Introduction and Background

• Host Steve Levitt interviews Nobel Prize-winning economist Joseph Stiglitz
• Stiglitz known for exposing limits of markets, argues neoliberal capitalism is "self-devouring"
• Levitt notes he's never met Stiglitz personally despite both being prominent economists
• Stiglitz's approach (information economics) wasn't popular at University of Chicago where Levitt works

Early Career and Chicago Experience

• Stiglitz spent one year at University of Chicago early in career, wasn't impressed
• Worked with mathematical economist Hijirou Uzawa on growth theory with Marxian economics roots
• Describes Chicago's "lively atmosphere of questioning and debating"
• Notes dominant Chicago school economists (Milton Friedman, George Stigler, Gary Becker) had "almost religious faith in free markets"
• This gave rise to neoliberalism - idea that government should stay out, markets are efficient

Information Economics Revolution

• Stiglitz pioneered information economics in late 1960s
• Traditional economics assumed "almost perfect information" - believed studying perfect information world would provide insights for imperfect information world
• Stiglitz showed this assumption was wrong - even small amounts of information imperfection "drastically changed the nature of economic equilibrium"
• Revolution influenced labor markets, product markets, particularly financial markets

Key Information Economics Insights

• Insurance market example: Companies can't simply ask customers about risk levels
• Adverse selection problem: As premiums rise, only high-risk people buy insurance
• Creates "lemons phenomena" - market can collapse or become very small
• Wage rigidity explanation: Lowering wages causes best workers to leave (adverse selection)
• Same effects in capital markets - raising interest rates may cause best risks to drop out

Debates with Chicago School Economists

• Stiglitz gave seminars at Chicago, spent time at Hoover Institution with Friedman, Becker, Stigler
• Showed firms maximizing shareholder value wouldn't lead to economic efficiency
• Friedman's response: "I know that's wrong" but couldn't identify specific analytical mistakes
• Anecdote about Friedman being upset that "price theory" was out of vogue
• Casey Mulligan's response: "Milton, you believe in markets - the market is saying price theory isn't what people want"
• Gary Becker's observation: Friedman "never lost a debate" - cared more about winning than truth
• Exception: Friedman later admitted Stiglitz was right about Soviet transition privatization

Personal Background and Motivations

• Grew up in Gary, Indiana - steel town founded by US Steel in 1906
• Witnessed "massive inequality, racial discrimination, segregation, episodic unemployment, labor strife"
• Originally studied physics and mathematics until third year of college
• Switched to economics to address social problems seen growing up
• Participated in civil rights movement - attended March on Washington (August 1963), helped integrate the South (1962)
• Martin Luther King's "I Have a Dream" speech was "very very moving"
• Was president of student council at Amherst College

Government Service - Clinton Administration

• Served on Council of Economic Advisers during Clinton administration
• Viewed role as continuing teaching - explaining ideas to president and White House staff
• Council maintained commitment to never say anything they didn't strongly believe
• Contrast with later administrations where economists provided evidence for pre-decided policies
• Successfully fought financial deregulation efforts during most of Clinton term
• Major win: Pushed for inflation-indexed bonds despite Treasury and Wall Street opposition
  • Bonds now provide profits to government and important macroeconomic information

World Bank Experience

• Moved to World Bank as Chief Economist after Clinton administration
• Frustration with US Treasury, World Bank, IMF pushing "very conservative orthodoxy"
• These institutions reflected "Wall Street's perspectives and interests" rather than workers, unions, NGOs
• Mission should be helping "poorest of the poor" and poor countries
• Led to writing first popular book "Globalization and Its Discontents"

Field Research and Empirical Approach

• World Bank provided opportunity to see conditions worldwide, visit rural sectors
• Believes economists focus too much on "manipulating data" vs. "opening up your eyes"
• Direct observation sometimes more valuable than quantification
• Talked to people in financial markets and developing country elites
• Cross-section of perspectives gave better understanding of how society works

New Book: "The Road to Freedom"

• Reframes freedom in economic terms as "choice set" or "opportunity set"
• Larger choice set = more freedom
• Income inequality severely limits freedom for those at bottom - small choice sets
• Someone in starvation "has no freedom in fundamental sense"
• Challenges traditional association of freedom with small government and unfettered markets

Progressive Capitalism Framework

• Government investment in education, basic research, infrastructure can expand everyone's opportunity sets
• Even with taxes, opportunity sets of richest can be enhanced
• Rich people's income depends on government providing rule of law, infrastructure
• Includes regulations against pollution (protects opportunity sets of people with asthma)
• Requires checks and balances to prevent wealth concentration from becoming political power
• Needs diverse, active media not controlled by rich and powerful

Comparison to Social Democracy

• Acknowledges similarity to European social democracy but says current European model insufficient
• Calls for "rejuvenated social democracy"
• European governments moved toward neoliberal model in 1970s-80s due to higher unemployment
• Irony: Neoliberalism promised faster growth but growth fell by 2/3 after 1980 compared to 1950-1980

Comparison to Milton Friedman

• Levitt suggests both embed worldview beyond mathematical models when writing for popular audiences
• Stiglitz claims his work more strongly rooted in economic theory and empirical evidence
• Says Friedman "wedded to very simplistic models" even when proven wrong by 1970s
• Stiglitz keeps "ears open," has changed views, integrates new research
• Acknowledges optimistic view of human nature but aware of selfish people, capture, rent-seeking

Advice to China

• Engaged with China starting around 1980, first visit 1981
• Helped with transition from communism to market-based economy
• Advocated gradualist approach vs. "shock therapy"
• Emphasized need for legal structure, institutional infrastructure
• Seen as centrist among Western advisers
• China's gradual strategy has been "very successful" economically

Existential Threats

• Climate change is "biggest existential threat"
• Also concerned about threats to democracy in US and other countries
• Nuclear proliferation: Led effort as Council chair to convert Soviet warheads to less dangerous form
• AI: Potential threat but "something we can manage" if proper oversight implemented
• Worried about AI concentration leading to wealth inequality
• Need competition oversight to prevent AI monopolies like in social media

Economic Philosophy and Advocacy

• Sees himself as advocate while maintaining academic commitment to truth
• Values and passions part of DNA but believes in dispassionate research
• Wants to know consequences and downsides of policies he advocates
• Views holding strong views as compatible with being analytic
• Believes economists who've devoted lives to these issues should contribute to societal decisions

Future Plans

• Show announcing top 10 favorite episodes replay over next 10 months
• Next episode features Caroline Paul on making the most of growing old