Joseph Stiglitz: evaluation

Transcript context

…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? 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. 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?…

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