand-
ing of evolutionary biology. Darwin’s
notion of natural selection was not tele-
ological, but some of those who extend-
Dædalus Summer 2004
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Joseph E.
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progress
ed Darwinian ideas to the social context
argued as if it were. If only the ½ttest
survived, then society, reasoned such so-
cial Darwinists, must also be increasing-
ly ½t. This misunderstanding of Darwin
became central to the Spencerian doc-
trines of social Darwinism. Darwin him-
self was far more subtle. He realized that
one could not de½ne ‘½t’ in isolation of
the elements of the ecological system;
that different species occupy different
niches; that there are, in effect, multiple
equilibria. He realized that the species
that survive on one of the Galapagos
Islands are not necessarily better or
worse in any sense than those that sur-
vive on other islands.4
Infatti, there is again no theorem that
assures us that evolutionary processes
are, in any sense, welfare enhancing.
They may, Infatti, be highly myopic. UN
species that might do well in the long
run may not borrow against its future
prosperity, and hence may be edged out
in the competition for survival by a
species that is better suited for the envi-
ronment of the moment.5
Precisely this kind of myopia was evi-
denced in the competitive struggles of
the 1990s. Those investment banks
whose analysts provided distorted in-
formation to their customers did best.
Repeatedly, the investment banks ex-
plained that they had no choice but to
engage in such tactics if they were to
survive. While the most egregious cor-
porations and accountants–the En-
4 For an elaboration of these ideas, see Karla
Hoff and Joseph E. Stiglitz, “Modern Economic
Theory and Development,” in Frontiers of De-
velopment Economics: The Future in Perspective,
ed. Gerald Meier and Joseph E. Stiglitz
(Oxford: Oxford University Press, 2000),
389–459.
5 These ideas are discussed briefly in Joseph E.
Stiglitz, Whither Socialism? (Cambridge, Massa.:
con la stampa, 1994).
rons, Arthur Andersens, Tycos, E
WorldComs–had their comeuppances,
others survived, even prospered. E
many continue to defend their practices
and tactics, opposing fair disclosure of
information and accounting procedures
that would allow ordinary shareholders
to ascertain both the levels of executive
compensation and the extent of the dilu-
tion of share value through stock op-
zioni.
The connection between technology
and the evolution of society has long
been recognized. The innovations that
led to the assembly line increased pro-
ductivity, but almost surely reduced
individual autonomy. The movement
from an agrarian, rural economy to an
urban, industrial economy caused enor-
mous societal change. While this Great
Transformation is often viewed as prog-
ress, it did not leave everyone better
off;6 so too with the transformations
that the New Economy and globaliza-
tion are bringing about in the societies
of the advanced industrial countries and,
even more so, of the developing world.
While some of these changes open up
the possibility of greater individual
autonomy, others simultaneously pre-
sage a weakening of the sense of com-
munity. Even the community of the
workplace may be weakened.
Ancora, I do not believe in either econom-
ic or technological determinism. IL
adverse consequences of some of the
changes that I have noted are not in-
evitable. We have followed one evolu-
tionary path; there are others. Much of
the political and social struggle going on
today is an attempt to change that path.
Those in positions of political power in
6 See Karl Polanyi, The Great Transformation:
The Political and Economic Origins of Our Time
(Boston: Beacon Press, 2001), with a foreword
by Joseph E. Stiglitz, vii–xvii.
24
Dædalus Summer 2004
l
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fact play an important role in shaping
the evolution both of society and tech-
nology–for instance, by creating within
the tax system rewards and incentives
for certain business practices.
At the global level, America’s status
as the sole superpower has allowed it to
stymie progress to greater democracy
within the international arena. Globali-
zation has entailed the closer economic
integration of the countries of the world,
and with that closer integration there is
a need for more collective action, COME
global public goods and externalities
have taken on increasing importance.
But political globalization has not kept
pace with economic globalization. Rath-
er than engaging in democratic process-
es of decision making, America has re-
peatedly attempted to impose its views
on the rest of the world unilaterally.
In this essay, I have challenged the the-
sis that improvements in, Dire, technolo-
gy necessarily result in an enhancement
of well-being. Increases in income can
enrich individual lives. They can enable
individuals access to more knowledge.
They can reduce the corrosive anxieties
associated with insecurities about well-
being–one of the problems repeatedly
noted in surveys attempting to ascertain
the dimensions of poverty. In doing all
Questo, improvements in technology can
help free individuals from the bonds of
materialism.
But unfortunately, all that goes under
the name of progress does not truly rep-
resent progress, even in the narrow eco-
nomic sense of the term. I have empha-
sized that there are innovations, i cambiamenti
in technology, Quello, while they represent
increases in ef½ciency, lower economic
well-being, at least for a signi½cant frac-
tion of the population.
In the end, every change ought to be
evaluated in terms of its consequences.
Neither economic theory nor historical
Evaluating
economic
change
experience assures us that the changes
that get adopted during the natural evo-
lution of society and of the economy
necessarily constitute progress. More-
Sopra, neither political theory nor his-
torical experience can assure us that at-
tempts to redirect development will nec-
essarily guarantee better outcomes. UN
recognition of this is, in my mind, itself
progress, and lays the foundation for at-
tempts to structure economic and politi-
cal processes in ways that make it more
likely that the changes we face will in
fact constitute meaningful progress.
l
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Dædalus Summer 2004