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August 25, 2002
David Warsh, Proprietor


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Skirmishers

Economics more than ever is a business for specialists. So when a generalist presents himself as ready to express opinions on a broad array of topics, prepared to skirmish regularly with those who hold opposing points of view, we sit up and take notice.

Everybody knows (at least a little) about Paul Krugman, the Princeton University professor who as taken up residence as a columnist twice weekly on the op-ed page of the New York Times — a complicated case indeed.

Two more economists, Joseph Stiglitz and Reuven Brenner, recently have entered this lofty realm, aided by the appearance of new books.

You might as well get to know them now. They’ll be around for many years to come. They come from opposite ends of the profession. And they take quite disparate views of the process of globalization.

Consider Stiglitz first. He was celebrated last fall as co-winner of the Nobel Award in Economics, sharing the glory with George Akerlof of the University of California at Berkeley and A. Michael Spence of Stanford University.

The citation mentioned their having rendered tractable the problem of asymmetric information, meaning those ubiquitous situations in which one party to a transaction knows something the other doesn’t. At last Stiglitz was famous. His photo was in all the papers.

But within the profession, Stiglitz had enjoyed a reputation as being among the smartest economists of his generation ever since he showed up for graduate school in 1964 at the Massachusetts Institute of Technology. His strength turned out to be a knack for clarity, coupled with a powerful economic intuition.

For many years, Stiglitz was a consummate insider. First at Yale University, then at Oxford, Princeton and Stanford, he contributed a steady stream of technical papers to the literature of labor-, health- and macroeconomics, contributing to what today is sometimes called the Market Failure Theory of government action.

Many of those papers described tight mathematical models of economic processes, including (with Avinash Dixit) a representation of markets for differentiated goods that turned out to be useful in many fields for analyzing the kind of market failure known as monopolistic competition. (Plans to publish Stiglitz’ collected papers are said to call for 26 volumes!)

By the mid-70s, he became a leader of a coterie of economists known as “New Keynesians,” of whom it was said (by their critics) that they never encountered a market whose performance they didn’t think they could improve by intervention, early and often. In the ’80s, he wrote a well-received introductory textbook.

And then, in 1993, he agreed to go to Washington to serve as a member of President Clinton’s Council of Economic Advisers, then as chairman, finally as chief economist of the World Bank.

It was in that capacity that Stiglitz began to become better know to the public. Tentatively at first, then more insistently, he became a critic of the International Monetary Fund’s handling of Asian currency crisis. Like the World Bank, the IMF was founded at the end of the Second World War to smooth the processes of global development. The Bank would supply capital to the poorer nations and the Fund would supply liquidity when needed.

Stiglitz charged that the IMF had become overzealous in assuring that commercial banks be repaid, He asserted that it cared more for the stability of the lending system than for businesses in Third World countries that were forced to shut their doors. Though it was somewhat muted while he remained in office, the dissent was widely noted. And after he left office, he turned up the volume.

Stiglitz moved to Columbia University and wrote “Globalization and its Discontents,” published earlier this summer. It is a fascinating book, full of glimpses into ordinarily impenetrable bureaucracy that is the IMF, and bristling with sensitivity to the Might-Have-Been.

Capitalism is at a crossroads today, Stiglitz says, just as it was during the Great Depression. Only a determined effort to ease up on the preaching the gospel of open capital markets can avert a massive backlash.

(At one point, Stiglitz adopts an unusually personal tone. He attacks Stanley Fischer, who had served as a top official of the IMF during the crisis before taking a very senior job with Citibank. “One could only ask, Was Fischer being richly rewarded for having faithfully executed what he was told to do?’

(The criticism backfired for at least two reasons. For one thing; Citicorp has a long history — in the person of William Rhodes — of employing debt negotiators who were fundamentally sympathetic to the problems of the developing world. For another, Stan Fischer had been the foremost macroeconomist in the foremost economics department in the world, MIT, for twenty years before he went to Washington to join the IMF. Having been born in Rhodesia, his commitment to fairness was unquestioned.

In all likelihood, before long Stiglitz will collect the other great honor that technical economics has to offer — the presidency of the American Economic Association. But the single thing he may have wanted most has eluded his grasp — the job Fischer held for all those years at MIT. Rivalry may have clouded Stiglitz’ judgment.)

Reuven Brenner, on the other hand, can expect no such honors. His claim on our attention is his originality. In a series of books — “History — The Human Gamble” (1983), “Betting on Ideas” (1985), “Rivalry” (1987) and “Labyrinths of Prosperity” (1994), Brenner set forth a vision of how a concern for relative position among individuals dominates economic processes and gives rise to behaviors ranging from entrepreneurship to gambling to crime.

His arguments were not carefully defended in the ordinary manner of technical economics — “to play the academic game was never my goal,” he says. When the Royal Society of Canada made him a member, the citation mentioned his preference for “topics bigger than those with which most economists are comfortable.”

But there is something in Brenner’s iconoclastic approach that resonates with practical persons around the world. He was raised in communist Rumania until he was 15, so he comes naturally to the Government Failure Theory of market action. He served for three years in the Israeli Army, including the Six Days War, then briefly again during the Yom Kippur War, so he isn’t a government-hater.

And his PhD at Hebrew University — work on index numbers for currency transactions for the Israeli central bank — was practical enough that he can claim never to have worked in anything other that applied economics. He consults extensively to businesses today.

Yet he is sufficiently well trained and confident to be able to slug it out with the best academically trained economists — including Stiglitz. Brenner holds the Repap Chair of Business at McGill University in Montreal.

His new book — “The Forces of Finance” — is not his best. It’s a collection of essays, speeches and pensees, loosely stapled together. But he consistently takes a view of globalization that is more or less the opposite from that of Joe Stiglitz — and often highly stimulating.

According to Brenner, prosperity is the consequence of one thing and one thing only, he writes: “matching talent with capital, and holding both sides accountable.” When capital markets are open, he says, “so-called angels, venture capitalists, banks, investment banks, leveraged buy-out firms and asset-management firms make these matches, betting on the visions of entrepreneurs and managers” and keeping their feet to the fire.

When capital markets are closed, he says, governments, family members and criminal elements decide on the matches, with considerably less salubrious results. There is a role for governments in keeping capital markets functioning smoothly, but it is easily subverted. Initiatives, referenda and other forms of “direct democracy” offer the best hope of keeping government in check, he says.

It’s been some time since business folk had an advocate who “spoke to their condition.” Perhaps Milton Friedman was the last effective popular champion, and it had been twenty years since he was regularly in the lists. Brenner is not Friedman’s class, but he is a welcome addition to the ranks of eminent skirmishers, Left and Right.

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