STIGLITZ2003rev
A B
Atkinson,
In the late 1960s/early 1970s, there was a flowering of the field of “public economics”. This brought together the theorems of general equilibrium and the tools of dynamic optimisation with the traditional concerns of public finance and welfare economics. Consideration of equity and efficiency drew on the latest developments in moral philosophy. It was a heady cocktail. Arrow-Debreu and Ramsey-Samuelson and Bentham-Rawls all mixed into Richard Musgrave’s Theory of Public Finance (1959). It was a cocktail that brought not just refreshment but also considerable insight into the analysis of policy. There were advances in understanding both positive and normative issues.
The lessons of public economics have wider application than to public finance issues, but these lessons have diffused slowly. Robert Lucas once remarked that, as a macro-economist, he had “greatly enjoyed [his] excursion into public finance ... How refreshing it is to spend some time in the company of a group of applied economists who simply take for granted the desirability of using (and extending) the powerful methods of dynamic general equilibrium theory to gain a deeper understanding of policy issues” (1990, page 314). This remark is generous but reveals the extent to which public economics has not been assimilated into the mainstream of economics. Its main lessons have not been fully disseminated in the profession. Nowhere is this failure of communication greater than discussions about globalisation. Many of the global issues being currently discussed are concerned with public policy: tax competition, survival of welfare states, global public goods, trade policy, role of multinational corporations, worldwide inequality, and the financing of the Millennium Development Goals.
In order to create a global public economics, at least three elements are required. The first, on which considerable progress has already been made, is the analysis of national policy in a global context. Models of tax competition, for example, have been extensively investigated. Here I concentrate on two further elements: the need for developing models appropriate for the analysis of policy incidence in an interdependent world, and the application of principles of cosmopolitan justice to the normative issues of global policy making. There are of course many other promising avenues, but space does not allow me to explore them here.
One important ingredient in making
progress in economic analysis has been the development of new models. A classic
example is the introduction into public finance by Arnold Harberger (1962) of
the two-sector general equilibrium model widely used in international trade
theory. The model allowed the formalisation of existing insights into tax
incidence and the derivation of new results. The trade model provides the
example that I take here. The standard
Heckscher-Ohlin model of 2 countries, each with 2 sectors, using 2 factors
(“the 2 x 2 x 2 model”) has been used to examine the implications of different
redistributive policies in a model of increasing global trade. Contrasts have
been drawn between a country with clearing competitive labour markets (the “
However, as Donald Davis (1998) has
pointed out, we cannot look at two parallel universes with 2 trading regions
(in one case US and NIC, and in the other
We have to move to a 3 x 2 x 2 model. In many cases, moving from 2 to 3 in economics adds nothing but complexity. But here the third dimension is crucial. Indeed, I believe that we need 3 factors and 3 goods as well as 3 countries: a 3 x 3 x 3 model. The 2 factors identified above were skilled and unskilled labour. This serves to highlight one aspect of income distribution: the dispersion of wages. It does not however illuminate the role of capital income. Changes in the real rate of return can have powerful distributional consequences, particularly at the very top of the distribution. We need therefore to incorporate capital as a third factor. This allows us to address the classic, but now neglected, question of the distribution of national income between capital and labour. The behaviour of factor shares must be part of the story. Factor shares in turn have to be linked to the distribution of income among persons. Here, the model of Stiglitz (1969), drawing on the work of James Meade (1964), remains the key theoretical reference, even if it needs to be supplemented by introducing intermediaries such as pension funds.
Much of the structural change in modern industrialised economies concerns, not agriculture and manufacturing, but manufacturing and services. The growth of service employment is a major element. We need therefore a three good model. Services may in the past have been treated as a non-traded good, but this may be changing as a result of new technology. Indeed, one way of representing the impact of increased globalisation would be to open to international trade the third service sector in a 3 x 3 x 3 model.
The model has moreover to be made dynamic. Factor supplies are evolving over time. Skill is a matter for investment as well as endowment, and the incentive to invest depends on the rate of return. Rising dispersion may in part be a reflection of a rising real rate of return on capital. Here too is work for the research agenda. The model of structural change advanced by Simon Kuznets (1955) has been used to throw light on the evolution of the distribution of income by Sudhir Anand and Ravi Kanbur (1993), among others, but the standard Kuznets model lacks both of the ingredients in which we are interested. The economy is assumed closed to foreign trade, so that globalisation has no direct role. There is no redistributive state. Nor is the accumulation of capital usually treated explicitly. The model has to be enriched to provide a basis for the analysis of public policy in a global context.
I introduced the example by
reference to the role of economic models, but the policy relevance is clear.
The role of the welfare state in a globalising world is one of the central
policy issues facing
The evaluation of policy has been a key part of public economics. Its role has perhaps been misunderstood. A false dichotomy has been created between public choice theory and welfare economics. The purpose of the literature on optimum taxation, for example, is to illuminate the structure of arguments that take place within a political context. It seeks to test these arguments and see whether the policies proposed in the political debate follow from the professed objectives of the protagonists.
In a national context, welfare economic arguments have often been founded, explicitly or implicitly, on a moral calculus. The whole Pigouvian tradition of public finance was deeply influenced by Benthamite utilitarianism. As it was put by Paul Samuelson, “to a man like Edgeworth ... individual utility – nay social utility – was as real as his morning jam” (1947, page 206). More recently, it has been recognised that individual welfares can be aggregated in different ways, ranging from distributional indifference through to Rawlsian concern with the least advantaged. And a variety of non-welfarist objectives have been taken into account, including explicit treatment of horizontal equity. As shown by Stiglitz (1982), horizontal equity may be a biding constraint on policymakers, since the pursuit of social welfare maximisation, or even Pareto efficiency, may be aided by random taxation.
In a global context, however, we cannot appeal to such ready-made
principles, and the calculus is more complex. The issue has been well stated by
Amartya Sen (1999). He distinguishes two positions and argues that neither is
satisfactory. The first is “national particularism”, where welfare judgments
are made for each nation treated separately, and then the relations between
nations governed by an over-arching judgment involving international
equity. Whereas one can understand some of the principles that may apply to the
over-arching judgment, this form of “two stage” evaluation does not allow, as
Sen notes, for direct relations across national boundaries. Direct
consideration of the position of individuals may call into question policy
changes positively evaluated by this procedure but which involve transfers from
poor people in richer countries to richer people in poor countries. The second
position responds to such concerns by supposing what Sen calls
a “grand universalism”, where we have a global social welfare function in which
everyone enters symmetrically and where nationality has no role. On this view,
the country in which one lives has no intrinsic claim on our attention. Such a position is, in my view, less easily
dismissed. A global social welfare function is a valid point of reference.
However, it would not be sensible to construct a normative theory of global
public finance solely on this basis, totally ignoring nationality. National
governments, by revealed preference, appear to give greater weight to their
citizens, and it would be natural to consider the implications of national
social welfare functions where citizens received a greater weight than
non-citizens.
Some people may
suppose that these matters are largely abstract. In fact they are highly
relevant to the issues of public policy with which Joe Stiglitz has been
involved in recent years. The World Bank regularly publishes estimates of the number of people in developing countries whose income is less than
$1 a day, and halving the proportion poor is one of the Millennium Development
Goals (MDGs). To achieve the full set of MDGs is going to require a substantial
increase in the flow of resources for development. In considering how this flow
is to be ensured, one has to consider the impact on people in the transferring
counties. Are higher taxes in donor countries going to be borne in part by
lower income groups, aggravating poverty in those countries? If so, then how can these be
balanced? We
then have to confront the tension between `absolute'
definitions of poverty, such as the $1
a day standard, and the thoroughgoing
relativity adopted in many OECD countries when measuring poverty, where
the poverty line is set as a percentage of median income. On the first basis, there is little or no
poverty in donor countries, but on the second basis risk of poverty remains a
serious concern, as witnessed by the European Union programme for social
inclusion.
How can these be reconciled? One line of reasoning is to postulate a hierarchy - or lexicographic order - in the field of poverty. Poverty is first defined on an absolute basis as referring to people whose income is insufficient to cover physical basic needs. When this is achieved, poverty is then defined on a relative basis as referring to people whose income does not allow them to function properly in their social environment. In this case, meeting the MDGs would have priority. A second line of reasoning consists of making relative and absolute poverty two dimensions to be evaluated jointly through some aggregate index. Such a view leads to defining poverty uniformly in all countries as some combination of the absolute and relative poverty concepts. As is developed in Atkinson and Bourguignon (2000), overall poverty is a weighted combination of poverty in developing and developed countries. Such a measure may become increasingly appropriate as an increasing number of countries acquire middle-income status.
The welfare economic basis for global public economics is an important area for future research. In grappling with these questions, economics can fruitfully co-operate with other disciplines. In particular, the flowering of literature on cosmopolitan justice in the fields of political theory and philosophy may well influence global public economics in the same way that John Rawls and Robert Nozick influenced national public economics 30 years ago.
References
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