Friday, December 16, 2011

Joseph Stiglitz explains the depressions

Fascinating piece in Vanity Fair by Stiglitz. He argues that the implosion of financial sector was a symptom of broader structural dysfunctions in the economy, involving the transformation from an industrial to service-based economy. He develops the argument but comparing with the 1930s, where the collapse of the financial system was in large part an effect of the difficult structural change from an agriculture-based to an industrial economy.

This is important stuff. It carries two broad implications. First, fixing finance alone won't solve the problem. It is an essential pre-requisite of exiting the crisis, but there also needs to be a fundamental shift towards a services-based economy, achieved through state intervention to retrain workers and make the investments needed to hasten the transformation. The private sector won't do it alone, and currently policy, by depressing demand, simply locks us into a downward spiral.