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Unformatted text preview: INFORMATION AND THE CHANGE IN THE PARADIGM IN ECONOMICS Prize Lecture, December 8, 2001 by J OSEPH E. S TIGLITZ Columbia Business School, Columbia University, 1022 International Affairs Building, 420 West 118th Street, New York, NY 10027, USA. The research for which George Akerlof, Mike Spence, and I are being recog- nized is part of a larger research program which, today, embraces hundred, perhaps thousands, of researchers around the world. In this lecture, I want to set the particular work which was sited within this broader agenda, and that agenda within the broader perspective of the history of economic thought. I hope to show that Information Economics represents a fundamental change in the prevailing paradigm within economics. Problems of information are central to understanding not only market economics but also political economy, and in the last section of this lecture, I explore some of the implications of in- formation imperfections for political processes. INTRODUCTION Many years ago Keynes wrote: The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly un- derstood. Indeed, the world is ruled by little else. Practical men, who be- lieve themselves quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. Keynes . Information economics has already had a profound effect on how we think about economic policy, and are likely to have an even greater influence in the future. The world is, of course, more complicated than our simple or even our more complicated models would suggest. Many of the major political debates over the past two decades have centered around one key issue: the ef- ficiency of the market economy, and the appropriate relationship between the market and the government. The argument of Adam Smith , the founder of modern economics, that free markets led to efficient outcomes, as if by an invisible hand has played a central role in these debates: it sug- gested that we could, by and large, rely on markets without government inter- vention . There was, at best, a limited role for government. The set of ideas that 472 I will present here undermined Smiths theory and the view of government that rested on it. They have suggested that the reason that the hand may be invisible is that it is simply not there or at least that if is there, it is palsied. When I began the study of economics some forty one years ago, I was struck by the incongruity between the models that I was taught and the world that I had seen growing up, in Gary Indiana, a city whose rise and fall paralleled the rise and fall of the industrial economy. Founded in 1906 by U.S. Steel, and named after its Chairman of the Board, by the end of the century it had de- clined to but a shadow of its former self. But even in its heyday, it was marredclined to but a shadow of its former self....
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