This lecture by Stiglitz is about how and why Pareto or near-Pareto improvement is hard to achieve, through his experience in Council of Economic Advisors for the United States government. First, Stiglitz writes about Adam Smith`s invisible hand theory as an explications of conditions under which market equilibrium will be Pareto efficient, and discusses about the importance of government intervention by writing that in presence of imperfect information or incomplete market, there will always be some intervention by which government can make everyone better off. Stiglitz as an economist thought that if he can contribute anything, it would be to implement Pareto improvement. However, he found it extremely difficult to even pursue even near-Pareto improvement and throughout the whole lecture, he gives out the reasons of why it was difficult.
Before he goes on to explain his four hypotheses about how misaligned incentives can induce government officials to take action that are not in public interest, Stiglitz talks about the two reasons critics of role of government gives which are inconsistent. One is coasian bargaining will lead to efficient solution, so government intervention is not needed. Stiglitz criticizes this reason by writing about how this doesn`t work in public sector. Another reason the critics give are government is rife with inefficiency. Then he goes to critic the way everything is done in the white house. He writes about how government lacks empirical evidence and theoretical analysis at many times, and not only do bad arguments drive out good arguments, but good economists adopt bad arguments for the incentive.
Then, Stiglitz explains the two successful pareto improvement which the government was able to achieve while he was in White House. One was the pension reform, where government made a model to show companies to follow where the maintenance of pension will not be as high as it was before and will work efficiently. Since this led...
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