Challenging the Economic Foundations: An Interview with Joseph Stiglitz

Franklin Templeton and Green Templeton College, University of Oxford, enjoy a close partnership. We recently launched a series of virtual academic sessions and investor panels under the headline “The Way Forward: Navigating the COVID Challenge.”

As part of this series, I had the privilege of sitting down with Nobel Laureate Economist Joseph Stiglitz to discuss his views on how we should look at the future. This is a summary of Professor Stiglitz’ views in our discussion.

Professor Stiglitz emphasized that the pandemic exposed deep fractures that were present before COVID-19 and need to be bridged in a post-COVID world. Disparities in income, wealth, and access to public health became even more pronounced during the pandemic, visible in less well-off Americans suffering and dying disproportionally. The pandemic also exposed low levels of trust in government and other institutions, which made coordinated and cooperative solutions more difficult in the United States than in other countries, such as New Zealand, where social cohesion and public trust are greater.

We need better instruments to measure and guide economic policy Stiglitz emphasizes that we need better instruments—and a wider variety of them—to measure and guide economic policy. Single measures of economic “success,” such as national income, commonly known as gross domestic product (GDP), do a poor job of capturing the complexity of what makes for a well-functioning society. A single measure cannot encapsulate the mosaic of factors that allow social success. Accordingly, Stiglitz made a powerful case for governments, international organizations, and research institutions to develop a dashboard of metrics that will better portray the economic, social, and public health of nations. Once equipped with better data, governments, businesses and individuals will all be able to make better decisions. Stiglitz argues that what is measured will heavily impact what policies are implemented.

And, greater cooperation is needed between government, individuals and companies

According to Stiglitz, if society is to work better for everyone, greater trust is required. People must re-learn how to trust one another. Trust in government as an instrument for the betterment of society and the individual must be restored. Trusting societies are more resilient and adapt better to crises, such as the pandemic.

He argues democracy, social cohesion and economic liberty require a balance between the roles of the marketplace and those of duly elected governments. At times, democracy and capitalism may be in conflict, but the freedoms and protections enjoyed by each requires that they coexist. Indeed, modernity demands that they strengthen and reinforce one another.

Public education and public health are illustrative. A successful economy requires trained and healthy workers. Yet left on their own, free markets will not supply optimal levels of either. By using the vast resources generated by free-market enterprise, government can raise sufficient tax revenues to fund proper investment in education and healthcare.

Modern economies are replete with externalities. Some are positive, such as education or public health. Others are negative, such as pollution, biodiversity loss or climate change. Free markets underprice both the benefits of positive externalities and the costs of negative externalities. As a result, we are left with too few public goods and too many public “bads.” Stiglitz believes only government can redress those imbalances.

Incentives need to be better aligned

Yet, incentives also matter. The neoliberal model, in extremis, was captured in the 1980s by Gordon Gekko, the protagonist in the movie Wall Street, who infamously declared that “greed is good.” Four decades later, it is abundantly clear that greed is not always good, and it surely is not sufficient to build stable, resilient societies. Understanding when one person’s freedom to act conflicts with another individual’s well-being must also be recognized.

In the realm of capital markets, the corollary is that listed companies, their shareholders and the financial firms that disintermediate savings into investment must recognize their responsibilities are broader than the neoliberal paradigm would preach. ?

Thus, shareholder capitalism, according to Stiglitz, must morph into broader stakeholder capitalism. Employees have an interest in their company’s stock price, but also in childcare, healthcare, work-life balance, and the ethical behavior of the company they work for. Customers have an interest in the price and quality of the product, but also in its sustainable sourcing. Regulators have an interest in the financial health of markets, but also in how risks posed by climate change may impact the welfare of the investing public.

Adapting incentives to encourage stakeholder-based capitalism can be accomplished by one of Stiglitz’s key observations—the need to change what we measure. If listed companies were required to publish environmental, social and governance (ESG) performance indicators alongside their traditional financial reporting, then journalists, investors, regulators and company management would take a greater interest in where firms rank on those more comprehensive scorecards. Shame and pride, alongside financial returns, are powerful motivators leading to changes in behavior.

Investors will need to understand the complexity and adapt

Following the pandemic, Stiglitz argues that building back better begins with an understanding that our challenges are complex and cannot be resolved by narrow ideology. Understanding the complexity of modern society, the working relationship of democracy and capitalism, and recognizing the prevalence of externalities are the first steps toward genuinely healing our social, economic, and financial ills.

I (Stephen Dover) believe that ESG criteria benefits shareholders and stakeholders alike

Some may fear that complexity leads to paralysis. Instead, I believe that good investors embrace complexity as the reality and relish the opportunity to use that knowledge to enhance their investment experience.

That’s why it is so important to be at the forefront of encouraging the development of new ways to evaluate corporate performance. And just like the symbiotic interplay between democracy and capitalism in a healthy society, I earnestly believe that companies that perform well on ESG criteria are also those likely to best reward shareholders with strong financial returns. The fiduciary responsibility to investors is enhanced, not compromised, by a conviction that ESG benefits shareholders and stakeholders alike.

Franklin Templeton and Green Templeton College, University of Oxford, enjoy a close partnership based on historical links. As part of our academic partnership program, we launched a series of virtual academic sessions and investor panels under the headline “The Way Forward: Navigating the COVID Challenge.” Read more:

US readers: The Newest “New Normal”: The World in the Wake of COVID-19, Never Waste a Crisis: Lessons Learned From COVID-19 for sustainable Investment Strategies and Progress Towards a Better World

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Readers outside the US: The Newest “New Normal”: The World in the Wake of COVID-19, Never Waste a Crisis: Lessons Learned From COVID-19 for sustainable Investment Strategies and Progress Towards a Better World

In addition, you can view Joseph Stiglitz’ full academic lecture, Building back better – but on what foundations?, as part of the 2021 Green Templeton Series “Navigating the COVID Challenge”.

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