It is quite clear that Professor Stiglitz has not compromised any of his powerful candour and nonconformist openness about macroeconomic issues of our time. As I’m writing this comment I 'm just seeing the latest news about Greece on my laptop screen saying:



“The scale of the No vote took European leaders by surprise, and led to panic in the financial markets. German Chancellor Angela Merkel spoke to Alexis Tsipras, the Greek prime minister, and is due to meet the French President, Francois Hollande”



One may recall the time when Ken Rogoff tried to characterize Stiglitz ideas as: “at best highly controversial, at worst, snake oil”. Well, the test of time proved that Stiglitz was absolutely right that time, and I’m afraid will be on-the-money this time again.



Last time it was financial authorities “conformism” that by trying to create a quasi-confidence, of the sort Rogoff implicitly was advocating in his 2002 open letter to Stiglitz, shaped the great financial crisis of 2008; and it was Mr. Greenspan of the notorious “committee to save the world”, who finally admitted the responsibility of adhering to unfettered capitalism, and confessed that the committee “had *not* it right” . It is still greatly profitable to reflect on Rogoff’s criticism of Stiglitz in that open letter:



“In your role as chief economist at the World Bank, you decided to become what you see as a heroic whistleblower, speaking out against macroeconomic policies adopted during the 1990s Asian crisis that you believed to be misguided. You were 100% sure of yourself, 100% sure that your policies were absolutely the right ones. In the middle of a global wave of speculative attacks, that you yourself labeled a crisis of confidence, you fueled the panic by undermining confidence in the very institutions you were working for. Did it ever occur to you for a moment that your actions might have hurt the poor and indigent people in Asia that you care about so deeply? Do you ever lose a night's sleep thinking that just maybe, Alan Greenspan, Larry Summers, Bob Rubin, and Stan Fischer had it right—and that your impulsive actions might have deepened the downturn or delayed—even for a day—the recovery we now see in Asia?”



… And it is important to recall what Stiglitz wrote in his very important article of April 17, 2000, in New Republic:



“I was often asked how smart--even brilliant--people could have created such bad policies. One reason is that these smart people were not using smart economics. Time and again, I was dismayed at how out-of-date--and how out-of-tune with reality--the models Washington economists employed were. For example, microeconomic phenomena such as bankruptcy and the fear of default were at the center of the East Asian crisis. But the macroeconomic models used to analyze these crises were not typically rooted in microfoundations, so they took no account of bankruptcy.



But bad economics was only a symptom of the real problem: secrecy. Smart people are more likely to do stupid things when they close themselves off from outside criticism and advice. If there's one thing I've learned in government, it's that openness is most essential in those realms where expertise seems to matter most. If the IMF and Treasury had invited greater scrutiny, their folly might have become much clearer, much earlier”



This is the crux of the issue now for Greek, for Portugal, for Spain, and surely also for Germany, China and the US. The world needs a right structure for the global trade, and to have a right structure we need a right model. However, as I’ve written before models are like city maps -- highly abstracted constructs to help the traveller to organise information and to get home safly. Like city maps any model, if you give it enough time, can take you home, but the question is how much time are you prepared to waste using an outdated map to find home? When one reads Stiglitz’ comments one can’t help to be very impressed with the richness of his sophisticated underlying general equilibrium model, which its intricacies unfortunately escape the less careful readers. It is, of course, impossible for him to present a fully-specified model in a short space of an article. Nevertheless, the clarity and consistency of his argument delineates a sharp sketch of his underlying model. In his open letter Rogoff accused Stiglitz of cloaking himself “in the mantle of John Maynard Keynes” and wrote:



“No, instead of Keynes, I would cloak your theories in the mantle of Arthur Laffer and other extreme expositors of 1980s Reagan-style supply-side economics. Laffer believed that if the government would only cut tax rates, people would work harder, and total government revenues would rise. The Stiglitz-Laffer theory of crisis management holds that countries need not worry about expanding deficits, as in so doing, they will increase their debt service capacity more than proportionately.”



Unfortunately, many politicians just follow this type of partial-equilibrium assertions and derive their misguided conclusions.



Perhaps if Rogoff thought of a model with both a fully articulated demand side and a complete supply side, he could see that it is possible to direct extra funds into the expansion of production possibility frontier, shifting the growth rate of potential output, and creating more debt service capacity. There are many ways to achieve such an objective within the framework of a capitalist regime –for instance by 3P (public-private- partnership) backed by a Brady kind of financial restructuring, and employing the possibilities of the global supply chains combining with the possibilities that the new advnces in information technology offer.



Instead we have the IMF formulation of its assistance program, which its Stiglitz’ characterization is spot on :



“When the IMF decides to assist a country, it dispatches a "mission" of economists. These economists frequently lack extensive experience in the country; they are more likely to have firsthand knowledge of its five-star hotels than of the villages that dot its countryside. They work hard, poring over numbers deep into the night. But their task is impossible. In a period of days or, at most, weeks, they are charged with developing a coherent program sensitive to the needs of the country. Needless to say, a little number-crunching rarely provides adequate insights into the development strategy for an entire nation. Even worse, the number-crunching isn't always that good. The mathematical models the IMF uses are frequently flawed or out-of-date. Critics accuse the institution of taking a cookie-cutter approach to economics, and they're right. Country teams have been known to compose draft reports before visiting. I heard stories of one unfortunate incident when team members copied large parts of the text for one country's report and transferred them wholesale to another. They might have gotten away with it, except the "search and replace" function on the word processor didn't work properly, leaving the original country's name in a few places. Oops”

