Joseph Stiglitz: Smith's "Invisible Hand" a Myth?

Complete video at: http://fora.tv/2010/02/22/Joseph_Stiglitz_Freefall

Nobel Prize winner Joseph Stiglitz challenges the influential teachings of 18th-century economist Adam Smith, citing flaws with Smith's metaphor of an "invisible hand" guiding the free market. "The reason the invisible hand often seemed invisible was that it wasn't there," he says. Stiglitz claims an uncritical adherence to Smith's ideas is partially to blame for the current financial crisis.

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Joseph Stiglitz, winner of the 2001 Nobel Prize Winner for Economics and author of Freefall sits down with Andrew Leonard, Senior Technology and Business Writer for Salon.

Stiglitz argues that America exported bad economics, bad policies and bad behavior to the rest of the world. Stiglitz outlines a way forward building on ideas that he has championed his entire career: restoring the balance between markets and government; addressing the inequalities of the global financial system; and demanding more good ideas (and less ideology) from economists. - Commonwealth Club of California

Joseph Stiglitz was chief economist at the World Bank until January 2000. Before that he was the chairman of President Clinton's Council of Economic Advisers.

He was awarded the Nobel Prize in economics in 2001. He is currently a finance and economics professor at Columbia University. He is the author of Globalization and Its Discontents and The Roaring Nineties.

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[bnicewilly]

@arzoyan How is it possible to have an "artificial scarcity" without the aid of gov't? In a free market if there is a scarcity it would be due to real demand by consumers --there would be nothing "artificial" about it, it would be real. Also, your history is a bit off. The greatest engine of human peace & prosperity has been via voluntary trade (free markets), on the contrary the greatest engine of death and destruction has come from the State.

[dick391]

This is a classic strawman/logical fallacy that so many supposedly left wing intellectuals fall for its truly embarassing. No economist, even the most right-leaning, believes that free markets are without imperfections. Of course they are imperfect, because humans are imperfect. But governments are human institutions, and therefore also subject to imperfections. The real question is, which alternative minimizes the imperfections. By a country mile, free markets are much productive than gov't.

[StrategicBacon]

@bnicewilly Yeah except that the industrialization of most developed countries today were the result of heavy government intervention in vital industries. Your ideal "free market" exists only in some third world countries.

[gcgrabodan]

@dick391 Actually he doesn't contradict what u said. If u watch the full video he says that there are a FEW things governments can do better, like basic research (cause there are too many externalities). As an excample he gives the development auf the internet. Also he doesn't call for a nationalization of banks, just for a recovery of free markets in banking, which means banks shall partizipate on profits and losses the same way(core principle of markets). This shall be archieved by regulation.

[MrFmmcosta]

LOLOLOLOLOL this guy is very very funny. Nice try with those fallacies. priceless

[LogicalFlawDetector]

@TradingTutor

Actually, firms do act rationally. They hire all the MBA nerds and economists to calculate the profit-maximizing price and strategy. Individuals, however, aren't always rational. Anomalies in behavior cancel out when you look at the aggregate group behavior. It's the latter that's important.

[dick391]

@donfolstar In a free market obviously you wouldn't be able to purchase an entire commodity outright. As one attempts to corner the market the price is bid up as other buyers and sellers realize what you are doing

The most tried and effective way to run your scam of course is to acquire a government license to produce the commodity in question. Or to introduce tariffs on your competitors products from other countries. Artificial scarcity is more often than not the result of gov't.

[dick391]

@TradingTutor No economist believes in perfect rationality. No human is capable of such a thing. Really, the debate is over the extent to which people are rational and markets reflect this rationality. On a scale of 1-10, some markets may be an 8 or 9 and some may be a 2 or 3.

Ultimately the debate will be settled by what model best explains and predicts reality. I would imagine that a model incorporating group irrationality is more accurate, but the challenge is constructing it.

[donfolstar]

@bnicewilly

See Dick Run Artificial Scarcity Scam, by Me

See Dick [you have to imagine the pictures, sorry]. See Dick run. See Dick run out and purchase or otherwise acquire control over a commodity. See Dick hold said commodity, slowing the release into the market below demand. See Dick create artificial scarcity.

[TradingTutor]

@LogicalFlawDetector What these economists don't get is that corporations and people don't act as rational agents, as they model them. Asymmetric information was introduced to show that the economic agents, being rational, can make bad choices.

For example, they explain financial bubbles as statistical rarities, instead of group irrationality. They either need new mathematics, instead of game theory, or need to stop using mathematics in everything.