“We thought that new technology would increase competition but it has led to more concentration. New technology has increased the ability to exploit. The move to an information economy has given market power to those who dominate in grabbing information – like Google, Facebook and Amazon. They use information to discriminate in pricing and distort markets for goods and services.”
“We have less-competitive markets because the people who control the information – a small group – have disproportionate market power.”
Prof. Joseph Stiglitz is an American economist and professor at Columbia University. He is also a STIAS fellow and presented a STIAS public lecture entitled the Revolution of Information Economics: The past and the future. Prof. Stiglitz is a recipient of the 2001 Nobel Memorial Prize in Economic Sciences, a former senior vice president and chief economist of the World Bank, and a former member and chairman of the (US president’s) Council of Economic Advisers.
“New problems need new solutions and the magnitude of the problem is only now being realised,” he continued. “There are many uncertainties about how we should respond.”
The presentation focused on highlights of a half century of research, including recent advances in understanding the implications of imperfect information for financial market regulation, macro-stability, inequality, and public and corporate governance. Stiglitz also explored the consequences of recent advances in technology and the policy challenges and opportunities they present for competition policy, as well as policies regarding privacy and transparency.
Stiglitz pointed out that the economics of information constituted a revolution in economics, upsetting longstanding presumptions with profound implications for economic policy.
He traced the development of information economics from previously accepted models like Adam Smith’s Invisible Hand theory which is predicated on the idea that maximising individual profit simultaneously enhances the wellbeing of society.
“This was a powerful idea if true,” said Stiglitz. “There was an almost religious belief that markets would solve all the problems. They didn’t.”
“The critical mistake was the assumption of perfect information,” he continued. “Prior economists believed that information was perfect – not so. There were also no real tools for a world with imperfect information.”
“Political policies were also predicated on this belief that markets are efficient.”
These theories led to the Washington Consensus which substantially influenced global policies. Stiglitz highlighted, for example, that the Consensus, the International Monetary Fund and the World Bank have a lot to do with many of the problems on the African continent today.
“African countries suffered most from structural-adjustment programmes – after 25 years of these, Africa was less industrialised than before.”
“In the same time period East Asia, which did not adopt these programmes, was going through an economic miracle,” he added.
“It’s now recognised that markets need industrial and innovation policies, and that you cannot separate economics from politics,” he continued.
“It has also became increasingly clear that a very large proportion of people in the world act in a way that is inconsistent with economic principles which behavioural economics attempts to address.”
New principles for development were needed which recognised market failures and advocated policy to address these, and also took cognisance of external factors that influenced markets (like climate change). The subsequent growth of information economics stimulated other advances in economics, including contract theory and behavioural economics.
“This paradigm provided a markedly different, and better, lens for looking at the economy than the older perfect markets competitive paradigm.”
Stiglitz pointed out that one of the most important factors in economic development, improving standards of living and reducing inequality is the provision of information and especially knowledge.
“Living standards have only really increased in the last 200 years – due to advances in knowledge. Knowledge is the core thing that causes economic growth.”
However, it’s becoming increasingly clear that not all information is equal and that “imperfect information leads to imperfect competition”.
Disinformation is the new battlefield
“Fake news – even in areas where the truth seems obvious (like climate change) – is a serious threat to science and to the functioning of a democratic society. This is not only about the future of economics but also of democratic institutions and society,” said Stiglitz.
“This is deliberately creating misinformation and includes the attack on scientific institutions and institutions of verification,” he added.
“The functional dystopia of the novel 1984 is now becoming a reality especially in the US,” he said. “We have to battle to prevent the normalisation of fake news.”
He also emphasised that the political influence of information technology companies like Google is huge. This, along with the concentration of media power in a few hands, affects the marketplace of ideas and also, on a very practical level, the outcomes of elections.
He pointed to the need for new regulatory frameworks to ensure competition. He emphasised that these should include issues like privacy rights and who owns data, as well as intellectual property rights “which is an area that South Africa is currently looking at redefining”.
“Treating data as a public good is the minimum requirement,” he said.
“Transparency in economics is the same as in politics. Citizens have a right to know – this is an important part of the democratic process. Usually governments don’t want you to know because they are behaving badly. You must advocate for strong right-to-know laws.”
Michelle Galloway: Part-time media officer at STIAS
Photographs: Anton Basson