Stiglitz (and Greenwald among others) Versus Jesus Christ
The new economics of Stiglitz (and Greenwald, among others) has been touted as the inaugural shift away from the study of the world of “perfections” to the study of the real world as is. We owe to Stiglitz “imperfections” and “asymmetry” as tacit prefixes for information, competition, markets, and so on. However, Stiglitz’s articulation of the problem has been geared primarily toward the gentlemen of the economics profession; consequently, his reach in the mucky turbulent world of realpolitik has been limited. As Stiglitz himself has lamented: policymaking seems to be based on advice drawn from the “basic instincts from perfect information, perfect competition world of Economics 101, rather than the living, breathing world that we inhabit” (see Economics for an Imperfect World: Essays in Honor of Joseph E. Stiglitz, 2003, p. 5).
If Stiglitz’s criticism of standard neoclassical economics is abstruse, then this attempt to critique it via a critique of Stiglitz is doubly so. In this post I try to do so in a form that is accessible to the general public.
What is the information problem in the real world? I will use the parable of the talents in the gospel according to Matthew 25:14–30 to compare two perspectives on the information paradox at the center of the dispute. The information problem in Stiglitz (and Greenwald, among others) is analogous to the institutional limitations facing the servant in the parable. As the servant himself puts it in verses 24–25, “‘Master, I knew you to be a hard man, reaping where you did not sow, and gathering where you scattered no seed, so I was afraid, and I went and hid your talent in the ground. Here, you have what is yours.” It is clear even from our casual reading of the story that the credit rationing problem described does not emanate from the real world as is, rather it is due to the subset of the real world circumscribed by the master’s [regulatory] intervention. Indeed, the servant’s main complaint is not information “imperfections” and “asymmetry” but his misjudged character of his master.
The real world as is — it can be argued, and contrary to Stiglitz for whom the servant does not suffer the consequences of credit rationing — is reflected in the master’s rebuke in verses 26–30, “You wicked and slothful servant!…. And cast the worthless servant into the outer darkness [in the language of Matthew 25:41, the everlasting fire prepared for the devil and his angels]. In that place there will be weeping and gnashing of teeth.”
The real world for the servant is the dilemma between the wrath of his hard master and the everlasting fire prepared for the devil and his angels. This may explain why policymaking has tended to favor the world of “perfections” than the world “imperfections”.
More money more problems
The parable of the talents contains, in my view, one of the most astute observations of the workings of the monetary system of a market economy. Its elevation to the scriptures — as a firmly held belief (an article of faith) whose internal workings need not be understood or explained —is based on two grounds.
First, its suitability to natural experimentation. It would have been apparent to any master with multiple dominions (or even a master with a single dominion over time after a succession of servants) that the dominions issuing only ex-ante profitable (i.e., expected profit “before the lending”) loans had more liquid money but also more sociopolitical and socioeconomic problems; while those which included ex-ante unprofitable loans alongside the ex-ante profitable loans had less liquid money but also fewer sociopolitical and socioeconomic problems (see for example, King and Levine,1993). Indeed connecting money buried in the ground (or bank vault) with the everlasting fire prepared for the devil and his angels is not just colorful biblical hyperbole, a dysfunctional monetary system is extremely detrimental to the economic and sociopolitical system. We need only consider the rise of Adolf Hitler as predicted in Keynes’ The Economic Consequences of the Peace.
Secondly, the insight of the parable as an article of faith — that is, attempts to explicate its internal workings is suppressed and discouraged—derives from its dialectical contradictions. Loans to ex-ante unprofitable projects (or money creation itself) is something that the servant is expected to be doing all the time but it is not to be spoken aloud.
Law of Jubilee
The main insight of the parable goes even deeper in antiquity. The anthropologist David Graeber (2011) examined the economic and cultural significance of debt going back 5,000 years and found the problem of [bad] debt accumulation to be of ancient origin. Therefore, unlike the arguments in Stiglitz and Greenwald where bank behavior must “be understood in terms of (or derived from) an analysis of information imperfections” which limit the supply of loanable funds to economy, bankers have been lending despite these imperfections from ancient times.
The sages of old expected bad debt to accumulate over time (p. 83); they expected that this bad debt would develop into serious debt crises and cause sociopolitical instability; they expected the crisis to be resolved only by debt redemption due to divine messianic grace or sacrifice or secular messianic cataclysmic revolution (p. 82) and therefore prescribed a period of debt forgiveness through “clean slate” edicts such as the Law of Jubilee (p. 82, 87) to preempt it. The ubiquity of the Law of Jubilee and Sabbaths suggest that the ancients experienced debt crises with such regularity that they were able to pinpoint their cyclical tendencies and to prescribe remedies on them.
Information imperfections and Lending
Is information imperfections a barrier, or limitation, to the supply of loanable funds to economy; or is information imperfections the very reason to have a monetary economy? This question will not be attempted here, it will be the subject of a future post.
