The Blog

  • December 14, 2011
  • Nobel Laureate Stiglitz on New Paradigm

    Nobel Economics laureate, Joseph Stiglitz, has a fascinating column in the January issue of Vanity Fair and it sheds much light on the current economy and our lack of meaningful recovery nearly five years post-meltdown.

    If I had to guess I would say Stiglitz is a salt-water economist—industry shorthand that implies more macro economists of the Keynesian school populate the economics departments on the Atlantic and Pacific coasts while Neo-Classical folks (think Milton Friedman) gravitate to the great lakes and the University of Chicago.  At least that is how insiders describe the distinction, though not being an insider myself I can only report.

    Stiglitz compares the Great Depression with the today’s Long Slump and concludes that there is more commonality between the two events, separated by 80 years or so, than first meets the eye.  Conventional wisdom says the Depression was caused by bad monetary strategy, tightening the money supply when it should have been loosened.  But that theory falls down in the present because we’ve done all the loosening we can and it seems like the Federal Reserve is simply pushing on a proverbial string.

    So, what’s going on?  Stiglitz believes that the cause of the Depression and the cause of today’s dysfunction stem from the same root, a paradigm shift.  In the 1920’s the economy was transitioning from agriculture to manufacturing.  Farmers borrowed heavily to make ends meet as their hyper-productivity made crop prices crash.  The more they borrowed and the harder they worked, the more productive they became but that only fed surpluses and weakened prices.  The financial sector became over extended to farmers as well as to speculators on Wall Street and before you knew it soup kitchens were sprouting up all over.

    Stiglitz contends that a paradigm shift, moving the economy from agriculture to manufacturing, was the cause of the meltdown.  Farmers were put out of work and many went bankrupt as they were unable to pay back their loans.  They moved to the cities looking for work in factories but because they had made up such a large part of the population and they had lost their purchasing power, they were unable to buy manufactured products and without their demand the economy entered a downward spiral.

    Moving the economy to make its paradigm shift from agriculture to manufacturing was too big a job for the private sector and government had to fill in.  As proof, Stiglitz offers the accidental stimulus government gave manufacturing at the beginning of the Second World War.  Demand for war materiel provided full manufacturing employment and within weeks ended the Depression.

    In Stiglitz’s view the paradigm shift today is from manufacturing to services.  Some may find this hard to fathom believing that this transition happened decades ago when steel making left Pittsburgh for Japan and other parts of Asia.  But the rapid further decline of manufacturing in the last dozen years (after China joined the WTO in 1999) has served to further erode manufacturing in much of the world by transferring it to the Far East.

    Displaced manufacturing workers like the farmers of the 1920s find themselves without employment prospects and in many cases without the skills to compete.  At this writing the unemployment rate for people with college educations and some work experience is a mere 4.4 percent (November 2011, U.S. Bureau of Labor Statistics).  In comparison, people with high school educations and work experience suffer double the brunt of unemployment; their rate is 8.8 percent as of November 2011.  People without a high school education have an unemployment rate of 13.2 percent

    Stiglitz contends that government is the logical player to help manage the economy into the new service paradigm and there is much work to be done because the jobs of that paradigm scarcely exist.  Flipping burgers is the archetype of a service job but there are only so many burgers.  Services range from healthcare, to finance (I think we have enough of those jobs, personally) to construction trades.  But given the other challenges we face from depleting resources we can also expect to see new demands for services in areas like clean energy provisioning and environmental repair and much more.  And, of course, there is a CRM element to all this.

    Services require at least a modicum of skill, training and experience to be delivered properly.  Services are ephemeral, in the moment and customized to one degree or another.  They rely on information of a specific kind, which is increasingly delivered through social channels and that is key.  The social revolution we have been watching for the last five years will be key to the success of the next paradigm shift.

    Socially sourced information will be key to inventing new services and to proliferating them throughout the economy.  Information shared through the social web will inform all services skill levels and help drive rapid expansion.

    Stiglitz believes we have already entered the transition state between stable paradigms.  Making the switch to a robust services economy will take a different mind set, one that values process at least as much as low prices.  We see evidence of this in movements to boost local economies through such things as supporting local farmers and community farms.  Hidden from our view right now is the desperate shape our agricultural lands and water supplies are in and we already know about the air and climate.

    Stiglitz doesn’t talk about it but others like by Richard Heinberg in “The End of Growth” certainly does.  If we want an economy that grows again we’ll need the services of modern CRM to remove as much friction from our business processes as possible and we’ll need a healthy services sector that incorporates some new services like managing the ecosystem.  It can happen.

    Published: 12 years ago

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