Alan Greenspan (1927--) Irrational Exuberance


“Clearly, sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets. We can see that in the inverse relationship exhibited by price/earnings ratios and the rate of inflation in the past. But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?”—December 5, 1996, American Enterprise Institute speech.


Over the years, Greenspan articulated the principle of irrational exuberance. In actuality, the phrase appeared only once in a major writing, cited above. But other economists have taken heart to it. In boom times, market participants follow a herd mentality, particularly in the housing sector, whereby bull market runs run amok in the hope of a further rise in prices. When countercyclical forces kick in to correct these eccentricities, there ensues a period of bust. That scenario applied for the latter part of 2008 to date, as of 20 April, 2009.


This concept will fit fine with the equity principle of Stiglitz in that when markets are no longer efficient, then equity suffers with the poor bearing the brunt of losses in income, jobs, quality of life, and life opportunities because of lessened access to capital, whether social, human, or political.



Joseph E. Stiglitz (1943--) The Equity/Efficiency Principle 


“There is a morally compelling case for equity; but it also necessary if there is to be sustained growth. A country’s most important resource is its people,…” (p. 46)


In his Making Globalization Work, Joseph Stiglitz advocates a powerful neo-Keynesian position to make globalization work. He deplores the divide between rich and poor nations, and within nations, the divide between the rich and poor with the middle class sinking economically into the lower recesses of a veiled class-derived status that has become quasi-permanent.


There is a conflict between two principles of efficiency versus equity. Efficiency entails the pursuit of profits to the exclusion of other concerns. The equity principle means questing for a meaningful, quality life in exchange for less income. Stiglitz values human capital, social capital, and a democratic polis as prerequisite institutions to be able to be a global actor. In the first instance, he puts a premium on free education and access to the Internet as the highest good and duty a state and its citizens should value. Social capital engenders community development where people can trust each and there is reciprocity of good deeds in a caring and nurturing environment. So, he advocates an ethics of care for marginalized groups. A democratic polity, in the third case, has the institutions to guarantee equal access of all citizens to these valued goods.


Stiglitz applies the same principles at an international level believing in a transfer of wealth to the developing nations so that globalization is truly all inclusive. The veil of ignorance, the social contract, and the difference principles are concepts of John Rawls that Stiglitz implicitly adapts to his thinking and writing. The equity and efficiency coefficients are diametrically opposed concepts. The principle of irrational exuberance in operation lead to a lack of equity between the rich and poor and also to a market place that is not efficient because information and scarce resources are distributed unequally and hence unfairly, influencing the political power of contending parties, interest groups, and factions who want to make public policy for the world political economy.