Rebel With a Cause
As a scholar, moreover, Stiglitz has been nothing if not iconoclastic, devoting much of his career to challenging one of the bedrock assumptions of neoclassical economics: that markets nearly always act perfectly on their own. Stiglitz has argued that because of asymmetric information--the fact that one party in an economic transaction often knows more than the other--inefficient outcomes are common, and therefore that government intervention is often warranted.
Stiglitz's skepticism about markets can be traced back to his childhood. The son of an insurance agent and a public school teacher, he grew up in Gary, Indiana, the same steel town that produced another Nobel Prize-winning economist, Paul Samuelson. His family was middle-class, but Stiglitz says the periodic layoffs and plant closings in Gary sensitized him at an early age to the bruising realities of a concept--cyclical unemployment--he would later study as a graduate student in the economics program at MIT.
Stiglitz enrolled at MIT in 1963. Five years later, at the age of 26, he was appointed a full professor of economics at Yale. Shortly thereafter, he was invited by the Rockefeller Foundation to go to Kenya. Witnessing the wrenching poverty in the slums of Nairobi sparked a lifelong interest in development policy. But Stiglitz noticed something else as well: In many developing countries, a seemingly inefficient system of farming--sharecropping--continued to predominate. From the standpoint of efficiency, this made no sense (sharecroppers have little incentive to work hard). It did make sense, however, if there was no other way for landlords to monitor workers' output. The problem, in other words, was imperfect information, affecting both their behavior and contractual relations. Over the next few decades, along with a growing school of economists including Berkeley's George Akerlof, he would produce rigorous mathematical models showing that asymmetric information was pervasive and made a measurable difference in everything from the way insurance companies operated to the way corporations treated their workers.
The author of a dozen books and several hundred prominent articles, Stiglitz has achieved eminence as a theorist that is not widely disputed. "If you had asked a broad number of economists before this year whether Joe would at some point win the Nobel Prize, literally 100 percent would have said yes," says Alan Blinder, an economist at Princeton. Where scholars disagree is in the policy prescriptions that should be drawn from Stiglitz's work. "There are people who would say information may be imperfect, but that government intervention to fix the problem will only make things worse," says Blinder.
For all his skepticism about laissez-faire economics, Stiglitz has never been known as a radical. He is a liberal with populist leanings, not a Marxist, and before coming to the World Bank had served as chairman of President Clinton's Council of Economic Advisers, not a job suited for hard-line critics of capitalism. Although he was aware of NGOs and activists who considered the IMF and World Bank neocolonial institutions, Stiglitz says he arrived at the World Bank full of optimism--some would say naïve optimism--about the positive role he could play in shaping development policy. "I didn't really take [the criticism] at face value," he says.
That would soon change. In March of 1997, barely a month into his job, Stiglitz flew to Addis Ababa to meet with a group of Ethiopian officials who had become embroiled in a bitter dispute with the IMF. Several months earlier the IMF had suspended Ethiopia's lending program after growing dissatisfied with the way its economy was being run. Stiglitz found the suspension baffling, for the Ethiopian economy appeared to be in good shape: Inflation was low, output was rising and, after decades of famine, the government had launched a rural development program focusing on the needs of the poor. The IMF, however, claimed that Ethiopia was too dependent on foreign aid, which could dry up and then cause a budget crisis, and had failed to meet certain conditions on its loans, such as deregulating its financial market.
Upon returning to Washington, Stiglitz pointed out that the Ethiopian government had resisted financial deregulation for good reason: In neighboring Kenya, the policy had led to higher interest rates, which devastated poor farmers. For several weeks, he waged an intense--and, in the end, successful--internal campaign to get the IMF program restored. But the experience left him deeply embittered. "I found the whole thing astonishing," he says. "Not just the policies but the way the IMF interacted with this country, basically just telling Ethiopia what to do regardless of what its leaders thought."