In an interaction with Amit Kapoor, Joseph Stiglitz shares his views on American Style Capitalism, Economic Development and Intellectual Property.
I would like to start with your view on how the world is changing today. There seems to be so much of turmoil that we are seeing, and especially the rise of a certain kind of leaders which I would call as the leaders that define coalition of restoration. How would you react to that?
It is a period in which there is some underlying economic turmoil. You can see this in two different levels. Significant fractions of those in advanced countries are not doing very well… In the United States, full time workers are the lucky ones at the same level as what it was 42 years ago, real wage is at the bottom of the same level that they were 60 years ago, life expectancy in the United States is declining, especially rapidly among those who are not college graduates. So, there are lots of symptom that something is wrong. People aren’t happy and understandably so.
The second is that, at the level of the nation state, we are seeing a rebalancing. With the collapse of the Soviet Union in 1989, there was one superpower and high stakes dominated. And then, with the collapse of Lehman brothers in 2008, it was clear that there were flaws in the American-style capitalism. Meanwhile, China and other emerging markets like India have been growing at 5-13% and that meant they were closing the gap. Incomes still lower but closing the gap, and a lot of people in those countries by sheer numbers even though the per capital was lower the economic weight was gaining, to the point that by 2015 in Purchasing Power Parity, China had become the largest country in the world. That was an interesting moment, where neither country made a great deal about it. It’s not a surprise that United States papers didn’t say, “US becomes No. 2” but interestingly, China didn’t either because it didn’t want pressure from the United States about it being No. 1. Then comes Trump at a moment of time where disgruntlement in large parts of America was significant. America’s national security teams were beginning to worry about our place in the world. He’s able to sense and exploit this unhappiness and to come up with a very ugly narrative but it was what you referred to- working to the past, restoration of power, why we can’t go back to the world after World War II where US was dominant.
The fact of the matter is you can’t go back in time and there is no way that you can go to the world period where US is the dominant power but Trump doesn’t really understand and those who support him don’t understand it. They would also like to go back to a world of the past where a single worker in the family could support the whole family, where America’s middle class seemed to have everything to be able to get a home, secure jobs, all the things that they wanted which increasingly seem out of reach for them today. So, all these images, they are the past and they are just images, because things were really not quite as good.
I grew up in the 1950s in the industrial town Gary, Indiana, and the reason I became an economist was I was upset about what I saw. I saw industrial strife, unemployment, massive discrimination and huge inequality, and it was this that motivated me to be an economist, so going back to the world was not the idea that some people think of it as. But inequality was not anywhere near as bad as it is today. So, Trump and his followers don’t really understand what it was like then, don’t understand why we can’t go back to then, that the Economics are different, the geopolitics are different. What they should be doing is saying how can we make the world that we live in a better world, how can the United States accept this new geopolitical reality, which means greater respect for the emerging markets. We will have to move to a multipolar world; it means making sure that the benefits of globalisation and advances of technology are shared widely and don’t go just to the 1%. That’s what we should be doing.
The problem is not with Mexico, not with China. The problem is with ourselves. We like to blame somebody else but the problem is really with ourselves, and that’s a hard message for people to accept, but we have to face that reality if we want to address the problem for those who have not been doing well.
There are two remarkable points that come out of it. One, there is something wrong with American-style capitalism and the second, there is a problem within the US. What are those problems that you would like to really catch up on? What is the thing that is affecting the US right now and what is wrong with the American-style capitalism?
Let’s begin with the question of what is wrong with the American-style capitalism. Every successful economy is a mixture of government, the private sector and lots of other institutions. For instance, one of the real strengths of America are its universities. It’s what attracts people to America, it’s the basis of our innovation economy. Almost all of our universities are not-for-profits; there are foundations and people who have given money. They are self-perpetuating and you can call them charities, and they work very efficiently. The other good universities are universities like University of California at Berkeley, a state university. The really bad institutions are for-profit universities like the Trump University who excel in only one thing- taking advantage of people who don’t know they’re being taken advantage of, the vulnerable people. Education is a growing sector where the for-profits are really terrible, and we have good state universities and good not-for-profits, so when we think of a prosperous economy, we think of an ecology of institutions.
Unfortunately, beginning with President Reagan in 1980, they developed an ideology that the only good institutions were for private corporations, and they had a few simple ideas- to get rid of regulations and lower the tax rates at the top. The idea was that the lower tax rates and getting rid of regulations combined would mean a faster growing economy from which everybody would benefit. A third century later, we can declare that that experiment was an utter failure. Growth slowed, the growth that occurred went to a relatively few people at the top 1%, or even more the upper one 10th of 1% while the majority of Americans saw their incomes stagnate. Those who didn’t have very much education, did really badly.
The result was the kind of world where opportunity was being destroyed, the American dream became a myth. Among the advanced countries, America became the worst, where opportunity was the lowest, which meant that the future prospects of young Americans were more dependent on the income and education of their parents. So, the contradiction between what we thought of ourselves and the reality what the statistics said, were startling. We can therefore say that America has been afflicted by an ideology that doesn’t work. The irony was that an ideology which said government should get out of the way led to the largest intervention in the market in the history of mankind, as seen in the $700 billion bailout of the banks where we gave to one company (AIG) more money than we spent in welfare for ordinary Americans in all the years. We said we didn’t have enough money to help poor Americans, but somehow, in a moment, we found more than $150 billion to help one company. It was not only that the system was dysfunctional, but it led to widespread feelings that the system was rigged and unfair. Naturally, this gives rise to mistrust in government, institutions and a society that does not function very well.
Is it not that what you’re really describing is a huge reflection of the disenchantment and inequality we are seeing within the United States today? This is how the US is electing their political leadership, which is effectively saying that we have to redraw the institutions or we have to redraw the very narrative that the country was based on for ages, which has driven U.S. to be an innovative economy and a power which was respected.
The election of 2016 was a very interesting election because the two candidates that did well were in a sense the anti-establishment candidates. On the Democratic side, it was Bernie Sanders and on the Republican side, it was Donald Trump. They both were saying that something was wrong with the system, but there was a fundamental difference between the two anti-establishment candidates. Trump was blaming the problems on others, on foreigners, on migrants and his response was to slap the Chinese with a 45% tariff. NAFTA was the worst trade agreement ever. He didn’t know what was inside the agreement, and when the negotiators began to negotiate, he didn’t have any coherent set of demands. Every economist knows what matters is the multilateral trade deficit, but he focused on bilateral trade deficit. In other words, if we change the trade between China and the United States or Mexico and the United States, we are not going to get jobs back in the United States. It is just going to move to some other country and the problem will continue to persist. When you don’t have the right diagnosis, you are not going to get the right prescription, and there is no hope that his policies will alleviate the problems of those who have not done very well.
Bernie Sanders was anti-establishment as well, but he presented complaints that were more coherent. He pointed out that one of the reasons there is not hope is that the young people can’t afford going to college. So, he suggested directing efforts towards making college affordable. One of the reasons a lot of Americans wind up in bankruptcy is hospital bills, medical bills, so he suggested having a healthcare system that many of the Europeans have, which delivers better healthcare at a fraction of the cost. We don’t have to have a banking system that makes its money by taking advantage of others. We ought to have a financial system that serves society rather than exploits society. Therefore, he focused on the too big to fail banks as an example of what had gone wrong. Since they are too big to fail, they know they can get away with almost anything, and when push comes to shove, they will be rescued. So, he went through and gave a list of concerns and some proposals.
Interestingly, Hillary Clinton articulated some of the same concerns, some of the same issues as Bernie Sanders, but she tended to be much more programmatic. When she made a proposal, she would cost it out, she would make sure that the budget was feasible. That’s not what voters wanted. They want to hear the concern and the reassurance that they are being heard, and both Trump and Bernie Sanders conveyed that message.
Every successful economy is a mixture of government, the private sector and lots of other institutions
Could it be then said that the voters’ choice is not going to be dependent on the economic development, rather it is going to be social issues which will define the future?
When I say social issues, a better way of saying it is the following. For a third of a century, Republicans have said, government is the problem, not the solution. The result is that today most voters don’t expect the government to solve their problems. What they want is the government to be empathetic, to be concerned. They are looking for somebody that understands and gives them dignity. The concern is that a lot of these with a view is East Coast elites. Ivory Tower look down on these people and there are lots of expressions that convey that kind of attitude. Sometimes the Midwest and the South are called flyover states. There was one point in the election where one of the candidates referred to the deplorables. So, the sense was that Trump understood them. Of course, he didn’t care about them and was only exploiting them, but he was exploiting them in a new way that they didn’t fully understand. This is why you could get away with it. Trump could talk as if he cared about them, about their problems, and he had a solution.
Of course, it wasn’t a solution. Blaming the foreigners, building a wall and raising tariffs wouldn’t solve their problems but unfortunately, too many of them didn’t and still don’t recognize the extent to which it is nonsense. The thing they like is that he is feisty and he is fighting against the others, as opposed the actual way that you have to solve global problems, sitting down in a room talking and eventually getting common understanding.
Globalization has given huge benefits to countries across the world, it has actually spread the work and so on and so forth. But with the present narrative, is it not dangerous that we might actually break that global order? Is it too sceptical to think that we might find something very startling happening in the future, like a trade or even an actual war, an era in time akin to the depression years?
We do have grounds for worry. The one force that a number of people have identified as a source of concern is that it has often been the case that when there is a rising power and a declining power, the power that was at the top doesn’t like it going into second place. Those are often moments of conflict. One historian said that there have only been two or three cases where that has not happened. The U.S. overtaking U.K. as the dominant country within the West is one of them. However, more often, there can be conflict. There doesn’t have to be, because the average American’s standard of living is not affected if somebody else’s standard of living is going up. In fact, there are mutual benefits. If their standard of living is going up, they can buy more of our goods. There are advantages of mutual managers as we all get wealthier, so it is not a zero-sum game.
One of the big mistakes that Trump makes is believing that it is a zero-sum game. He sees the rise of China as causing the problem in the United States. It is not true. It’s our problem. Moreover, our income is going up, not down. It is just that the increase in income is going to a few people at the top. So, it’s not the case that the rise of China has in any way adversely affected us. There is no evidence that our growth rate is caused, in any way, by the increasing growth of China.
When you say that government needs to be empathetic towards people but they cannot solve problems, then they have to create the conditions to solve the problem. And if corporates are there, where do you see the capitalistic role of the large corporate or the enterprise in solving this problem?
I see the economy as consisting of an ecology, a mixture of government, NGOs, universities, cooperatives, and the private sector, and they each have a part to play. For instance, basic research is almost always done by the government, and the big breakthroughs, the discovery, DNA, transistors, lasers, the internet, the browser are all either done or effectively financed by government. The private sector is very good at taking those innovations and bringing them to the people, designing products that meet people’s needs. These are two very different roles- basic research on which everything else depends and that last mile of making products that actually are what people really want. The balance has to be achieved by realizing that there is a role for each. One also has to realize that the private sector sometimes has a proclivity for taking advantage of other people. There are two ways of making money- by innovating and by exploiting. Often, it is easier to make money by exploitation than by innovation. One of the jobs of government is to make sure that the rules of the game encourage the private sector to do things that serve humanity rather than exploit them.
There is always going to be tension because the private sector is interested in profits, and resists any kind of restraint on making more profits. There are different ways of making profits. For example, you can come up with a good product, but if it is a competitive market, your profits will be zero. So, it is natural that corporations try to create barriers to entry, to create monopolies. Therefore, one of the roles of the government is to try to ensure that it doesn’t happen, to keep the marketplace competitive, to make sure the financial sector does what it is supposed to do. The financial sector can make a lot more money by exploiting, predatory lending, market manipulation, abusive credit card practices, and all the things that they did in the years before the 2008 crisis and were exposed for after the 2008 crisis.
Thus, there can be seen a symbiotic relationship in well-functioning economies. One of the other natural conflicts that come up is not paying taxes. The profits of the private sector are partly a reward for those who are undertaking risk provided their capital and partly a result of the government creating an environment where there are secure property rights, educated labor force and infrastructure. To take Steve Jobs as an example, if he had never come to United States and was living in Syria, he would not have been able to do what he did in America. It costs money to create that environment which can nurture innovation, to create the infrastructure, to enforce the rule of laws and to educate our young people. Unfortunately, too many of our corporations say somebody else should pay for those things.
Apple, the most profitable firm probably in the history of mankind, uses the same ingenuity that it used to create the iPhone to avoid paying taxes, operating out of Ireland and something called the double deduction and other tax gimmicks, so that it was paying a tax rate of 0.02%. Everybody would agree that 0.02% is not a fair tax rate, except Steve Jobs or Tim Cook. Their view is that they are maximizing the wellbeing of the shareholders and of course, of themselves because they get paid on how well the share price goes. So, it is a natural conflict, but it is disturbing that companies like Apple make a big pretense of being good corporate citizens. The first aspect of being a good corporate citizen is paying your taxes.
One of the jobs of government is to make sure that the rules of the game encourage the private sector to do things that serve humanity rather than exploit them.
How do you look at intellectual property and protection of intellectual property? You talked about how corporates attempt to create monopolies, so how would you look at patenting intellectual property, the system that actually exists?
There is academic literature called national innovation systems. Countries have to create a national innovation system, which can be described as a portfolio mixture. On the one hand, you need basic research provided by the government. That is the most important for advanced country, but also for a country like India because you have to have an understanding of basic research if are to take ideas that are in the forefront and translate them into products. Then you need patents, intellectual property. Patents can be viewed as an example of a price system. Prize is a temporary monopoly power given to whoever discovers the idea first.
There has been a lot of research, even practice of saying that there are other kinds of prizes. Historically, there have been number of instances where governments or societies have provided a prize for the first person to make a mechanical chimney sweep, for example. It was a prize for preventing little boys from going down chimneys to clean them, which has adverse effect on their lungs. They rewarded the invention with a prize rather than a patent because they wanted to be sure that the moment they discovered this mechanical chimney sweep, it was disseminated as widely as possible so that everybody could make use of it and little kids didn’t die being chimney sweeps, or had their health impaired.
It is similar in the case of some categories of innovations concerning drugs. When a cure for a disease is discovered, we want to ensure that it reaches everyone suffering from the disease. If left to the drug companies, they would charge a very high price and the poor will die. They could also charge governments a very high price and that would mean the government would have less revenue to spend on other important areas of health or even other areas of development. So, especially in the area of health, a price system that is not a patent system or a monopoly is particularly important.
The intellectual property regime gives a temporary monopoly that introduces an inefficiency. Monopoly isn’t efficient because knowledge is not being used to the extent that it could. The cost of another person using a piece of knowledge is zero. Sharing some knowledge does not take it away from the person who acquired it first, but allows others to use that knowledge for whatever beneficial purposes. It is desirable for the knowledge to be disseminated as widely as possible. Restricting the use of knowledge is inefficient, and so the patent system creates a tension between the short-run efficiency of the economy and the long-run dynamism of the economy because it is supposed to incentivize more innovation, but when the patent system is not well-designed, it can actually impede innovation.
The most important input into any research is knowledge, but the patent system restricts knowledge. In many areas of modern innovation, there are many patents involved, and this is what we call the patent thicket. If one comes up with an idea, they may find that they can’t put it into practice without paying off dozens of patent holders. For example, making a chip may require thousands of patents, and any one of the patent holders can block the whole process by denying permission to use their idea, effectively blocking the whole process. This is called a holdup, and there are lots of holdups. A famous case was where Blackberry was sued and basically told that if they don’t pay up a certain ransom, they will have to shut down.
The patent system can really intrude on innovation, and it has been the case historically. The Wright brothers had a patent on the airplane, key part of the airplane, but the patent office gave patent to somebody else as well and the development of the airplane in the United States was impeded as a result. It wasn’t until World War I when it became so indispensable to have an airplane to fight in the war that the government forced these patents into a patent pool and said that it will be the one to decide who gets the money. So, the patent system really acted as an impediment. The bottom line is that a well-designed patent system can be an important part of a national innovation system and has a albeit limited in incentivizing innovation
However, the lack of a well-designed intellectual property regime can really impede innovation. The U.S. patent system is not well-designed, and one of the problems that countries like India face is that the USTR or trade office, which represents the interests of American companies (not American people) often tries to force our intellectual property regime on other countries including India. American companies try often to extend the life of a patent by all kinds of mechanisms, which are collectively called evergreening and USTR likes that, but as a matter of public policy, it is a really bad public policy. It is important for countries like India to realize that and deny to have any part of that. TRIPS gives us a lot of flexibility, and you ought to use all of that flexibility. I was on an international commission that said that what was really needed was TRIPS minus. Unfortunately, U.S. has been pushing for TRIPS plus.
Is open source going to be the solution? There would be a lot of corporates who will come down very heavily on this kind of an argument, saying that it would infringe on their profitability, infringe on livelihood and so on.
As I said before, what is needed is a portfolio. Open source is an important part, but it is not going to replace intellectual property. The argument that if a country like India or a small African country doesn’t recognize the intellectual property of American pharmaceutical companies, that it will destroy innovation is absurd. The American companies do not make their calculations of how much to spend on innovation, on the minuscule amount that they are going to get from an African country or from India. The TRIPS provided flexibility recognizing that, and they say that in the case of drugs, you can have compulsory licenses. You should use that flexibility, those compulsory licenses when they are charging $10,000 for a drug that costs a $100. There is nothing wrong with doing that. It’s just one way of looking at it, that every dollar more you give the drug companies is $1 less that you have to spend on the health of India or African countries.
Except pure transfer, it will not affect the pace of innovation, and the intellectual property regime itself should have made it clear that you cannot engage in evergreening. They have used very clever ways of disadvantaging generics. But in the United States, we reached an accord between generics and big pharma, in the Hatch-Waxman Act in the 1980s that resulted in the generics having over 80% of the market. Despite that, America remains very innovative, so the argument is nonsense. Finally, most of the basic research is supported by the government, so that is the driver, that determines whether we have real innovation or not.
How do you foresee India in the coming years?
I’m very optimistic about India. It has been growing very strongly and has some of the strong technology, well-educated people at the top. Overall, its record in recent years has been very impressive, and I see no reason why that shouldn’t continue. However, there are three problems. One is a political one. India was founded as a secular state. It was founded as an inclusive country bringing together Muslims and Hindus with commitment to help those at the bottom and to create greater equality within the country. I worry that the current government is leading to divisiveness, is leading to infringements on basic rights or encouraging others to infringe on basic rights. It is part of a strand that we see in many other countries, including the United States, Turkey; the growth of leaders, who seem unattuned to fundamental democratic values. This is the first, and probably the most important danger.
The second is the challenge of jobs. There are a large number of people entering the job market every year, and while India has been successful in creating lots of jobs in the market economy, the gap between the new entrants and the new jobs is huge. With advances in artificial intelligence, robotization, improvements in productivity in many sectors in manufacturing and even in IT, I worry that the gap between jobs available and jobs being sought will be increased to the point where it will be politically untenable.
Third problem is related to the second. Agriculture sector has not been keeping up with the rest of the economy. That is often the case at this stage of development, but it is a little bit worrisome because productivity in agriculture remains markedly lower than that in East Asia. There is ample room for increases in productivity in the rural sector, but even more disturbing is that in many parts of the country, whatever growth is there has been at the expense of the environment. The groundwater in some places has been relied upon and is diminishing very rapidly, and there are other environmental issues that raise the concern that even that low rate of growth may not be sustainable. It means that there will be pressure for more people to leave the rural sector and move to the urban sector leading to more demands in the urban sector for jobs and not enough job creation. So, these three issues are very much related, and if they are not solved, the politics in India may make it ugly. Therefore, it is important that all three of these issues be addressed.
Am I hearing you say that U.S. and India are same in terms of how politics is defining them?
There are similarities. There are global similarities that we both have failed to create inclusive growth. We have grown, but the benefits of that growth have not been equally shared. In the United States, we are seeing the consequences of electing Donald Trump, who is not committed to democratic institutions. In fact, he has been undermining our institutions, weakening the institutions of the state over and over again by criticizing the judiciary, attacking the media, which is a very important part of our democracy, partly because it is part of our system of checks and balances. Trump creates an alternative reality, undermines discourse, exploits divisions and makes those divisions larger, making it more and more difficult for us to work together as a country. So, there are similarities both in the underlying economics and in the political consequences of those underlying economics.
The intellectual property regime gives a temporary monopoly that introduces an inefficiency. Monopoly isn’t efficient because knowledge is not being used to the extent that it could.
What is the one thing that you would like India to do to solve the problems that it faces and make it a must more just and humane society?
One has to recognize first these as problems and one has to recognize that there is not going to be any single solution that is going to take a comprehensive agenda, that there are some things that can help all of them together. For instance, if you impose a carbon tax, it simultaneously raises revenue that can be used to promote education, health, or development infrastructure. Secondly, it provides incentives for a better environment that ensures reduction in pollution and greenhouse gases. Thirdly, it can stimulate demand because people have to retrofit their houses, their establishments, their firms to reflect the new relative prices, the new economic realities. So, it does all three; it promotes growth, it raises revenue and it promotes a better environment.
Thus, there is a need to look for things where you get synergies. Well-designed policies that promote a more equal society can do the same. They create demand because when you redistribute from the top to the bottom, those are the bottom spend more, which increases demand and creates a more equal, society. That further helps rev the engine of economic growth. Unfortunately, there is no magic bullet here. One has to first recognize the magnitude of the challenge. not shy away from it, and then ask if we can we find common ground of a few things that have synergistic effects in addressing multiple problems simultaneously.
Would you then agree that it is going to be capitalism and democracy that are going to solve the problems of the world in the long run?
It is a 21st century market economy in which government plays an important role, civil society and non-for-profit institutions play a role and market forces or capitalism plays a role, but it is not going to be any one of these institutions on their own that can solve it. Each of these institutions have their limits. Firms on their own are more interested in exploitation than they are in development, government has some strengths but is not able to undertake the multiplicity of activities related to development in most countries, and so it is the ecology that can solve the problems. It is wrong to say the market is the solution or capitalism is a solution. 21st century capitalism is a capitalism in which the market and civil society, NGOs all play an important role.