 I'm very pleased today to welcome you to this third lecture in the memory of Frank Kahn. I'm pleased today by the Nobel Laureate in Economics, Professor Professor Stieglitz from Bloomberg University in New York. We are really delighted to have the year, Professor Stieglitz, beside his outstanding, must say, profile, he has also a solid connection with Professor Hahn. Indeed, Frank Kahn was the supervisor of Professor Stieglitz at the University of Europe in the UK in the mid-60s and influenced in and of many other economists. In one of his articles in a book in honor of Frank Kahn, Professor Stieglitz remembers that I'm quoting, he followed Frank first in focusing on the consequences of incomplete markets and later in focusing on the consequences of imperfect and costly information. So, as you can imagine, it's really a big pleasure to introduce today this lecture, the third edition of this lecture, for at least two main reasons. On the one hand, because it's more than an honor to introduce the lecture in inequality and growth in the knowledge of society, a crucial topic in another day's debate. I would like to thank once again Professor Stieglitz to have accepted our invitation to hold the lecture in the memory of Frank. Here I would like only to briefly call, considering other speakers following me, the enormous impact that Professor Stieglitz's work has had on public policy and more in general on the public debate still now. Professor Stieglitz received 2001 Nobel Prize in Economics jointly with George Akerglob and Michael Spence for data analysis of markets with symmetric information. His curriculum is really outstanding and they have no time to recall the huge list of publications. However, let me say two words and because I'd like to emphasize that Professor Stieglitz was one of the first who analyzed critically the effects of globalization, particularly in his 2002 book. And he recently published a book, The Euro, reflecting more generally on the future of Europe. On the other hand, it's a big pleasure to be here today to remember Frank and because Frank gave brilliant contribution to the economic theory and he also has been very important for our department. He directed our PhD programs in economics for many years and he contributed to the intellectual growth of young scholars and to the development of their careers. Indeed, I have memories that he was never too occupied to meet and talk to young scholars and students. When he came to Vienna about 15 years ago, I met Frank and I remember him for his advice and also for his kindness. He was very interested in my field, economic history, and he wanted to know about my research. I also remember that every contribution of the European soldier is wide to our department. She's an economist too and she was very proud to take each of our members of the department and I remember that the research must be something with her for this. During the photos are still in our archive. I would like also to take this chance on this occasion to underline that this year it is very important for us because now it's 50 years that we have studies in economics and banking in Vienna. Finally, I'm very pleased now to give the floor to the coordinator of our PhD program, Professor Hugo Vagano, who probably introduced Professor Stiglitz and the third and next. Thank you. Let me start by thanking you very much for coming. So, I want to thank you very much for giving us some lectures to the PhD program. This PhD program is something that has always characterized our department, our university, that has always been a lot of attention to graduate students. In fact, the PhD program started since the very beginning of PhD programs in Italy. The first coordinator of the PhD program was Professor Hugo Vagano. Then Sandoval Ciali, who was here, was the next coordinator and then after that, Frank Kahn took over and he became the coordinator of the PhD program and he reorganized the program. It was to me a lot of things that were typically Anglo-Saxon, being also a partist for research students and so on. In fact, I've been a French successor and it is very close to the job because I objected that you, you know, to be this partist and organize the disease. It's the only job in the university of the main course, so it's not like me there. So, I think I fragmented the normal sequence of all our generation of economists who go through the disease, the creation. And myself and Joel met Frank at different stages because Joel met him before me. But I think that we agree, yes, to agree neither, that what was really the key point about the methodology of Frank Kahn was this idea of always starting by imagining the world with complete markets, with silver transaction costs, then removing this assumption and seeing the consequences. It seems to be like a strange methodology, but it has been very, very fruitful. In fact, in this way, Frank was opening the way to the analysis of the solution. He was basically saying that markets should not be made unprogrammed, they are a costly solution and in some cases they can be complicated. And that was a very, very important distribution because it really expanded the role of economics. That was not any more simply about scarcity of physical resources, it was also about company scarcity, institutional scarcity, the institutions that step by step you had to be in human history. However, this was only a way of opening the road, but it looked the mind, or incredibly cleverly looked like Joel, to exploit this intuition. But if you look at the initial intuition, there is I think a little Frank Kahn contribution there. Because in fact, one of the first, not really the first, but you know, it was many years ago, contributions by Joel, see this was about efficiency wages, unemployment and so on. But in the end, that is when there is a missing market for effort. And that is really the reason, you know, why can't you get unemployment, unemployment is big, the human is strong. But this business is usually a failure there. And also if you think of credit rationing, credit rationing is really the key in the fact that there are no markets for a specific quality of borrowers. And for this reason you had credit rationing. So again, you know, there is some form of incomplete market hypothesis, incomplete information that imply that you get missing phenomenon. So, in this way, from this paradigm of incomplete markets, and this absurd generally with you that Frank Kahn was building, something new was generated and indeed a new connection approach was generated. Because they didn't explain equilibrium unemployment, rate of interest, but not equilibrium rate of interest and so on. And clearly, you know, there has been some continuity between Frank and Joel. Even if Joel has pushed the frontier so much that he began to figure out the initial contribution. Well, Frank Kahn was my PhD examiner and later on, I mean as Joel was saying, you were a PhD student, I mean he could be very fine to be Frank Kahn. Later on he became first Michael Lee when he was appointed to the University of Cambridge and then Michael Lee to Vienna, we became friends. And so I mean it happened that I could talk quite a lot with Frank and also sometimes about Joel. So I knew the convenience that Frank had about Joel. And by the way, I was talking with Frank about Joe Sieglitz, because I met Joe Sieglitz in fact before finishing my PhD thesis when he was coming often to the CCN. He was also even my guest, you know, at my house in Phoenix, he called me some Russian, you know, he was called Daris. And I mean, I think it's all, I was invited at Joe's first PhD at Columbia University and Bob Solo said that he knew Joe Sieglitz when he was not yet in the CCN. I agree that I knew Joe Sieglitz when he was becoming the CCN. And that when he was becoming Joe Sieglitz and he was spending time in the CCN, he was following some rules. One rule that may be yes now forgotten, he's not following any more, was that before going to the bank, you should tie it for any rangers. I don't know whether you remember that, but you had a clue when you were in the CCN. And I didn't remember that. It was some sort of an effort, you know, because you were very much interested in these new electric machines, so electric machines, that the dead time had come out. And we went together to the electric shop and you tried, you know, all these machines. And they found that, you know, they were electric, they were far too slow for you. You tried them and you did not buy them, one of them. So, you know, you see that it was an effort, you know, to be down, and Joe Sieglitz, you know, he's done something like that, he's cost free. The second thing that I must say amazed me about the law that is one characteristic, and I'm going to talk about it a bit, because I think that there is a certain kindness between these characteristics of Joe Sieglitz and the director of Fentana, was exactly towards the economic profession. Joe was telling me that really, you know, in the economic profession, there were a lot of people, and there still are, who were simply interested, to believe in problem puzzles and so on, they were not really so much interested in understanding the economy. But, you know, it was a bit upset about it, but not too much. You just say, so I have to formulate my problem in such a way that they become puzzles for the others so that I can explain my ideas. So, I found this way. And this characteristic of Joe, he said, yeah, that you find the environment and that you must find the proper way in the community is really typical of women. And I was very confirmed in the continuity of the story to Joe when I was at Columbia for Joe's first years. And Joe was commenting on a paper by George Akerlof. And George Akerlof had a paper when he was using irrational behavior to explain some equilibrium outcomes. And Joe said, well, when we were young, we already knew that this rational behavior did not really exist, but we needed a job. So we went for a semantic information that was much better than we do, you know, to reach the provision. Now, you may see that this is a bit of a cynical outfit, you know, to reach the provision, to communicate and try to do something. I think it's the opposite. I think Joe really has always believed in the pregnancy of ideas and of open needles and good ideas. And the way to convey them, to advance them, that you can be flexible once you have got your mind really what you want and what is your analysis of society. So he said, you know, he was using a puzzle for economics. He was writing and then at a different level for newspaper. He's very effective with the press. He could also communicate too. So I think he could do such tragic things as designing for the World Bank or other things like this. But they were always by which, you know, he would convey his message and about his message had yet very, very clear principle that he has always been following. However, I must say, to go back to Frank Anna, that this was not the Frank Anna activity. Frank Anna really believed in the sacrarity of economics, the sacrarity of theorems. Yeah, sometimes he was also joking about this, I must say. But certainly he believed in this thing to much a greater extent. In fact, he had a dinner. He was telling me that one time Frank and Anna were shown a non-convergence result of the equilibrium was saying, well, I have now put another nail in the coffin of Carlos because he really saw that this mathematical theorem and this science was a way to proceed. And I must say that the interesting thing about Frank was that he had also very much an attitude of the economic mechanism as a dynamic one. Suddenly it was a serious thing and it was a complicated mathematical problem. He put a lot of effort into that. And in a way, it is said that in the world as a whole, not in Siena, this tradition of dynamics has been lost. In Siena, this tradition is particularly strong because Richard Woodwin was part of it. So my idea was that because Frank had disappeared, he had enjoyed being a Joe supervisor, but somehow he had also suffered quite a lot because he was second in need. But first of all, he was always telling me, Joe Siena is the best economist of his generation, by far. That was something that was very clear to me. However, the problem with Joe is that he does not believe in the economic system. And the other problem that I don't understand are these assumptions. But he knows the theorem, the assumption, and he didn't merely say the correct assumption. Then the truth is always wrong. But the theorem is right, and the assumptions are all perfect. But it has not been clear about the truth because he already does know it in his mind. And he's had a very upset, but he had a lot of admiration for this strange mind that could go through the assumption and the theorem without having to order too much with the problem. And having said that, I'm not saying that really the relation at least on Frank's side, but Frank ended up playing this role of father, of uncle, of Frank, and so on, was very much a role of a father, also towards Joe and towards everybody. And he's certainly, certainly for Frank, Joe would have been his preferred son. I think he really was the son that he wanted. Now Joe can tell us whether he wanted to have a Frank and Loni as father and mother now. Professor Francesco Fratti, for Wembley, thank you very much. Thank you Michelangelo. I am the only conist here at this table, so you probably are here to listen to the con. So I will be very quick in saying a few words. And my first words will be of thanks for this. Thanks to Professor Stieglitz for being here with us today and the success of his career I think is best exemplified by the crowd that has gathered here in our room and in our building. I also wish to thank the department so brilliantly, chaired by Professor Basta, who spoke earlier. And I also wish to thank our graduate school of economics, so brilliantly chaired by Lugobagano and his staff. I would like to thank the entire school of economics because here we have the opportunity of studying, of doing research, of attracting students from all over the world and we think that we are given this opportunity for our students to listen to such important persons and names in economics science. I also wish to say thank you to you for coming here, your presence here today, the colleagues, the people from the city, the press and especially the students are the best group that we are on the right track in doing our job and doing research and in giving the possibility for our students to follow these lectures. Joseph Stiflitz, I think you already understood that, he's a friend of the University of Siena, he's a friend of the city of Siena and we are very proud of having a global prize winning winner among our closest friends. The School of Economics has been able to attract such famous names, such important researchers in the field of economics. Many of them have been already mentioned before, besides Professor Stiflitz, Professor Pan, Professor Gudwinner, Professor Holtz and many others that have been able to, also to raise the quality, the prestige of our School of Economics and it is a prestige of which we are very, very proud of and as a rector of this university, I also, I always, when I go around, I always mention our School of Economics as one of the key schools, one of the key departments in our old university. Last, I am not an economist, as I said, I'm a biologist, so I cannot provide important reasonings about the economy, but I cannot miss the fact by simply reading a sketch of the career of Joseph Stiflitz that the issues that he has approached in his research are the issues that are more common in the discussion, not only among professional economists. If you open the newspaper, if you listen to a press, you hear words of inequality, you hear the world growth, you hear the world knowledge of society, you hear about globalization, you hear about the euro or the crisis of euro, you hear about the European Union or the crisis of the European Union you hear words, terms, which are now familiar to all of us, which are the key of the discussion in our world, from universities to bars and restaurants, and so it is really important that we as a university contribute to this overall discussion by using our best people, by using our best intelligence, and this is why Joseph Stiflitz is here today with us, and by giving the floor to him again, thank you very much for being here with us. Give the floor to Professor Joseph Stiflitz in a quality approach in the Northern society. It is a real pleasure to be back here in Siena. The first time I came to Siena was actually 43 years ago, which is probably before many of you were here. And I've been coming back and I've made a lot of good friends over the years like Hugo, and when he asked me to come and give this talk in memory of Fred Kahn, I got exposed to Chicago economics and explained what was wrong to those right-wing nuts in Chicago. But there was also a lot of reference to the left-wing economists in Cambridge, England and Joan Robinson and Nikki Talibor. They were treated with greater respect, but with also a little bit of... I don't know what the right word is, but it was mutual. And the nature of the mutual suspicion was I got a vote right to Cambridge. And the question was how would I have you place... I thought I was going here to finish writing my PhD thesis, but the faculty at Cambridge had to accept me and Joan Robinson argued that I should be... I should be taking as a first-year undergraduate because I was actually in a worse position than a first-year undergraduate. Listen, MIT had done enormous damage to me and it would take at least three years to undo the damage that MIT had done in two years. Fred Kahn was one of the people who argued that that would be an act of war. And people like James Meade and David Chamberlain who were working with me is not the same as me was a. And it became clear that we were in parallel universes like Americans are with Trump down with Trump. There was no way that we were going to communicate. But she was my supervisor and I don't know if you know that in Cambridge and Oxford it's not like in most universities where you don't like to teach or you can hide in the back of the room and nobody will notice. You have one-to-one tutorials so there's nowhere to hide. And we met once a week she would sign a topic to write on and I would write about it and she would yell at me and say I'm serious about economics and I said I thought I was going to try to teach you some economics and she thought it was an arrogant American and we did go on very well. But Fred Kahn saved me after six weeks he organized for me to become a fellow in a college. So it saved me in two ways. It saved me from her and it saved me from the food that you eat as an undergraduate. And because it's a fellow you've got a different... But we went to it actually that was a much higher quality food. I felt bad about this because I was very impulsive and writing a lot so I turned it in favor and Frank's response was the kind of response that he gave to all the students which was why are you bothering me with this rubbish? You should be embarrassed and then three weeks later he was the editor of the review of economics studies he said we would like to publish it in the review of economics studies so it was the easiest submission I had ever had because I didn't even submit it and years ago I had an application I came back in the subject about the paper is a subject that's become fashionable again it's about distribution of inequality and economic growth which was as I said what I was writing about and so I wanted to read it and say was Frank an official judgment or was revised judgment and I decided his revised judgment was right that it actually was a very good paper and in fact it was it atomized the dynamics of inequality in a model of a kind that people are just not coming back to if you look at the work of Piketty it's a special case in the kinds of models that I developed years ago so the but what Frank really believed was that mathematics was a language it was a very personal language a rational discourse of people with economics was a serious subject the issues and policies were important and you needed to have a framework for being able to talk about it consistently and rationally and that's why and he thought mathematics was perhaps he thought it was the only language a little bit too strongly but that it was a language it was very clear and one of the points at that time in Cambridge while he was doing very particular mathematical models he and many of the other people at that time were really looking at the big issues in a way that I think today has gotten lost and by that I mean big issues are the organization of our whole society and our whole economy capitalism the nature capitalism alternative to capitalism and the common room in Cambridge at that particular moment in the period of 65 to 70 but it was quite amazing we had people like just the Nobel Prize winners including Ken Aro, Bob Solo the dimension of early age James Mead and then there were a lot of people who should have gotten the Nobel Prize maybe Joe Robinson and and and so it was it was an amazing group and so there was one particular moment that Google made a reference to where Frank showed the dynamic instability of a model of the economy where there were multiple capital goods and it showed that it was dynamically unstable because the paper you should all read published in 1966 and he came up with this enormous enthusiasm that he always exhibit and said, I've just put it in the golden nail in the coffin of capitalism and he really didn't believe it it was that kind of exciting moment that I think really inspired all of us who were studying in Cambridge at the time as I say, I was doing my thesis on inequality I had grown up in Gary, Indiana which is an industrial town in the southern shores of Lake Michigan and the complexity, history of industrialization and de-industrialization in the United States it was founded in 1906 and by 2006 it was basically death and I grew up in what I now realize is the golden age of capitalism in the 1930s but I didn't know it was golden I thought it was pretty terrible because what I saw was high levels of inequality there were people for instance from the south of the United States that moved to Gary that I knew that had a sixth grade education and at this in the wealthiest country in the world there was a right of discrimination episodic and bus unemployment last days didn't have money for lunch later than for luxuries like bicycles strikes so it was not the golden age that we now realize that it was in our history the period of our fastest economic growth was a period where every group grew of the bottom grew faster than the top incidentally I mentioned that at the time top tax rates were over 90% and according to current theory at 90% tax rates nobody should have been working and yet it was the fastest period of our economic growth some of modern theory has something wrong with it and I'll come back to that a little later so I've heard a lot about the issues of equality in my thesis and I've continued to be interested in it but as Lugo mentioned in the intervening period I spent a lot of time on other issues related to missing markets and dirty information but I came back to it in the beginning of this December 2011 I wrote an article partly inequality was roaming to levels that you could not ignore if you were interested in what was going on in our society and so I wrote an article in Vanity there and it went viral and the different ways of communicating what I discovered is that you get many more readers in that sphere than you do in a convent or a convent and so maybe there's an order in the order of review of economic studies maybe there's a message there but the title of that article in Vanity Fair was for the 1% and by the 1% and those of you who know the context it was maybe it was a playoff of one of our most famous speeches in the United States Adrian Lincoln the Gettysburg Congress the Civil War the preservation of the United States where he was trying to justify this vicious war that as you know our President Trump was pointing out that he would not have to have that war had Jackson been the president this is sort of a joke the war was fought over slave owners and Jackson had 150 slaves so he was not exactly a person this is going to be solved this particular debate which shows the enormous historical ignorance of our president it's an embarrassment to humankind so he said with every person in the United States that was burned by heart the Gettysburg Congress he said the point before was so the government of the people for the people and by the people should not perish from this earth it's a little bit American-centric but to put that aside the point is what I said in the last 150 years we've evolved not into a government of the people for the people and by the people but a government of the 1% for the 1% and by the 1% and as a book in action and that then meant me to then go back to the subject of inequality doing a lot of both theoretical and character and gathering data so what I wanted to do this afternoon is to talk about some of the things that have been happening in the meaning of equality to provide an interpretation of why they've been happening or what I want to talk about some of the consequences and what we've done about it follows very much from the analysis of the causes so the so the question is there's been this growing inequality in most countries in the world and is this growth resulted in the forces of nature the basic laws of economics or the result of the laws of man what we ourselves are doing isn't the result of the basic workings of the market or inevitable with unpleasant side effects isn't the result of how we have structured markets how we have changed the rules to gain in our market economy in some cases undermining the market economy and is it because we've not done enough to counter the forces of nature or is it because rather than trying to stand against the tide we have reinforced the effects of nature the laws of economics well the simple thesis of this lecture is that this growing inequality is largely the result of what we have done and that's really important that it's not the laws of economics that are driving the inequality it's how we've structured the market economy and more precisely how we've changed it in the last third of the century so in that sense I'm going to argue that inequality has been a choice a choice that not obviously that individuals have made but in our democracy a choice that has been made by the output of the system and then I'm going to try to argue what we've done has resulted not only in more inequality but in lower growth more instability in overall poor economic performance the knowledge economy presents some special challenges which if not well managed could even lead to more inequality that in knowledge economy there are good reasons to understand that they will lead to more inequality and the same as all of you know we can't describe the probability distribution with a single number even though the single number that is typically used actually is a Italian contribution to economic science the GD coefficient but that number while it has some merits that doesn't really capture adequately what's going on so what I'm going to try to describe is going on is the more money at the top more people in poverty and the evisceration in the middle that is to say the middle is not doing very well and more people are into the extremes say outside plus or minus half of the median income I'm going to talk a lot about actually up there as one of the most unequal and understanding why section to section is an interesting question I don't view my understanding really enough to understand really why is where it is within the advanced countries but what is clear other countries that have been following the US model like the UK are getting results very much like the United States so there's a line there at the bottom that looks like a flat the horizontal axis it looks totally flat it's not totally flat if you have a microscope you can see some changes there but that is the average income of the bottom 90% and what you see is over the last 40 50 years there have been no increase in the averaging adjusted for equation of the bottom 90% of the United States and on the other hand it doesn't continue the microscope to see that the top 10% has been doing very well not every year but overall that increase in income is very stark just to show the contrast this with other countries these put together the data for Europe and what you see is that most of the European countries are not on the bottom 90% are not doing that much better but the top 10% that has very greatly some countries have done much better than others France is a country where they curtail the increase in the income of the top 10% and Italy the increase in the inequality has been less extreme but it doesn't look it's not much different from the general batter this looks at the same data of the 1% by sheer and the blue line at the top of course is the United States where the sheer of the top 1% has increased 2, 3, 0 and the sheer of the top 10% has increased 3 to 4 in the last a third of a century in a way if you're looking at the top the CEO pay provides the best the worst example depending on whether you're in the CEO the CEO pay has increased from a level by 30 times the average to more than 300 times that of the average worker it's not because over the last several decades they've gotten that much more efficient except of one dimension they've gotten more better at being able to take money from the corporation for themselves there is a little sad story here because they've taken so much they haven't done investing that means the companies haven't done very well so they have to fire workers and it's very hard to fire workers it's painful so they have to compensate themselves for firing the workers so it's a hard job when you're a CEO and you have to fire so many people so that you can pay yourself so much but this is the the vicious circle of that American CEOs and part of the justification is always there that's told and these narratives are very influential that you need this as incentive pay well I'm very interested in this more than 35 years ago I analyzed in models of principal agent how would you design good incentive pay incentive pays that provided high marginal incentives with low risk taking if you were a board and trying to design a good incentive pay system what would it look like and the answer is it looks nothing like the CEO pay that any of our companies provide basically they're telling the lie and it's been a very effective lie to take money out of corporations one example illustrates this and I think it's important to understand it tells a lot of the story of the growth of inequality you asked this is a sensitive subject individually but airlines have CEO compensation