 Good morning, ladies and gentlemen. Good morning, ladies and gentlemen. Let me welcome you all to this morning's session. Just in case you are wondering why I'm doing this, I'm doing this in my capacity as chair of the board of UNIWIDER. I have a very simple task here to introduce our chair for this morning's event. We are extremely fortunate to have as our chair President Tharia Hallounen. President Hallounen is a Finnish politician who was the 11th president of Finland, serving from 2000 to 2012. She was the first female head of state in Finland. Hallounen held two appointments as a minister and served as a member of the parliament from 1979 to 2000 until her election to the presidency. She graduated from the University of Helsinki where she studied law from 1963 to 1968. She served in the parliament of Finland for six terms from 1979 to 2000, representing the constituency of Helsinki. She also had a long career in the city council of Helsinki, serving there from 1977 until 1996. President Hallounen is widely known for her interest in human rights issues. And during her presidency, she participated actively in the discussion of women's rights and problems of globalization. So ladies and gentlemen, our chair for this morning, President Hallounen. Let's try again. Now you can hear. But I hope I don't disturb too much. Okay, so ladies and gentlemen, this thing was party so much. Good morning. This is a great day. I have a great honor to be a chair of this morning's very interesting session and I'm especially honored to present to you the keynote speaker today, Nobel laureate and economist Professor Joseph Stiglitz. So I start anyway by congratulating Wider Institute for its very important work during the past 30 years. So you are at the best age now and we are looking forward at what you will be doing in the future. And as you know, this is your home country in a way. We will support you almost in everything. So I'm a little bit becoming more and more careful now during the last days. So, but let's go back to Professor Stiglitz. He was born in Indiana in 1943, which is a great year. You can guess why. And then he graduated. He received the doctor's thesis from MIT already in 1967. He has done research and thought that the many of the world's best academic institutions since then will do. He has also held many important positions such as the chief, economist and senior vice president of the World Bank, was it correct, yes, from the 1907 to 2000. So in 2001, he was awarded the Nobel Prize in Economics for his analysis of markets with asymmetric information. And even after that, he was a lead author in 1995 report of the Intergovernmental Panel on Climate Change, which shared 2007 Nobel Peace Prize. But now he is honorably a professor at the University, professor at the Columbia University. So I feel myself a little bit silly because everybody knows him but anyway my honor is to introduce you. So, Jofe, your work has been widely recognized and among all the awards which I found more than 40 honorary doctorates can be already bigger, including from Cambridge and Oxford universities. The list of honors, awards and important assignments is impressive and long and it will take the whole two hours we have time. But especially remarkable, he has been the content, his work and the contribution to economic thinking. Let me just mention one of his very known books globalization and its discontents, that was in 2002, which has been translated according to my information, 35 languages and which has sold over one million copies worldwide. And so which is certain kind of the basic handbook for many students also today. Why I'm behaving, I think not enough respectingly, is not the lack of the respect, I have a great respect. But it's also that I have had an honor to work with Stiglitz on ILO's World Commission on the Social Diamonds in Globalization. The commission which normally is known about so-called decent work commission. And I guess that I think that Professor Stiglitz might agree that that work we did was not only interesting but important. The Millennium Development goes, which of course we all are now happy this year to tell that it has been the major achievement, the biggest global social justice agreement we have had and it has proved to be very useful. But when it was made the concept of the decent work for example was not there. It came afterwards 2004. But and if we think what we have done after that, three of us 20 which has now made this preparatory work for these STGs, they added women, youth and the poor to the East. So now of course we cannot avoid today, Mr. Professor, also the situation that we will have quite soon the SDG agenda, I think that you don't need to be a very, very skillful seeing the future if you say that it might be adopted by the 193 member states of UN in September after a few days next week. And then we might be able at the, I mean formally at least, finally combining on unique way the social, economic and environmental dimension to form a modern trinity, how I call it, upon which the sustainable future can be built. We have moved from working hard and often in silos on GDP growth, environmental protection and social program to understand that it's more cohesive and the policy conference is required. And now Professor Stiglitz, your work, how you have studied the state, the market and the development is the most interesting and welcomed of course. I don't try to tell the story and the end of the story. That's his right during this morning. But I will say that so far of course we have had an economic theories very often a little bit oversimplified. And a view of the market and the role of the state have not seen in very analytically way. But today I think that we will hear the most interesting contribution on that. So the events of the last 30 years have shown the importance of this including the financial crisis of 2008 to 2009. And I could say that it showed also the importance of properly regulated financial markets. And now I will end with a little bit true story. I hope that I don't disturb or being not respecting enough my Finnish experts by saying that when this report of the decent work when it came out here in Finland and then I was mentioning about the question of the possible crisis of the financial markets on that. So some of the experts of our university said that what nonsense President is again speaking or something like that to perhaps in a little bit more decent way. And then I tried to say it's not not me but Professor Stiglitz and then when all that started happening then of course I was proud to say that. But Stiglitz and I said in this case. OK, but now the voice yours. And we have a very wonderful situation that this morning is not at least now saying we are not in hurry. So you have all the possibilities to use the time as you like. But after that we might have some questions and discussions further. Please be most welcome. Well thank you very much. It's a real it is a real pleasure to be here and to be introduced by the president honan. We had a wonderful time working together on this international commission. And as you mentioned I can't help reflect on one of the major findings of the commission besides this idea of decent work was concerning intellectual property. It was what is very interesting about the this commission was under the ILO and of all the international organizations ILO is one of the most interesting. So it's one of the oldest goes back to 1919. But it's also one in which they bring together government, labor and business. So it's sort of like the social partners in Europe. It tries to get all the perspectives. And so getting consensus among this very diverse group from a diverse group of countries because the commission had representation from all over the world took a lot of achievement. But there was one issue that I think was the most important. Probably the hardest to get a unanimity on but we did in the end. And that was intellectual property rights in particular for medicines. And we had a consensus that we needed to move towards what's called trips plus minus. That is to say that the 1994 Uruguay round set of intellectual property rights was unbalanced and the world needed to rebalance it to reflect in particular in this social dimensions of globalization to reflect the most important human right, the right to live and access to medicine was an important part of that. Unfortunately, that's an example where the world has moved back. The United States right now is engaged in a very active campaign to have trips plus plus rather than trips minus. And many of you are from countries where the issue of TPP, the Trans-Pacific Partnership, partnership is a euphemism. And TTIP, the Trans-Atlantic Agreement, that has within it a very, very bad trips plus plus provision. So all of you when you go back home should be concerned about these trade agreements and the direction in which they are moving in absolutely the wrong direction. And I find it mystifying because we laid out the agenda so clearly in 2003 and they don't seem to have paid as much attention as they should have to our report. Well, that was a joke. It's also a real pleasure to be back here in wider, which over the last 30 years has played such an important role in development thinking. My own engagement with wider was particularly, I guess highlighted by my 1998 annual wider lecture. And I used the, I had just come, I had just gone to the World Bank as Chief Economist in 1997. And I found myself in the anomalous position of being the Chief Economist of an organization whose DNA was different from my DNA. So it was like having a blood transfusion of somebody with RH minus with somebody with an RH plus. It didn't always go together well. So I decided to use the occasion of the wider lecture to explain what was wrong with the Washington Consensus. And I have to say that I think that in my years at the World Bank, we did manage to change the thinking at the World Bank in a way that we started a movement. Just to lend his ear, Francois Bergallon continued that movement in that direction. So it's one of those hopeful things that occasionally one can help move things along. The title of my 1998 lecture for those of you who haven't read it, and I suggest you do go home and read it if you haven't, it was called More Instruments and Broader Goals Moving Towards the Post-Washington Consensus. And maybe looking at that title today, I should emphasize moving. It wasn't that we had yet gotten there. And now we're 17 years later. And I'm very pleased today that there is a massive strike here in Helsinki in Finland, recognizing that there's been some difficulty moving even Europe away from the Washington Consensus. They don't call it the Washington Consensus. They use other words, maybe the Frankfurt Consensus or whatever. The point is that same economic philosophy not only succeeded in destroying Africa and Latin America is now destroying Europe. And what I find so interesting is that a lot of the young people particularly have said they want a future and are expressing their discontent with these set of ideas in a very, very forceful way today here in Finland. So one of the things, the main thrust of my talk today on the state, the market and development is a talk about what's happened in the last 30 years, taking the life of the wider and more particularly what's happened in the last 17 years to change our thinking about the relationship between the state, the market and development. And if I were to summarize the ideas that I'm going to try to put forward, in many ways it's saying that today we understand even more that we have much broader goals. We have even more instruments. And if we don't use this in the right way, we can have negative effects of the kind that we are seeing so dramatically in Europe. So this rethinking that I describe, this rethinking the role of the state has been influenced by the major successes and failures of the last 30 years, which have also led to a reshaping of our understanding of development but also by major changes in economic theory. And I want to really emphasize these two strands that we've had some really great experiments. One of the problems is that we can't do random control experiments on societies. We can't say, well, let's try this year, this time we'll try China, we're going to try this set of, we'll have TVE's in China, and then we'll have another planet over there with a China just like our current China, but we won't have TVE's. And then we'll see what difference do TVE's make for the growth of China and the world. That would be a random control level. Lots of planets out there and we'll do it randomly. We can't do that kind of experiment. So we have to be limited in the inferences, in the experiments we have. We have to make inferences on the basis of the limited experiments. You might say the natural experiments that our society throws up. But the exciting thing is the last 30 years, the last, have thrown up a lot of big experiments. I feel sorry for a lot of the people who've suffered for those experiments. I mean, some of them have been a disaster. Most of them have actually not worked out very well. But we've learned a lot. I sometimes think that one of the things that the IMF has been great at has been trying experiments in East Asia of let's give a real dose of austerity and see whether the patient dies or not. And as they've done all these experiments, they find out that the patient dies with different degrees of quickness and different robustness. So we have learned a lot. And we are learning, I think, Europe for another set of experiments of doses of austerity. What's interesting about the European experiments on doses of austerity, from the results we have so far, it really fits a linear regression. It's actually amazing that the countries that have taken the biggest cuts in fiscal consolidation have had the biggest drops in GDP and the relationship is close to linear. And so you have out there Greece with the very largest fiscal consolidation and the very largest decline in GDP. But it's right on the regression line. So I guess thank you for those our graduate students need these topics. And now Europe has given us a whole set of new experiments for our students to study. That's why I say I feel sorry for the people who have been the subject of these experiments. But we've gotten more data. So an important point is we shouldn't throw away that data. We should use that data. We should use the insights. So a lot of what I'm going to be talking about is what have we learned from those big experiments. But the second thing is there have been major changes in economic ideas. Some inspired by these events, some of these changes in economic ideas occurred well before the economic events. But the economic events gave these particular ideas more credence than they otherwise would. And you'll see lots of examples. So the major insights, if I were to summarize, is that government policies need to pursue an even wider range of objectives, a wider range of instruments that I envision in my wider lecture. We now know more about how government can successfully pursue these objectives, including how to reduce the risk of government failure. We also know more about the reason for government failure. And I'll give some comments on that later. And we need to broaden our analysis to go beyond thinking about the role of the state versus the role of the market in this very simplistic way that we did say 20 years ago. There are more complex interactions. And most particularly, there are more actors, more institutional arrangements. When I say more actors, civil society, like the demonstration today, is an important part of how our society functions. And there are things we can do to strengthen civil society. And that's part of the way our society functions. So I actually, you know, if they had allowed me a longer title, it was long enough as it was, I would have added these third actors, these third sector actors. What if you are free now to make changes? Okay. So let me begin by talking about some of the major events and the lessons that they taught. In a meeting focusing on development, one has to begin with the success of East Asia, including China. These countries in East Asia, let me emphasize, they did different things. They didn't do all the same thing. And that variation across countries also gives an important ability to make inferences. You can say, what was the essential things? What were the common ingredients and what were the things that were different? And why do they have these differences? But the important point is that the development and growth was beyond anything that had been thought possible. No one 50 years ago thought that growth at the rate of 10% for 30 years was conceivable. No one would have thought that you would have been able to move 500 million people out of poverty in a span of 30 years. So, you know, as development economists, we should claim success in development. But I guess we ought to give credit to China in figuring out how to do it. But as development goes, development has been successful over the last 30 years because it's just the enormous success in reducing poverty. And in terms of achieving the Millennium Development Goal, we achieved it. That was thought to be very ambitious and it was achieved. The magnitude of the achievement perhaps is made clear by thinking about what people thought was possible back 40, 50, 60 years ago. And Gerdner Murdoch, who got a Nobel Prize for his work, wrote a book called The Asian Drama. And he described what he thought was possible after studying it. He wrote a huge, three-tholium work studying this very closely. And he said that he thought that Asia would be mired in the poverty that had been 4,000s of years. Now, there are many lessons of that. One of them is you shouldn't make forecasts that are going to be proven wrong. And as I thought about how to do that, there are two basic lessons for those of you who are going on and making forecasts. The first forecast is make long-run forecasts because then you're not proven wrong in the short run. And so, you know, an example of what not to do was Ben Bernanke right before the 2008 crisis said, do you think there's going to be a problem? You know, the housing market is collapsing. So don't worry, all the risks are contained. That's what I would call bad forecasting. But the point is it was not, you know, people keep reminding him of this little mistake that he made. So the first thing is make long-run forecasts so that nobody that you know will be alive to prove you wrong. And I've tried to specialize in that. The second thing is to make two armed forecasts or conditional forecasts. So the IMF and the Troika, they are really very good on this because what they say is if the country does what we tell it to do, then it will grow. And then the country doesn't grow. And we say, well, they didn't do everything that we told them to do. And of course, if you make inconsistent demands, you know, say do both A and not A, which they typically do, if you look at the programs, they are inconsistent, you can always find something, it's impossible to do everything. And often that's one of the reasons why the IMF and the Troika give 150 conditions. With 150 conditions, the probability that one of them won't be done is very high. And you can say, ah, it was what you really didn't do is making sure that you didn't have the right size of breadcrumbs that we demanded of Greece in the Troika package. And that failure to have the right size of breadcrumbs is why Greece has done so poorly. Now, if somebody is shaking their head here, probably not agreeing with me or, never mind, go on, okay. Okay, but anyway, this is just a general lesson for the young economists who haven't yet learned these tricks of making sure that, well, the success, though, of East Asia in all the countries is based on government assuming a major role in the economy. At the same time, making use of markets. And this is an important point. In all of the successful countries, government played an important role. In the most successful countries, the government played a role of what is called the development state. And I'll talk a little bit more about the development state. The lesson of that is that almost surely going forward, the countries that are going to be successful will have to have a development state. Not necessarily exactly like East Asia. One of the lessons is how do you adapt? What are the features? What are the core features? And as I already mentioned, there were differences among the development states within Asia. But I think the idea that a, you might call a neoliberal state which have successful development I think is very, very remote. So the idea of the Washington consensus was really related to these ideas of that markets on their own basically would work. A very limited role of government was needed. All that government was needed was to make sure there was macro stability. And macro stability typically meant price stability. That once you achieve that, then markets on their own would take care of the rest. And that has led, I think, to failure over a long period of time, both in Latin America and Africa. Let me just comment very briefly particularly in Africa. The, in context of Africa, these were called structural adjustment programs. And they led actually to a lost quarter century and to deindustrialization. The level of industrialization in Africa today is lower, percentage of GDP, than it was before these programs began. So for a long while, GDP actually, per capita actually declined. Now it's growing, but it's growing not because the Washington consensus policy is growing partly because of the spillovers from the growth of China. So even the success of Africa can be thought of as a derivative of the success of East Asia. And growth has recovered also in Africa, partly because of China's strong involvement through infrastructure. One of the big question is, will it be sustained as China slows? Or could it actually increase as China moves into becoming more of a service sector economy, meaning that there's more space for industrialization for China? I think one of the critical mistakes relevant to this talk, the critical mistakes of the structural adjustment policies was that they focused on limiting the role of the state, limiting the ability of the state to increase its capacities. The point is if it is, as I believe the case, important for the state to play an important role in development, one needs to develop the capacities. And some of the argument that you hear, and we heard a little bit of that yesterday, was, well, you can't have a development state in Africa because the stakes don't have the capacity. But those capacities are endogenous. They're affected by what the country does. And one of the important ideas I'm going to come to later is this concept of learning by doing. If you don't do these things, you don't learn how to do them. And learning is the basis of development. And so by ripping away, by limiting the scope of what the government did, you incapacitated the government from learning. And you led to even weaker stakes. The irony, of course, is the countries that achieved macro stability and good governance didn't see a flow of foreign investment except in actual resources. So this has been obviously a real concern. And I don't think we fully have the answer. But what is clear is that getting the macro right and even getting good governance right has not had the results that the Washington consensus predicted. One other minor thing I can't help but mention. I was in Audis, as many of you were, for the Finance for Development meeting. And a very big change in the tone, the discussion of finance for development from the previous two meetings, everybody had given up on the idea that the West would give more money. They keep giving promises. Countries like Finland, Scandinavia fulfill those promises. But the cow is no more milking. Or they used to. But the United States, Britain, and those countries have not. Britain has actually done a very good job in the presence of austerity. I shouldn't mention Britain because they've actually done a good job. The United States has not. So they haven't lived up to that. But everybody sort of have written off those countries fulfilling what they promised to do. But the view was, well, at least you shouldn't do any harm. And you shouldn't do things that make development more difficult, like make it more difficult to get access to generic medicines. But one of the important aspects is that as countries have opened up their doors to foreign direct investment, foreign firms come in, one of the contributions that these foreign firms ought to be making is paying taxes. They're generating revenue. Firms talk about social responsibility. The most important social responsibility is paying your taxes. But companies, our major industrial companies from GE, Google, Apple have actually shown more cleverness in tax avoidance than they have even in making beautiful products. And what was so disappointing and honest was that there was a broad consensus on civil society for a need for reform in the global tax regime to reduce the scope for this tax avoidance evasion. There was even a framework. There was an international commission that a wide swath of civil society put together that Jose Antonio Campos chaired, that put together advanced a program for doing it. And part of that agenda is there ought to be an international effort to reduce the scope for tax avoidance. And if you have massive tax avoidance by American and European companies, would you expect a club of government of America and Europe to figure out how to change the rules to stop their companies from avoiding taxes? No, you won't. And anybody have a simple political economy, hard to figure out how would they get their governments to tax them more so developing countries would do better? It's not conceivable. So when I say we, all the emerging and developing countries wanted the discussion of reform of the international tax system to occur in the UN. And there's a framework within the UN with doing it, and it could be strengthened. And what was the response? Well, the United States joined by Europe, put up a very big fight. It was a big issue at that oddest conference, and unfortunately won. I think they lost in some ways in terms of public opinion. But in terms of what happened at that meeting, when I say lost in a public opinion is here the United States talks about tax avoidance and all that, and yet stands by a system which is rife with tax avoidance and refused to move it into a context where it'd be better discussed. So that's the first, you might say, experiment that showed a big event that showed that the set of ideas that were widely shared didn't work. The second big event was the transition from communism to the market economy. Accepting China, Vietnam, and the countries joining the EU, that transition has been a real disappointment. Economists across the board had expected, we understood the failure of communism. Our theory said you can't work with central planning, can't work without incentives, can't work without prices. But all of a sudden now, we changed the rules of the game you went to a market economy, you indexed central planning, you used prices, you restored incentives, you established property rights. All of that was supposed to lead to faster economic growth. And what it led to was a deep recession. And shock therapy didn't work. The depth of the analysis at that time, many of you were too young to remember that. But just to recall the depth of the analysis, this is the kind of analysis that was going on at the IMF and the World Bank, was based on things like metaphors like you can't jump a chasm in two steps. That was the theorem that how they proved that shock therapy was necessary. I'm being only a little facetious. The point is that, and there were actually interesting studies, the World Bank WDR 1996 looked at what were the successful countries and what were the failure countries. It was one of the worst WDRs ever. And I won't tell you who was responsible. But it said, as you expected, that the countries that followed the Washington consensus that did what the World Bank said for it to do did well and those who didn't do very well. Yesterday, in the evening, in the last session, somebody gave a slide pointing out how behavioral economics was applied to economists. And what they showed is confronting economists with a set of data. And then they told them this was data from an experiment either about face cream or about minimum wage. And it was consistent that people interpreted differently depending on what the question was that they were supposed to answer, same data. And the correlation between what they wanted the answer to be and what they said the data proved was very high. So important lesson here is that some economists, I say other economists, are prone to biases. And so you have to be very careful in making sure that you don't fall into that trap. Well, this was a real example where I think the World Bank and IMF fell into that trap. The interesting thing now is that we have 25 years of data. And it's really quite remarkable as far as I can find. I have my students look at this and say, now that we have 25 years of data, we can ask in an interesting way, did the countries with shock therapy wind up 25 years later doing better? It's sort of the old ESOP's fable between the hair and the turtle, the tortoise. And, you know, the hair does better for the first moment, but the tortoise just wings in the end. There's very little literature. There was all the excitement in the beginning of telling countries what to do. Economists don't look back on history very often and say, okay, now we have 25 years of data. Who won? Well, it's pretty clear, at least my students, when we went through the data, it was very clear, the tortoise won. Shock therapy was a disaster. And gradualism, the only successful countries were those, particularly who were gradualists in privatization and in the institutional frameworks that led to success. So again, I don't want to sound as if I had preconceptions on this, but again, it was the reliance on the Washington consensus policy that arguably contributed to the failures. So these are probably the two biggest events in the developing world, the failure of the Washington consensus policies in Africa, Latin America, and the transition. But there were three other events in the rest of the world that have really helped define our thinking. The first, and probably the most striking, was the 2008 crisis. And that crisis showed that markets on their own were neither efficient nor stable. And let me just maybe emphasize, because I won't have time to talk about it when I come to the model part of this talk. There actually never were good models that showed that markets on their own were efficient or stable. You can find a set of simplifying assumptions in which they are efficient, assumptions like no asymmetric information. Obviously, if that were true, I would have been out of business. But information asymmestries, imperfections in markets are pervasive, especially in developing countries. So the idea that markets were efficient on their own is really an absurd idea. But there were many economists who made assumptions in their models that led to the result that the markets were efficient. But one of the things in doing economic theory is you don't want to bake your conclusions in the assumptions in a two-transparent way. And to me, that has been the major criticism, the DSGE models and these models. It was transparent that they were assuming what they were concluding. And that's bad theory. There were absolutely huge losses from this inadequate regulation. In the trillions of dollars, let me say that's an order of magnitude, orders of magnitude greater than any losses that would have occurred from inflation. The irony, of course, is the economy was only saved through massive government intervention. So when I say it's an irony, it was because what they did is they said, we want to set up policies that stripped away, reduce the role of government, and then they wound up with the government taking an even bigger role. And the double irony was it was the same people who advocated stripping away the regulation and advocated the government intervention at the same time. There is a kind of consistency to this that if you look underneath this, there was a consistency. It was all policies designed to make the bankers more money. And it worked if you thought that the objective of economic policy was making bankers more money. So in that sense, it was a consistent set of policies, but it didn't work for the rest of the economy. And finally, one of the things that it showed is that there were deficiencies in the governance of even the most advanced countries. One reason why I say that, particularly in the East Asia crisis, one of the things I heard over and over again is there had to be reforms in governance, in transparency. The problem with East Asian countries were defects in their governance. And before I went to the World Bank, Chairman of the Council of Economic Advisors in the United States, so I saw up front how the American government worked. And I didn't think it was that pretty of a picture. You know, it's one of those things when you shave, when you have these mirrors that make your face look, and you realize there are all kinds of flaws in your face. You don't want to see things too close. And I had the misfortune of seeing things too close. I shouldn't have done that. And when you see things up close, it's not a very pretty picture. There is what I call massive corruption American style. And it's not in the form of brown paper envelopes, but in terms of dollar magnitudes, not surprisingly, it's larger than anywhere else in the world. But in this particular case, at the core of the failure of governance was the Federal Reserve. Now, again, the reason why I want to emphasize this as an illustration, I don't want to beat up on the Federal Reserve, the chairman is a good friend of mine. So there are good people there. The point is that as the development agenda has moved from projects to policies to institutions, everybody says countries need good institutions. The next question is, what do you mean by good institutions? And what they said for a long while, well, look at the United States. They also say look at Scandinavia, but I haven't looked up that close. And you can probably tell us more about that. But looking at the United States. Let's go out. Yeah. Yeah. The Federal Reserve when you started looking at how the presidents of the regional boards were elected, was basically elected in secret by the big banks. And then who did the people who got rescued in this in 2008 and nine, where $700 billion was given, who got the money, the big banks? And then there was the question of transparency. We wanted to know where $700 billion went. Now, the wonderful thing in America is things leak. And if you have enough inside information, we knew where the answer was. But it was a sort of an attempt at embarrassment. So we asked, where did that money? We gave one company, AIG, got $180 billion. That's a lot of money. I don't know if you know. Some of you are, but $180 billion is a lot of money. A lot of zeros there. So one company got $180 billion, more money than we gave welfare for the poor over a decade. So where did the money go? We poured the money into AIG, and there seemed to be a hole at the bottom because at the end of the day, AIG didn't seem to have any money because we kept pouring it in and it kept going out. We'd say, where is it going? And Ben Bernanke, who had written paper after paper and said, I believe in transparency, suddenly lost the faith in the religion of transparency. He said, no, no, no, it's none of your business. So in the end, I had to, I worked with one of the congressmen, and the Congress in the United States does have certain powers. So as an ordinary citizen, I wrote to one of the congressmen and said, as a citizen, I want to know where the money went. And of course, she said, then held up the letter in Congress and said, we have to know, our citizens are demanding it. And of course, we knew. The largest recipient was Goldman Sachs, who had been on the committee, who had elected Geithner as head of the Federal Reserve of New York. And the second two, the number two and three were foreign banks, not even American banks. And so it became clear something else was going on. So I mentioned that is only to highlight that the issue of creating good institutions and good governance is an institution that all of us have to face and is one of the major lessons that come out of the crisis. The second is the growing inequality around the world. A view that was held very strongly in the 50s and 60s was the idea that President Kennedy put it a rising tide lifts all boats. And what we now know is a rising tide is very good for the yachts, but if the waves are too big, the little boats get destroyed. And to translate that into numbers, what we show and we know is that trickle down economics didn't work. In the United States, very clear, the top has done very well. You've had a third of a century of experiment with supply side economics, lowering the taxes at the top, providing more incentives, deregulation, providing more opportunity. And a third of a century later, the bottom 90% has stagnant income. Median income of a full-time male worker was lower than it was 40 years ago. Wages at the bottom are lower than they were a half century ago. Median income adjusted for inflation was lower than it was a quarter century ago. Trickle down economics hasn't worked. It's a system, if you say that a economic system is to be judged not by how Bill Gates does, he's done very well, but how most citizens do, the American economic model has failed. So we have to ask why? So the system that was a model for everybody to follow, we now know is a failure in a fundamental sense. It has some good features and we have to figure out what are the good features, but it's failed. But the other thing that we know is it's not just global forces. It's not things like globalization, technology, because those forces are affecting all countries in the similar economic position in the same way. So all the advanced countries face the same, the different emerging markets are similar. And yet there are enormous differences and that's a result not of the laws of economics, but of policies. That's actually very good for us economists because it says that the policies that we design and advocate can make a very big difference. If it were just the laws of nature, we can't, you know, if we were physicists and we say I don't like gravity, I don't like that coefficient of two on the force of gravity. You can't have a meeting and say let's change that coefficient of gravity to 1.5. And if we don't like the law conservation of matter, we can't say okay, let's change that so we don't have the law conservation of matter. You know, the fact is we have some legislatures. One of the states decided they wanted two plus two to equal five and they passed a law, but it didn't have that much effect on our arithmetic. But you can't change the laws of nature, but you can change the laws, these economic outcomes because of their result of our policy. The third major event is the Euro Crisis and I think in a way it's really one of the most exciting experiments. It's another example of economic globalization, outpacing political globalization. One of the main themes in both my book globalization is discontents and making globalization work. So it was a result of an attempt to share a common currency without the necessary institutions, without the political integration that would have made it work. But it was also, and I think this has not been sufficiently appreciated, it was based on some of the same flawed economic analysis that unrelated Washington consensus. They didn't call it the Washington consensus here in Europe, we refer to it as neoliberal ideas, but it was the same kind of ideas that markets will work in particular ways. And they didn't work in the ways that were hypothesized. And so they put together a set of ideas that said that there was going to be convergence, that the countries will grow together and the result of the particular model is that there's been divergence, the countries have actually spread apart. And I think that even though European and developing countries are obviously in markedly different circumstances, there are important lessons for developing countries from the European experience for monetary policy, industrial policy, and most importantly for austerity policy, which is the object of the particular strike today. Well, I'm going much too slowly, so let me go a little bit faster. So the second set of ideas that I said, so these are all changes in the world that are going on that in one way or another, as economists, we have to study and try to make inferences from. And there are going to be different inferences, we all come with different priors, we're going to make different inferences, but we can't ignore these grand experiments, they really do tell us something. And there are a lot of minor experiments what happened in a lot of different countries and we ought to use that information as well. But there have also been major changes in economics. The model that was very standard in economics 40 years ago, 50 years ago, has really been questioned. I'm not going to talk about some, say the work that I did which questioning the assumption of perfect information. I'm going to go to some of the other, you might say deeper and more current work that looks at some of the basic premises of the model about human nature, human behavior, about technology. And I think the exciting thing is that in the last 50 years, these have become questioned. And the reason why this is so important is many of these are at the heart of development. Because in part, development, and I'll say this again, is a transformation of societies. And part of that transformation of societies is changing people's mindsets and changing norms. And those kinds of considerations were totally left out of the older models. So the first important change is behavioral economics. And here at the point, the standard model was based on the wrong view of individuals. There have been two strands of this literature, one which has gotten a lot of attention, but the other one I think is probably is even more important. The part that's gotten the most attention is based on the psychological literature which has emphasized the lack of rationality but emphasizing that people are predictably irrational. They do certain things in a predictable way, inconsistent with our model, but it's still, we can predict their behavior and therefore it's part of systematic scientific economics. There are systematic biases. The observation I made before about how people look at data is it was an illustration of confirmatory bias. We look at data and the stuff that confirms our prior belief, we like and we remember, we calculate it and the stuff that doesn't, we discount, we ignore. And Carl Hoff and I have shown how if you combine notions of confirmatory bias together with some others behavioral hypothesis, you can get equilibrium fictions. So rather than the rational expectations model where everybody has the same beliefs and those beliefs are fully in accord with data, everybody behaves according to the world as they see it, but the way they see it is distorted. And we know rational expectations is wrong. Under the standard rational expectations, everybody has the same beliefs. If everybody has same beliefs, you wouldn't have any trade in stock market. You wouldn't, you know, most of our discussions would, you know, if everybody had the same knowledge, I couldn't be up here talking to you because you know before I talked what I'm gonna say that life would be really boring. So the fact is that people have markedly different beliefs and we now know some of the systematic aspects of those differences in beliefs and Kahneman, there's a huge literature now about the implication of that for development. But there's another literature, just sociological literatures which emphasize that our beliefs are largely determined by those around us. And that's really important because it helps explain societal rigidities. It's hard for one individual to change his beliefs if others don't change. But if others do change, then you can have a very big shift. And this gives rise to new instruments, new roles of government. So where this is laid out, for those of you who wanna look at this more closely is the 2015 World Development Report does a really very good job at looking at these issues. It's, you know, some of these, the milder forms have already been incorporated into government policy in many countries. It's called the nudge, governments can nudge. There are changing defaults can lead to higher savings rate. Much bigger effects than price effects. You know, we've never been able to get the people to save more by changing the interest rate. But these nudge effects by changing the defaults on retirement plans, we can get very big changes in savings rates. By changing institutional arrangements, we can change the savings rate. So what this gives us a whole wide range of new instruments. But there are things that go well beyond this kind of nudging is really changing in aspirations, societal understandings. There are these wonderful experiments of soap operas. And how soap operas can change people's perception of role of gender, role of education. And governments now in a number of countries have actually used kinds of things in exposing people to different media experiences. And that changes their perceptions and changes behavior. So there are a whole set of deeper philosophical questions about welfare economics and how we evaluate. But what is very clear is that it opens up a whole new avenue for government interventions. Also, it gives us new interpretations of successes and failures. There was a lot of excitement 15, 20 years ago about one of the new instruments in development which were microcretics schemes. And these spread like wildfire around the world. And about a few years ago there was the largest failure of a microcretics scheme ever in India. And there's been a lot of discussion about why did it fail. And there are a lot of RTC experiments before that about the design of RTC, design of repayment programs and all that. My mind, and we've done some work on this with Antara Halder. The basic reason was you changed the institutional arrangement from a nonprofit, which was what Grameen and Brack were to a for-profit institution and that changed the borrower's attitude about the creditor. And it changed the creditor's attitude about the borrower. And that changed that whole social relationship. And result of that was that when the borrower knew that the lender were there to help them, they were working together to promote development, that was one thing. But when it was a lender who was trying to make money off of the poorest people in the world, it was India's subprime lending. Problem. It changed people's attitude. And that's the kind of thing that we had not previously incorporated into our analysis. And it has profound institutional implications about the design of institutions. And none of that is being picked up by RTCs. So these are one important idea, the indigeneity of beliefs, of behavior, of individuals. The second one is endogenous technology. Most of the advances in the standards of living are associated with learning and improvements in technology. And most of these are endogenous. And this is in contrast to the standard theory which said that either fixed technology or if it's not fixed, it's exogenous, isn't explained. Well, one of the themes that were raised when I was chief economist of the World Bank and reflected in our WDR of 1998 is that what separates developing from developing, developing from developed countries is more a gap in knowledge than a gap in resources. And this changed the view of the World Bank to a knowledge bank. But this has some things that have been changed but this has some very profound implications for how we think about the role of the state and the role of the market. First, once we incorporate these ideas we no longer have the presumption that markets are efficient. The theorems about the efficiency of the markets, the first fundamental theorem assumes fixed technology or at least exogenous technology. In a book that just came out with Bruce Greenwald called Creating a Learning Society where we argue that it's learning that's been the basis of development and the basis of increases of standard living. What we show is that when technology is endogenous when technology is endogenous the market, there's a presumption that the market is inefficient. There is an important role for government in promoting learning and innovation and the reasons are pervasive market failures associated with competition, externalities, risk, capital markets. But the problems are deeper than that. The problem is that the policies based on the standard model may actually have an adverse effect. It's not only that markets are on their own are not efficient. If you use the wrong model, you get results that are wrong but in this particular case we show that many of the Washington consensus policies actually retard development. And the obvious example of this is Korea. After Korean War, Korea had a comparative advantage in growing rice and the World Bank and the IMF said, believing in the neoclassical Washington consensus model said Korea, you should grow rice and Korea said thank you but no thank you. Yes, we will become the best rice grower in the world if we follow your advice but we will be a poor country. There is no industrial, there's no advanced country that focuses on rice. They want to become an industrial, an advanced country. And they said the only way you do that is by industrializing. You can't read a book and say how do I become a steel producer? The only way you learn about producing steel is producing steel. It's the idea of learning by doing. And you only can do that if you have some degree of protection. And so they had some degree of protection, some subsidies and they became not only a steel producer, they became more efficient than any private steel company in the United States. I jokingly point out that the reason in the East Asia crisis that the US government and the IMF insisted that Korea privatized the steel mill is that they knew as long as it remained government steel mill without subsidies it was going to be more efficient than the private sector. You needed to have the inefficiencies of the private sector to have fair competition. Actually I visited Posco, which is the Korean steel mill after they were privatized. And I said what difference has privatization made? And he said well before we used to have a very tight scrutiny of what we were doing with our money, making sure we were reinvesting it, making sure we were using it. The part we weren't reinvesting, we were spending on training for our community. And we had to be sure that we were doing things good for the environment so far. So now we have a lot more scope to pay ourselves better salaries. So it's made our lives a lot better. But there was no obviously efficiency change. So really the point is that I want to make is that you cannot learn to be a fishing steel industry or anything without doing it. And developing countries at early stages of development have to have some form of protection. What we explained in our book is that today the ability to do this is constrained by WTO. So you have to be clever. And we provide clever ways of doing it. One of the ways you do it is by managing, I didn't say manipulating, I said managing your exchange rate. If you want to know what's the difference between the two, it's in the minds of the beholder. So by keeping the exchange rate more competitive, China managed to create an export-led growth. And out of those industrialization, they learned how to be more and more efficient in producing industrial goods. But this idea is similar to, but it's distinctly different from, the infant industry argument that goes back to the 19th century. We emphasize what we call the infant economy argument for industrialization or for protection. The argument is there are important spillovers. If, in the case of Korea, the steel industry led to the training of high, large numbers of engineers. It led to establishment of the MIT of Korea. It led to establishing financial and educational institutions that promoted development. So it led to a whole set of things that spilled over out of the steel industry that succeeded leading to the ship industry and so on and on. So these externalities are the core of development. This is not a new idea. It's what Hirschman emphasized. And what we've done is formalized some of that. And, but that's the core development. These kinds of spillovers are externalities. And obviously, the market won't do this on its own. So again, it's another new and different role for the state. It's an argument for a whole set of policies, not only industrial policies, exchange rate management, carefully designed trade bar policies. It's also an argument against excessive financial sector liberalization. One of the things that one has to learn is how to allocate capital. That's part of learning by doing. And if you delegate that to London or New York, you're not going to learn that. So in the United States, we did not allow banks to operate in more than one state until 1994. This was well after we were telling other countries to open up their banking market to the whole world. Because we believed at the time within the United States that there were advantages of having banks that were focused on your particular state. Now, actually, things were fraying even by 1994. There was circumvention. But the important point is that we understood the role of these externalities, these spillovers, in our own domestic policy. And so finally, there's an argument for well-designed intellectual policies, which is not trips. So a second set of ideas, important ideas, are related to game theory and the theory of imperfect information and imperfect markets, imperfect competition, imperfect markets. Here I want to go very quickly now, because we now understand that perfect markets model is not robust. Slight imperfections like epsilon search costs can have very big changes. You can go from an equilibrium with price equal marginal cost to price equal monopoly price. So small changes in the assumptions. The model is not robust. And most markets are characterized by some degree of market imperfections with market. The result of that is that market participants strive to increase their market power. The limiting case of monopoly and perfect competition are bad examples of limiting cases that don't really give us insight into the way markets work. Because one of the things in between those limiting cases is there's a struggle to increase market power. And that's really one of the major sources of market distortion. So the limiting case of perfect competition or perfect monopoly provides a poor description and poor guidance, policy guidance. One of the things that we've learned is that many small imperfections throughout the economy add up to something that's big. So a lot of the Washington consensus economists say yes, I know that there are small imperfections, but that doesn't matter. We're close to perfect. But the point I'm making is that many small things can add up to something big. And part of our analysis was to show that. Probably one of the most important aspects of why these models provide poor guidance is the theory of the second best. Because behind these ideas was the idea that moving towards the theoretical idea might lower welfare. It's not like here we are, here's the theoretical ideal, and if we just move there, we'll be better off. So one example of this is in our theoretical ideal, which never, you would have no barriers to trade. Is it the case that moving towards that, when you have other market imperfections, we'll make things better? And one of the results that we proved with David Newbury was to show that in the absence of risk markets, eliminating trade barriers, or even reducing trade barriers, could make everyone, everyone worse off. It was cradle inferior. And the same thing was important part of the financial market liberalization in the United States. The idea was completing the markets, making more risk markets, made things better. But what completing the markets, making more risk markets, actually made things more unstable. The final, or not the final, let me go to these things a little bit quickly, is that there are macroeconomic externalities which have profound implications. Some of my earlier work had shown that whenever there was imperfect or asymmetric information or imperfect risk markets, that is always, markets are not pratoefficient. The way I sometimes put it was, the reason the invisible hand was invisible was that it wasn't there. And this work reversed the presumption about the efficiency of markets. There's not just a few isolated failures like environmental externalities. But one of the exciting things that's happened, particularly in the last 15 years, is that these ideas have now been applied into macroeconomics. So the implications for macroeconomics have been understood. And macroeconomic policy has to be designed to take them into account. So as an example, the DSGE models that have become very popular before the 2008, systematically did not do that. And that's how they said markets were efficient. Why you should have capital market liberalization. They were all based on ignoring these principles. So some of the implications of this for the role of the state is the market on their own will lead to excessive borrowing, especially for denominated debt. There are externalities associated with that foreign borrowing, particularly when a shock happens. That's a foreign exchange rate. That affects everybody in society. And we saw that in the crisis. We saw, I came to these view very strongly in the East Asia crisis, but we saw that even more strongly in 2008 crisis. International firms were engaged in the excess of borrowing. But who suffered most in East Asia? It was small and medium sized enterprises. It was ordinary individuals who lost their jobs. Those were macroeconomic externalities on a massive scale. In the 2008 crisis, it was Goldman Sachs and the other banks that engaged in excessive risky lending that caused the crisis. Who suffered? Millions of Americans lost their homes. Millions of Americans lost their jobs. Millions of people around the world who had not even engaged in this lost suffered. So those are examples of macroeconomic externalities which were simply ignored. We know too that market on its own will lead to too big and too intertwined financial institutions. There's a need for strong financial sector regulations, including macroeconomic regulations, including regulations on cross butter flows and capital controls. Let me say, much of that we knew before and many of those here not only knew it, they wrote it before. But people didn't pay attention. They had to learn it for themselves. Now we have stronger theories explaining showing this even more forcefully than we have before. But these are among the changes that have occurred. There are a whole set of implications for monetary policies, monetary economic central banking. And I don't have time, I won't go through it. I'll just make two observations. One of them is we know that the wisdom what we knew before was wrong. That all that a central bank needed to do was focus on making sure that there was low inflation and the economy would perform well. In the case of the European Central Bank, they made the mistake of putting that in the Maastricht Treaty setting up the European Central Bank. So the degree of freedom is limited. At least in the United States we had the ability to say you ought to focus not only inflation but employment, growth and financial stability. We added financial stability because the losses from financial instability are orders of magnitude greater than from inflation. And the central bank is at the center of that. So we now understand that that view of monetary policy was just wrong. And our model was before that explained that but hopefully now people will read that work that we did before. A second example is the importance of non-convexity. This is a little bit of a theoretical point but that's why in this group I wanna emphasize this. There was an intellectual incoherence in the models, the DSG models, the models of central bankers. A lot of these incoherence, intellectual coherence, almost cognitive dissonance was really striking. They had models, they used models in the central banks in which there were no banks. And if there were no banks, because in the models you didn't need banks, the social functions of banks didn't exist in the theory. But if you had no banks you wouldn't know central bank. So the central bank was using models which were inconsistent with their existence. Now we all live in a world of cognitive dissonance but I thought that was really a wonderful example where they wouldn't be on. But another example of this kind of cognitive dissonance was they made assumptions of strong concavity. These are assumptions of diminishing returns and so forth. In that kind of world, risk diversification is a good thing. You spread risks around the world. And so important was diversification. One of the reasons that Bernanke said, don't worry about the housing crisis, the breaking of the bubble, because he said we've diversified the risk. We spread it around the world and so we don't worry. Now it is true, they did spread it around the world. Europe bought 40% of our toxic mortgages and we, thank you. Because if you hadn't bought so many of our toxic mortgages, the downturn in the United States would have been much worse. But here, what I'm focusing on is the mathematics or the logic, the models. After the crisis, what did they say? After the crisis, what was part of the rationale for government intervention? What they said, contagion. Contagion was barring a metaphor from contagious diseases. Then something would spread from one country to another. Well, when you have the risk of a contagious disease, do you believe in diversification? Think about this. 100 people with Ebola arrive in New York in our wonderful humanitarian open policies. So we say, well welcome these refugees from Ebola. Come from West Africa, come to the United States where we don't have Ebola. So we have these 100 people and we say, ah, the Federal Reserve says diversification is a good policy. So we'll send two of you to each of the stakes of the United States. So this policy of diversification would work wonders in making sure that everybody in the United States came down with Ebola. Now, if you want to spread Ebola, that would be the optimal policy. But if you think that it's something that you don't want to spread, what would you do? You quarantine it, you isolate it. Well, if you're going to isolate, that means you don't want to diversify. But if you've diversified ex ante, that means you're interlinked and you've already created a structure that spreads the Ebola virus. So the quite, or spreads, I didn't mean the, it spreads the economic contagion. So a coherent economic, so the mathematics behind contagion is a mathematics of non-convexities. It's a mathematics of multiplication. Exactly the opposite of the mathematics of concavity of diversification. So what they were saying is, we believe that the mathematical model that describes the global economy is not the mathematical model that we believed one year ago. Well, how do you have in your mind two mathematical models? Well, the way you do it is not to have one model articulated very well. And you have to have, again, a high level of cognitive dissonance. And in a graduate school, we try to train people to have that cognitive dissonance so that you compartmentalize your mind. But the result, if you have, one of the things that we know now is that we have models where we have non-convexities, which are really important. Bankruptcy and learning, all of these introduce non-convexities, increasing returns to scale, all of these things are of first order importance. And we have that, you have optimal degrees of diversification. You don't have full diversification and you use capital controls. You have circuit breakers. That's one of the things we learn from the analogy to electricity where these non-convexities are very important. Well, a whole set of issues related to monetary policy that I don't have time to go into. Let me go on to very quickly to institutions. Older theories pay little attention to many things that we now know to important like inequality, but also institutions. For a while, we now know that institutions do matter. There was a short while where many people thought that institutions were designed to create market, to correct for market failures, they're filling gaps. Some people call that North One, early North. But now we realize institutions often persist when circumstances change, leaving dysfunctional institutions in place, and many institutions exist to reserve power structures. So institutional analysis is really first order in development, but it has to go beyond the traditional economic analysis to include power, including market power, but also political power. And that's where game theory advances have led us to a lot of new tools. But our institutions and markets don't exist in a vacuum. They are structured by norms, laws, and regulations. The way they are structured makes a big difference for how the economy behaves, and they can lead to stronger, weaker economic performance, and they can lead to more or less inequality. And here's really the important point. The Reagan-Thacker era and the Washington consensus entailed rewriting the rules in ways that led to slower growth and more inequality. My interpretation for the United States is that beginning around 1980, we started rewriting the rules of capitalism, the market economy, lowering tax rates at the top, taking away, stripping away regulations, and the result of it is that we have a new kind of market economy. Now, if you told the American people in 1980. Just a minute. What? Somebody seems to rise in the system. Oh, okay, I can talk. Could you help us? Okay, you can go talk. I can talk. I can see it. So, the point I want... The... Just listen to him. Okay. Back in 1980, if Reagan had come to the American people and said, I have a deal for you. We're going to rewrite the rules of capitalism. We're going to lower tax rates at the top. We're going to change a lot of the other rules. And the result of that after a third of a century is going to be that the top 10% is going to be doing very well. But the 90% of the bottom is going to have stagnant income or even worse would the American people have voted for it if we have a democracy? The answer is, it's a rhetorical question in case you... The answer is no, but it's what we did. We wound up through a democratic process with a system that led only the top 10% to grow and the other 90% bottom to stagnate. We have to understand how we got there. And it was through this process of rewriting the rules. And now we have to rewrite them again. Finally, one of the other things that we've learned that we didn't know before, I talked about equality, how there's been this enormous increase in inequality. The older theories paid little attention to inequality. The second welfare theorem said that efficient distribution could be separated. Economists like Bob Lucas would say things like, of the tendencies that are harmful to sound economics, the most seductive and in my opinion, the most poisonous is to focus on questions of distribution. And that was the mainstream. Well, I think he was wrong and very badly wrong. That was the kind of reasoning that led to the 90% not doing very well. And the interesting thing to me is that as we've looked at it, we now realized that there's a wealth of theory and evidence that the distribution of income does affect economic performance, growth and instability in a very important way. And the fact that inequality affects economic performance creates another form of externality. Because nobody ever said that markets would lead to a good distribution of income. So it's a kind of macroeconomic externality. The best that anybody said is that they would lead to an efficient outcome, not a good distribution of income. So now, if it is the case that distribution matters for economic performance, now we know that the market won't lead to outcomes that maximize economic performance and we have to intervene to assure the kind of outcomes that are socially desirable. In all the class of models that we've been talking about, there are multiple, multiple equilibrium. In the standard model, there was unique equilibrium. The reason why I emphasize that is again, it creates a different role for government because the government can move us from one equilibrium to another. We can have an equilibrium where there exists discrimination, the government through affirmative action can stop that discrimination, can reduce whether it's caste, gender. And once we succeed in moving out of that equilibrium, we can have a non-discriminatory equilibrium that is self-sustaining. So that's an important role that government, if there are multiple equilibrium, we can help move the economy from one, from a bad equilibrium to a good equilibrium. Now I have to think there are a whole set of these multiple equilibrium involving also political and economic interactions. So one of the things that America has trapped in a bad economic equilibrium where money matters, we've moved to a democracy not of one person one vote, one dollar one vote. They vote for a system of one dollar one vote and it's self-perpetuating. They then have more power to create the economic inequalities that lead to the political inequalities that lead to the economic inequalities. But there are other equilibrium where we don't have that kind of inequality. So the understanding of these multiple equilibrium I believe is fundamental and helps move us in the right direction. So let me just try to conclude with a few further observations. The central issues we've been discussing involve comparative economic systems. It's how the whole system operates together. It's not about one element. Nobody said the reason East Asia was successful was because they used, had one particular law versus another that they had one incentive system in for management versus another. It was not any little change that an RTC is gonna give you an insight to. It was the way the whole system worked together. And I think that that's the fundamental point that it's development is about how economic systems perform. And I think we need to pay more attention between of these comparative economic systems and which includes often the study of economic history. There are multiple roles that the government has, a regulatory role, a catalytic role, and a coordinating role. And putting them all together, the overall role I refer to in the successful country is a development state. And the interesting thing is the most successful countries in Africa now have a development state. On institutions, I wanna emphasize is that there are a variety of institutional arrangements. I think just not just the for-profits and the government in the US, the most successful institutions are not for-profit foundation. For instance, our universities. There are different kind of institutions. There are many examples of successful cooperatives. TVEs were among the important in those institutional invasions in China. So much of the discussion of the role of the state market oversimplifies by ignoring the this richness of the institutional variety. There are public failures. There are many cases where the government hasn't done what it's supposed to. And a lot of the research of the last 30 years has tried to understand when government fails. And sometimes I'm criticized and say you have too optimistic view of government. You always assume it works. And when I reply is no American can be unaware of government failure. Especially after President Bush. So we know we feel government failure. So it's not that we ignore government failure. That we have to learn to deal with government failure to understand the causes and what we can do about it. And it's a constant struggle. As I said in the beginning there's been no successful economy that does not have an important role of government. So you can't say just because government failure we're not gonna do it. We're not gonna, we don't say because there were the failures of monetary policy. I haven't heard anybody say you know Greenspan and Bernanke did a terrible job before 2008. Did anybody respond oh yes monetary policy has failed. Let's take rid of the central bank. No. But when industrial policy occasionally fails somebody says let's get rid of industrial policy. So the lesson is yes there are failures but we have to learn from those failures. And try to make you know there are successes. There are huge successes. I'm trying to increase the probability of excess and reduce the probability of failure. One of the reasons that the public sector is often marked by failures is the public good is a public good. Now what do I mean by that phrase? Public good in a Samuelsonian sense. We all benefit from a good functioning public sector. That's what we mean by public good. Public good is something that we all benefit from. So the fact that we have government doing the right thing is a public good from which we all benefit. And what is the basic theorem of public goods? There will be an under supply of public goods without government. So we have an irony here. We need the public good but we will have an under supply of those activities necessary to make the public good work. Well that means we have to subsidize those activities that ensure that the public good works. And that means we have to subsidize institutions like the media think tanks, education and it means there is a very important role for civil society and other forms of voluntary collective action. We have to encourage not to discourage this kind of activity. One has to think of these as partly resolving the public good problem of the public good. Now there are other ways of preventing government failure and capture systems of checks and balances. When I was a student we all learned about the wonderful checks and balances in the United States. But if not well designed and a society is too divided this can lead to gridlock. And gridlock is a policy. It's a policy that entrenched existing elites. It stops change. So if you want to entrench the existing elite design a political system with gridlock. So that's why actually a lot of people on the right in the United States like our economic, our political system. This gridlock was not an accident. It was part of the structure that was designed to keep the power elites in power. And we've also learned that democracy may not provide an adequate check partly because of the public good problem I said especially in societies marked by high inequality. And again we need to have more transparency strong right to no laws, restrictions on the influence of money in campaigns, restrictions on the revolving doors. The bottom line that I come to is what is needed is more than checks and balances within government but we need checks and balances within our society. And that can only be achieved at the extent of economic inequality is limited and there is a break in the transmission of economic advantage across generations. And this goes back to the original reason that in the United States we had antitrust laws. It wasn't about Harberger triangles and inefficiencies of markets. It was about the concentration of economic power being translated into a concentration of political power. And we've forgotten that important message. It was about creating a fear, a democracy that works. And if we have a democracy at work we have to have more economic equality. So to me this war on inequality is a war for democracy. And it is the only way that we are going to have effective democracy. If we don't have that, people talk about the rule of law but what we will wind up with is a rule of law that matters what kind of rule of law. And what we mean by a rule of law is a rule of law that protects the ordinary citizens against the powerful. And the rule of law that we've created in the United States is basically to a larger extent a rule of law that protects the bankers against ordinary citizens. So what happened in the middle of the crisis? We threw out people out of their homes by the millions, including many people who didn't owe any money. It was more important for the bankers to get money back than for people who didn't owe any money to stay in their home. The bankers said, well on average, they owe us money. But that's not a rule of law. But we didn't punish any of the bankers who lied by the thousands and thousands of times to the courts saying that these guys owed money. They signed affidavits, they lied, they perched on themselves. None of these were punished. None of the big bankers who violated so many of our laws and market manipulation, LIBOR and market which $300 trillion of derivatives is based. None of these are almost none of the senior people have gone to prison. So basically what I want to say is we have a rule of law and everybody looks at the rule of law index. We looked like we're doing very well. But what is a rule of law? Like a rule of law that protects the ordinary individuals against the power. It's not a surprise that we don't because of our economic inequality being translated into political inequality. So the reason why I emphasize that in recent, even at the UN there's a rule of law initiative. But if we don't understand what a correct rule of law is, we can embed in our legal framework systems that preserve and extend inequalities. So finally, two points. First, our metrics have become increasingly important, but it's wrong to focus narrowly on GDP. And this was really the central theme of beyond GDP, that we have to have more goals and that it really undermines development if we do that. And finally, let me summarize with some of the changes in our understandings in the last 30 years. Then the neoclassical model predominated, now we understand its limitations, the importance of imperfections of competition markets and the lack of robustness of the model, the importance of second best. Now there's a focus on behavioral economics and dog-genous technology and learning. These are especially important for developing countries. Then there was a presumption that markets were efficient with the exception of certain well-defined problems like environmental pollution. Now there's a presumption that markets are not efficient or stable, that they are not just environmental externalities, but also information, learning externalities and macroeconomic externalities, giving rise to multiple needs for government intervention, not just macro stabilization, but also industrial and trade policies. Then it was thought that one could separate issues of distribution from efficiency. Now we realize the issues of distribution efficiency cannot be separated. Then we paid too little attention to how markets are structured by the legal system. Economists would simply refer generally to a rule of law with strong property rights rigorously enforced. Now we realize that markets don't exist in a vacuum, they are structured by our legal system, there are many alternative legal frameworks and that choices of a society makes, make a great deal of difference for development and distribution. And inevitably these are decisions made by the political system. Then many subscribe to Timbergens analysis assigning each institution to a single objective and a single instrument, assuming little need for coordination. Now we realize that there are many more instruments in the government's toolkit than we realized 30 years ago that even monetary authorities need to pursue multiple objectives and that different policies need to be coordinated. Then the focus was on limiting the role of the government, getting it out of the way. Now we realize the government is essential and a central part of the development policy is improving the performance of the public sector. While the Washington consensus policies and the theories on which they have been based have been widely discredited, their influence still lingers, often masquerading using different language as we've seen in recent years. The most successful countries had a development state. So our challenge today is to adapt these concepts to the developing world of the 21st century, taking advantage of all we have learned in the last 30 years, both about government failure and market failure, about the richness and variety of institutional arrangements to ensure that we do an even better job of raising the level of standards of living of all the citizens of the developing world. Thank you. Thank you very much for you. So we still have some half an hour time and I have a privilege also to make some of them questions and remarks. But I think so that we have also prepared to have some of the questions of the audience. So if you haven't such kind of feeling that I want to say this, so I hope that you are prepared just to contribute this discussion also here. But if I start making this question, what we have been discussing quite much now concerning the sustainable development goals. So pretty much has been also the same ideas what you have, but also a lot of very interesting new things in your lecture contribution. But if I confess first my own old sins, I'm not an economist, I'm a lawyer, formal lawyer, never try to get any up to date information. But because of my education as a lawyer, so I have a very strong trust that we should have a democratic state. And so parliament, government, the head of state, the rule of law, but then also the respect for the human rights. And that's very important what my African colleagues always tell to me, they say that if you are only underlying the frank and fair elections, so after the elections the situation might be even worse concerning the human rights of those who have not won the elections. But then when we think that how the United Nations is combined now for the SDGs, so it's much better that in millennium goals because now we have had a transparent process, we have had possibilities for the interventions with internet systems and so on. But then when we think that what is now the future, millennium goals were made mainly for the governments. They were mainly the ideas, but the governments, the duties the governments could fulfill. Of course, we citizens should be involved. But now when we see already these promises for the SDGs, so the big difference is that now it's not only for the governments, but it should somehow also the fulfill the obeyed by the markets or let's say the business and then the NGOs. And one thing what's is how could I say a little bit disturbing me is that in old ways thought, we thought that it's a power pyramid where you have the parliament and government and people. Normally the people are there on the basis, but still thinking that the people is that one, the will of the people, which is the most important. But in the matter of fact, the political power is not covering the economic side too well. We always say that the business have its own. They have to respect the rules, but still it's a different sector. And then we say that we have of course, the activities of the NGOs and the citizens, they are very important because they will vote the parliament and they will vote the governments. And then I normally say that people has as good politicians as they deserve because they have voted them. I mean in democratic system, but if you have not tried to vote, so it's a different. So my old fantastic pyramid in the Nordic society has changed to become, I call it, it's not scientific term, I call it a certain kind of the ecoblasma. It's moving all the time. And then you have now described during this one and a half hour very well, also the markets. How the markets will serve then in the future this kind of the sustainable development. How can we create the societies that both deliver economic growth, which has been said also that it's welcome, even necessary, but also it should contain contain social justice and be inclusive, not only to get the fruits for the people, but also to be inclusive. And then finally to respect the planetary boundaries. So how can we build a socially inclusive sustainable societies? I don't expect that you will make another lecture. But how do you feel when you see already these SDGs? That what will be really the role of the role of the governments and then the role of other sectors of the society where the light and blessing of the democratic society is not perhaps so strong or what you said that it's sometimes even good that it's not so always. How we can do that. Let me go back to actually the MDGs. There was no legal enforcement of the MDGs. They were part of a norm setting process. And the same now with the SDGs. And even stronger with the new SDGs. And their norm setting not just for governments, but as you say for society as a whole. And that's where things like gender inequalities come in. We know the limits of government enforced affirmative action. It does have an effect I think. But it's even more effective when everybody in society is basically enforcing it in a sense. When people say it's wrong for our corporation to behave that way. And the same thing about environmental issues. So what I think was very good about that process because it was a very inclusive process for creating it. That dialogue itself raised the issues that people care about. And have moved things up into their mindset in a way. And really broadened out in a way what are things that are important for the development agenda. And not only development applies to advanced countries as well. So I think one needs to see all of this as part of a very important part of a democratic process that's much more deeply democratic than elections. Because unfortunately our electoral process has become undemocratized because of the influence of money. I mean we still go through the process and it's absolutely essential. So I don't want to get rid of it. But what I'm saying is these are in some ways more deeply democratic because they can be more participatory. So yeah, some of you know that I spent the last spring semester at Harvard University in Boston. And my own target was to learn to know more a little bit more about American society. But anyway I have worked with Americans a long time. Yeah, what you described about the role of the money. Money was exactly the same experience I got in the short time. But also in Europe the money has become more and more important in political game. So you cannot think that everybody's possibility to become elected in the parliament. And then later on could be possible. Like it used to be a long time ago when I was young. But then of course now the question is that you come just in the day when we will have at 11 o'clock starting the big demonstrations. At least 20,000 people will be I think gathered to go nearby square there in the city center. And it's very interesting concerning your ideas because there is another hand there have been a government who has said that the Finnish economics is in crisis. We need a more balanced interstate budget than we should also to help our companies our business to come more let's say stronger or more competitive in the markets. And that's their idea of how to do. And they asked that the markets could do the employers and employees associations could make an agreement. But with a certain scale. And then the union said that it's not the negotiations if you say that what we should decide. And the employers side have been how could I say hoping that the government will give what the unions will deny. And now we see that what will be then the role of the government in the future. And what will be the freedom of the workers to unite and to negotiate. And what will be the role of the employers in the future in this kind of the international markets. So I don't ask you to solve our national problem. But the situation becomes very interesting because Finland has been one of the very strong ones in the European Union to support Germany that put the limits to the spending or how could I say to do all this. But what I will now to ask you that this is of course very transparent what happened now. But in media is always interested what happened behind the doors. They are not interested what happens here. They interested what they don't know. And they said is it already growing the negotiations what we all hope of course. And so now how do you see this question what you talked about the equality and possibilities to have a role in this system when the different sectors of the society are not in the same way transparent. And if you would go to the business and financial markets and so on. So I think that it would be quite how could I say I don't say that naive but quite optimistic to think that the financial markets could be very transparent. Or am I too pessimistic. And at the same time when we say that the political system has to be very transparent in order to be democratic. So the other sectors of the society are not so transparent. Do you think that the imbalance can be difficult or how we could make it more balanced. I think it's part of a large part of the private sector DNA to be very non-transparent. And there's a good reason for this. You make money when there's market imperfections. The standard theory of perfect information, perfect competition is zero profits. You know I teach, I give classes in a business school and what we try to explain to students is how to create market imperfections. How to create barriers to entry because it's no fun living in a world of zero profits. So I shouldn't say that I don't do this but my colleagues do. How to create monopoly power. One way of creating market power is lack of transparency. So if you have transparent prices they get bit down. That's why the financial institution doesn't want to have transparency in derivatives and CDSs. They work very hard to have lack of transparency. No reason for that. Other than that they want profits. So the answer, there are some areas where inevitably the business community will need lack of transparency. I'm doing a deal. I don't want somebody to come in in front of me. There are all kinds of reasons that you want short run lack of transparency but the problem is that small business small rationale for a limited non-transparency is extended much too broadly. So let me give you the worst examples in African developing countries, the mining and oil companies don't want to disclose what their profits are and what they're paying to the developing, to the countries. We passed a law in Dodd-Frank requiring disclosure of payments by our companies to governments. You would say that shouldn't it be public knowledge what you're paying out and what people are receiving? Is there any reason not to disclose it? Yeah, there is a reason not to disclose it because money is being bribed and money is not getting to the people and that people would be upset if they knew the government received a check for 100 million and then it disappeared. So the only reason for non-transparency there is a bad reason but it is so interesting that our corporations are fighting tooth and nail the implementation of this regulation. So that's, and even in the United States we have a hard time finding out what is going on in the agreement. So that's an example of a really bad case of non-transparency where it doesn't serve any social function. One very important example going on right now where what I think is really undermining democratic process is the discussions going on TPP and TTIP. These are these two trade agreements. The, everybody understands the trade agreements today are not about lowering tariffs. It's about regulations. But regulations are at their heart of the role of the state. And the regulations ought to be decided in a democratic process. They want all the regulations that will apply to all the countries on both sides of the Atlantic and both sides of the Pacific done by the business community behind closed doors and then the parliaments have to say yes or no in an up or down vote. I mean that's not a democratic process. The businesses are at the table. They're writing the rules with the USTR and the trade ministers but civil society is not at the table. So this is a deeply undemocratic process. And my view is for that reason alone these agreements ought to be rejected and say that's not the way in the 21st century we ought to be writing the rules for the global economy. So and you might expect that now I'm making my next question then that what kind of state institutions do we need to manage the market as a driver of the development in the their own sector and also what kind of institutions on international scale. I agree to your criticism but then I will of course to say it a little bit in the same way what our government has said here in Finland that okay I understand that you are against our proposals but what is your proposal? And so we cannot solve all world economical problems here today but could you tell us in which kind of the new implement implications you could see there that which could be more balanced in a way that of course not everything is transparent. Even the state has also the so-called if not the secret but at least the gray side what we have learned about the Snowden and big leagues and whatever things that all these elements have then natural character to spread bigger and bigger and bigger because that's you want to keep it for your own but then the question is that we have to leave with certain kind of the confidence with certain kind of the trust to each other then what do you think how we could do it in there with the manage the market? And so to say that they are creative they do the good dynamics but how to still to think which kind of institutions they need and if I put one element more that here in the Nordic countries sometimes we feel that it's not only the question that whether the government can limit the area the business but sometimes I have a feeling if I put it only to myself that it's like a little bit nursing the markets that is it now put everything for you what you would like to get more that you could do some new jobs. I understand it's a hard job to be in business but sometimes the attitude of the government I have that ass they are grown up business but if you find the balance between not nursing not being the little nests but also to say that you do it you are a big boy or big woman you can do that but they are the certain limits. Yeah. Perhaps the partnership. Yeah those are hard questions but I guess one of the things that I would argue is is one needs a framework for one of the reasons why I think the market fail your framework is useful is that first it identifies those instances where there's likely to have been large deviations from barriers to the market working well. So that's going to be true for instance for big projects in developing countries where the entrepreneurs are likely to be small businesses and can't take large but even the United States the big research projects like the human genome project was beyond drug companies were not interested in doing that. There's a law large public good element that had to be done publicly. So I guess what I say is one needs to have what I think is the intellectual framework that I try to give today is the beginning of trying to think about what are the things that the government should do and what are the things it shouldn't do. There are things in the market and where the market could do better. The government can't do everything. There are these market failures but it's also to the other issue that you raise how to prevent government failure. I think we do need to have think a lot more about not just the institutions of transparency like right to no laws which are very important. I wrote a paper once about you know the information transparency is just the political side of the economics of information. So the question is what are the arguments for not disclosure. And there are very limited cases where you can say okay there are certain state secrets for military reasons and you should establish institutions to make sure that it doesn't go beyond that and interesting Patrick Moynihan which one of our great senators wrote a book called Secrecy where he argues that secrecy the effect of secrecy in the case of the military have the effect of extending the Cold War for beyond 10 years that it really was that it undermined. It allowed the military to create a false sense of what was going on in Russia and so it was a really strong argument that we extended security secrecy well beyond the arena where it would have been socially productive. So I think there needs to be even in that area a lot of work but I also try to emphasize it's not only access to information there's this public good aspect and that is in dissemination of information and processing of information. So the right to know is about access to information but you need to make sure that there's a media that is diversified. So some of the Scandinavian countries do that well when they subsidize a second newspaper in a different town. So that it's not dependent on Rupert Murdoch. If you have a Rupert Murdoch kind of media you're gonna get distorted information. So and I think we ought to realize that it's not only the right to know it's sort of the mechanisms of telling. Yeah, thank you very much. I promise that there could be a question by the audience. I think so that what will be also the result that some of the questions you will know the racial hands will be in the next wow. At least you see that they have a lot of questions. That's a good sign. They have been listening to you very carefully. Is it agreed that we take one woman and one man? Sure. Now you can choose. Would you like to get here or there? No, this is the question to how to get out of the responsibility I told already to you that happened already when you spoke about the financial crisis. I see that lady first there. Okay, you. The gray head lady. I saw already our former minister finance there but she didn't raise her hand. So, okay, yeah. Okay, please introduce yourself. Hi, I'm Marty Chen from the Harvard and also the Wego network. I didn't know that she's from Harvard. And thank you very much for the talk and also the exchange. And I just think there's one thing missing in what were the developments over the last 30 years and it's an area where there haven't been advances in economics. And this is the whole structure of production and distribution and what the labor markets really look like now. And I work on the informal economy and we know that it's 50 to 90% of the workforce. It's probably 40 to 60% of the GDP. And yet in the neoliberal Washington consensus economics, it's stigmatized as illegal underground gray black. And there is a wedge that's that. But mostly it's ordinary people trying to earn an honest living under very difficult situation. And so all your talk about the need for stable prices and price transparency and the need for incentives and protection, they don't get that because the rule of the law is structured against them. So I just wanted to add that to the agenda. And if we put to here that I had in my notebook that I should ask also that what could we do that the poor, the young young people and the women could be more included in this business and they had just the 90% of that system what she made a question. And we have not the rates this question. Okay, fine. Yeah, so I agree and obviously I couldn't cover everything in my marathon talk. So the point I guess I would add is that when I said that what structures the market or the market economy, including this informal market are the rules and regulations. And one of the big issues that is going on right now for instance are can there be organization, labor negotiations across these disparate unics and a lot of the employers are trying to make it impossible to say you can't organize. And in the absence of organization with organization on the employer side and no organization on the worker side and that's an imbalance and that's going to lead to exploitation. Okay, what I'm trying to say is the legal framework is now being attacked and that's where it really is. So there is an organization, the question is how it flourishes will depend on the legal framework and it's really important to get that right and right now there's a battle over precisely that issue. So thank you very much. Now I think it would be the possibility for the men. Sorry to discourage me. This is not the balance. Okay, all the men, all the men. And I think, perhaps we could get, I saw, I think, perhaps, now they want this one here in the first row. Okay, perhaps we take a third question also but you can be now be the man. It's not the discrimination, but you introduce yourself. Okay. Thank you Joe, by the way, especially being on time. Remember, you took up like three hours at the ARC last time. Anyway, so African Economic Research Consortium, Lemon Sunbat, I'm very impressed with your wide-ranging diagnostics and the rethinking of the standard model. But what was striking to me was the three conclusions that you made, like good financial regulation and you mentioned market access to leverage and then micro prudential. These are the things that I can actually get from our standard paradigm. So we're just wondering how, for instance, the behavioral economics that you mentioned. You know, some of the issues that you diagnosed could have actually impacted this, that's one question. The second is, I know you mentioned in a very prominent way about this development of state. Now, let's assume that the state is actually competent and very well-capacitated. But we have distorted incentives. You know, you have government actors, you know, who can rent a seat, or even at a narrow level of financial regulation, who regulates the regulator? So I wanted to hear more about, really the incentive structure within the development of state that actually gets you to get those decisions right. Thank you. So I take an exception. There is also that tall, fair-haired man there. Okay, that one, he looks a little bit younger than we others. Okay, fine, okay. Could you stand up and introduce yourself? Thank you very much for a very inspiring presentation. My name is Lasse Moller and I'm with the Ministry of Foreign Affairs in Denmark. I consider myself as a development practitioner and my question derives from that. I was very interested in your example with the Korea where you said that the IMF had actually asked them to produce rice and then they said, no, we want to produce steel. We have had presentations from the new structural economics from Justin Lin, emphasizing quite a lot that you should emphasize your comparative advantage. And if Korea was not supposed to produce rice, then what are actually the sort of principles? To what extent should we go beyond those comparative advantages and how should the state actually get those decisions right? Thank you. Easy question. Yeah, they're all good and hard questions. Let me first say on the issue of financial sector regulation, many of these regulations are based on, are necessary, let me put it like this, the standard model began with the premise that banks could be self-regulated. That was the idea that Bernanke and Greenspan and that came out of a simplistic model of how the actors in the financial sector behaved. Alan Greenspan made a famous speech when he had to testify in Congress about what had gone wrong. He said there was a flaw in his reasoning, a flaw that cost the American economy $5 trillion, but let's put that aside. There was a flaw, his flaw was that he thought the banks would behave in a way that was more prudential and he was surprised, but actually I was surprised that he was surprised in a way because if he had taken a micro economics course, he would have understood that the extent of structures in the financial sector were for excessive risk-taking and a short-sighted myopic behavior. So he used to say, well that's just telling those reforms that I described were just incorporating what we know about good micro, which the macroeconomists, including the central bankers, had systematically ignored. That is a very important improvement because those macro models had ignored all that kind of microeconomics, banking, all that and incorporating that is a revolution in macroeconomics. But I would go beyond that in a number of ways. The ways that I mentioned before that in the minds, their advice, the way that optimal degree of diversification that they would have recommended was based on models which assume concavity, which were inappropriate in a world in which there are these non-convexities. The models that you use based on rational expectations I think are just very bad. We know from the work of Schiller and others that there is all kind of irrationalities. I mean, irony, this is another example of cognitive dissonance. I was there when Alan Greenspan gave his very famous speech in Washington where he said there is irrational exuberance. And there was irrational exuberance. But in his mind, the people who suffer from irrational exuberance are the people who are irrationally exuberant because those models had no macroeconomic externalities. But if you have irrational people and there are macroeconomic externalities, we will suffer from here irrational exuberance. And we did. And designing the regulatory structure can't be based on a model of rational expectation. It has to be based on the understanding that there may be massive irrationalities and there have been massive irrationalities. Third example that may be more relevant where focusing particularly on behavior, well, in behavioral economics, emphasizes the herding behavior. Herding behavior means it's more likely that you will get these kinds of bubbles. So once you recognize the presence of herding behavior, it means the degree of tightness and macro-pronential regulation has to be based not on a model of rational expectations but of behavioral economics, systematic distortions. But for developing countries an even more, and let me say these that are important for say emerging markets because many of them are being told like China, liberalize your markets, trust the market. And China went too far. And now we're seeing some of the consequences in China of trusting the market. What? Oh, USA is very clear. But I was saying China is a developing country. But I mean the future by China. Yeah. But even on the other side, behavioral economics, I didn't have a chance to talk about this, that one of the things that development policy is concerned with is increasing savings rates. Behavioral economics, you know, standard models of inter-temporal savings behavior maximizing utility function, you know, assuming separability and constant elasticity and all that focuses on the interest rate and their interest elasticity. And we know that those interest elasticities are not very great and we haven't gotten ever been able to get much of a response except if you get very negative real interest rates then you have a negative response. But normally it's very hard to move. But behavioral economics has gotten all kinds of ways of stimulating savings that are very different and very important for development. So I, you know, and these are just an illustration that this new thinking really has changed. How even in this one narrow area of finance, the way we think about those issues. Now I'm the question that you raised on incentive structures in the public sector. One of the lessings I think of behavioral economics is that don't focus on financial incentives. That you are likely to get better responses from intrinsic rewards than extrinsic rewards. That, and I think this is really important. So for instance, for teachers, and there's actually some interesting experiments supporting this. For teachers, if you tell a teacher, you know, somebody who is accepted a low-paid job compared to a banker, and you remind them every day, by the way, you know, if you work just a little bit harder and get your students to get a little bit higher score, I'll give you another $35. You remind them of two things. They chose the wrong profession of their interest in money. And the reward, most of those things that they don't have control of, if they get back students, you know, they're one of the influence, very important, but they're only one of the influences. You get much better results by motivating people to why they went into teaching in the first place. They went into teaching because they cared about the students, they wanted to improve. Most of us who went into development economics, you know, I would not want to be paid on the basis of the success of those who followed my advice. But on the other hand, Justin would be a billionaire now. So the question is, that's not why we gave the advice that we gave. It wasn't, and would we give different advice if money were on the line? I don't think we would give different advice. I think we're doing the best that we can. And, you know, our motivation has been, you know, we went into academia because we're interested in the ideas. We don't get paid for, you know, I'm beyond the tenure clock and I still write a lot of papers. Would I write more or less papers if my pay depended on it? No, it has nothing to do with it. And I think that's true of most people who enter public service and most people who enter academia. And talking about financial incentives is really going in the wrong direction. I think we have to think about how do we motivate these people in other ways to, the real deep motivation is to create a better society. And I think that's what most of the people are concerned with. So, then the final question, about dynamic comparative advantage. So what I was saying is, don't just accept that your comparative advantage is in rice and therefore do that. The question of what your dynamic comparative advantage, what if you invest would be, is a really hard one and would be the subject of another lecture. But even on that, Justin and I don't quite agree. So let me try to illustrate. So, Justin has emphasized what he was saying, comparative advantage, defying going absolutely in the opposite direction. I would say, put it like this, that there are often directions that you can go that are consistent with your resources that you want to advance. So that for instance, a country with a lot of natural resources, it is natural that it take account of what it has learned from producing those natural resources to go to the next stage. So that South Africa, for instance, in producing its natural resources, had to develop machines to move to do the mining and those machines were very similar to cars and that's how we got into the car industry. Rise and steal? What? There was no link between those two. So that was a leap. That was a leap that worked. So that was why I would say that was a case where it was a leap. It turned out to be right. They were right and I think, okay, so you've hit at the hardest question. One of the things that Justin has said sometimes, I may be misquoting him, is that you could look at what was successful of other countries at comparable stages. That gives you some information about what you might do, but it also has a problem and that's related to the structure of the economy is constantly changing and what worked 30 years ago in East Asia may not be the right thing today for Africa. It may be, but it may not be. So all I can say is that's a hard problem where all of you have to work together to solve it. That they had to go to something that was quite different. They realized that there had to be a leap. They made a very thoughtful decision of what that leap would be. One of the reasons they chose that and it was another reason that they chose chips a little bit later on and was another big leap was those were vital inputs to further stages in development. So it wasn't linked to their past, but they thought of it as very linked to the next stages to which they were going to go. So they thought of it as part of a development strategy. And the same thing in Taiwan, one of the reasons that Taiwan developed a synthetic industry for synthetic fibers was that they thought textiles was one of the things they wanted to go and they having a synthetic fiber as an input would be linked to their next stages in their development. So thinking about it within the development trajectory is important, but there are going to be some cases where you're going to have to make leaps and those are going to be hard and you have to think about use all the relevant information including successful leaps in the past, but what were successful leaps in the past may not be determinative of what you wanted to today. Thank you very much. I know that many of you would like to make further questions and continue the discussions, but we cannot criticize the organizers because we have had a lot of time, but you know this is an area you come again and again back. So once again, thank you very much for you, Professor Stigius. And now you can go to the coffee. It's only 15 minutes, you are in Finland, so it was 30 minutes, but we used 15 minutes for your discussion, so I hope that you will be punctually back. Thank you very much.