At the Fourth Annual Conference of Government and Economics, held virtually on April 26, 2022, audience members viewed a lecture from Joseph Stiglitz on the importance of balance between market and government as illustrated by the COVID-19 pandemic. What follows is a transcript of his lecture that has been lightly edited for clarity. Joseph Stiglitz is a 2001 Nobel Laureate in Economics and University Professor at Columbia University.

It's a real pleasure to be able to give this address to your Society. The central message of your Society is one that I very strongly support: that an effective society, an effective economy, requires a balance between the market and the government. A complex 21st-century society has to decentralize. That means there have to be markets.

But markets on their own won't necessarily be efficient and won't necessarily be just and equitable, won't necessarily be sustainable. And there is, accordingly, a need for government.

Government fulfills numerous roles. It needs to regulate. It needs to invest. It needs to coordinate to make sure that society works well together. Countries that have achieved this balance between markets and government have, I think, done better over the long run.

We are going through a moment where the lessons of this balance between government and the market could not be illustrated better. COVID-19 has been a challenge to all of our societies. COVID-19 brings forth and illustrates the limits of markets, and what the government can do to both regulate and to enhance a society.

The underlying problem, in the language of economics, the source of the market failure—why markets, on their own, are insufficient—are numerous. One of them is there's an absence of full-insurance markets.

When the economy plummeted, when jobs disappeared, there was no insurance that the private sector had provided to protect individuals. They were not protected against even the health risks, the health costs that they faced. So, this absence of insurance markets, which we see in many other contexts, was the first market failure.

The second is that COVID-19 posed a public health risk, an example of externalities, and markets don't handle these externalities well. What one person does can affect others in ways that he does not fully internalize.

Thus, if individuals walk around without masks, they can spread the disease. If individuals don't get vaccinated, they can spread the disease. So, the regulation of externalities necessitates an important role for government.

The third area is, what is called broadly, public goods. The market will undersupply a public good. And among the public goods, among the most important of the public goods, is knowledge. In a technical sense, what we mean by a public good is something the marginal cost of which for providing it to an additional individual is zero.

And therefore, economic efficiency means that it should be provided freely. But if it's provided freely, there will be an undersupply. That's why basic research is almost always financed by the government.

In many of these areas, there are partnerships. The government may provide the finance, but the research may be done by others. But in the absence of that, there will be this undersupply of public goods—in this case, knowledge. And that undersupply of knowledge will have hard social consequences. So, these were the underlying market failures.

In the context of COVID-19, we turned to government in every respect. We turned to government to reduce the spread of the disease. We turned to government for vaccinations. We turned to government for protection against the economic aftermath.

Let me illustrate each of the things that the government and the private sector did in helping us address the challenge of COVID-19. Many of the aspects that I've described are intertwined in complex ways.

One of the reasons why in some countries, the disease spread faster than in others, was that there was a lack of social protection. In the United States, for instance, many workers are not covered by insurance. They don't have paid sick leave.

And the absence of paid sick leave meant with so many individuals living paycheck to paycheck, they went to work even when they were sick, and that helped facilitate the spread of the disease.

So, one aspect of policies trying to contain a health risk, of a contagious disease, is to make sure that everybody is covered by paid sick leave. But unfortunately, that did not happen. So, either the government has to provide it or the private sector. And in the United States, there was a failure on both accounts.

And in most European countries, almost all, there is mandatory paid sick leave paid by the private sector, but required by the government—the kind of regulation that is important in preventing the spread of the disease.

A second aspect of trying to prevent the spread of the disease was making sure that there were tests available and that people took the tests. Unfortunately, again, in some countries like the United States, there were weaknesses in the private sector in making sure that these tests were widely available. Many other countries did far better.

Within the United States, we have a law called the Defense Production Act that could have been used to force or encourage the private sector to produce more of these tests. But unfortunately, we did not invoke that until very late.

Interestingly, some countries that were less developed did a better job in testing. When we talk about testing, we mean not only testing and tracing, we mean genetic identification. So we could see which strand of the virus was going around, and we could figure out who got the disease from whom. And especially in the early stages, we were able actually to do a better job of containing. So, this is a second area where we found a failure, at least in many countries' private sector. In some countries, government stepped up. In others, it did not.

A third example is the regulation of individuals' interactions. The disease, any disease, is spread by contact. And when one person has the disease, he can spread it to others, unless he is quarantined. And some countries took a more active role in quarantining than others did, and those that took a more active role were more successful in containing the disease.

There were complaints in some countries that a quarantine, or masking, which I'll come to it in a minute, was a deprivation of an individual's freedom. But one person's freedom is another person's unfreedom. One person's right to walk around can result in another person's lack of the right to live because they get disease and die.

And every society always has to balance these rights. So getting a better balance of those rights is very important. Now, the management of quarantine is an example of how important it is to get public policy designed right.

Some countries didn't manage the quarantine very well. Some countries, like India, restricted movement in ways that meant people could not get food. And when the government couldn't control the movements, in order to get food, people traveled long distances, increasing the spread of the disease. So while they made attempts to restrict movement, given the way society was organized, this actually led to a greater spreading of the disease. So in fact, the way the government of Modi managed the disease led to millions of people getting the disease, and probably hundreds of thousands actually died.

Another aspect of the management of the disease was masks. Some countries showed that the market wasn't resilient. In the United States, we were unable to produce simple products like masks. And even after they were produced, we had no system of standardization. So we had no way of knowing which masks were really good, and which masks weren't.

That's another important role of government: setting standards. The market doesn't have, necessarily, the correct incentives for standard-setting. Masking requirements are a low-cost way of reducing the spread of the disease. Some places imposed those masking requirements, and in others, it became politically contentious. But in my mind, this is another example of where appropriate action to contain the disease had relatively little cost and enormous benefit.

So these are some of the things that were done early on and continue to be an important part of addressing the public health hazards associated with the COVID-19. Probably the most important response though, and what has played an important role in getting the disease under control, was the development of vaccines.

And here, the mRNA vaccines have turned out to be extraordinarily effective. And here, the role of the government as an investor in basic research and then helping finance the movement from basic research to applied research, a movement from private research to production, and that movement in coordination with the private sector, was absolutely essential.

We have to remember that we were able to respond to COVID-19 so quickly because of the research that was government-funded. We were able to identify the pathogen that caused the disease. We were able to develop a vaccine in record time, to test it, to roll it out into production. These are achievements of an enormous magnitude. And had we not had that achievement, the spread of the disease and its health consequences would have been far, far worse.

And so we need to congratulate ourselves, but in congratulating ourselves, we need to realize the important role that the government played. And some of that, the last part, the last mile—bringing the production to scale—we have to recognize the important role of the interaction between the market and the government.

There was a failure in one sense: we didn't scale it up to the global level. We had vaccine apartheid. We did not provide the vaccine in sufficient quantity to developing countries and emerging markets. The result is that we paid a very high price because while the disease raged in parts of the world, mutations developed, and they came back to bite us—mutations that are more contagious, some even more vaccine-resistant. It was a foolish decision of us not to scale.

And here the rules in the market economy, the WTO rules on intellectual property called TRIPS, were a very important barrier. Fortunately, the US government was persuaded to argue at the WTO for a temporary waiver of these intellectual property protections. But unfortunately, Germany, Switzerland, and a few other European countries resisted. And the world has paid a very high price because of their entrenched interest.

I talked so far about the health response, and the role of the government and the market in this health response. I want to turn out very briefly to the economic response.

COVID-19 had an enormous impact on the economy. Unemployment in the US soared. Similarly, in other countries that were badly afflicted, GDP plummeted. Had we not had a strong government response at the macroeconomic level and in protecting the vulnerable, the economic consequences would have been absolutely disastrous.

So here again, the response of the government was absolutely vital. Some countries did a better job than others. The United States spent a massive amount of money, 25% of the GDP, and that was one of the reasons why our economic downturn was much less than other countries that were similarly afflicted. But the design of the program was not as good as many European countries, and that was why the peak of unemployment was so much greater, and in many ways, the economic suffering of certain groups in the population, was so much greater.

Right now, there is a great deal of worry about the impact on developing countries and emerging markets. They didn't have the resources with which to resuscitate their economy. Fortunately, the global community came together with an issuance of 650 billion dollars of SDR (special drawing rights), IMF money, and that was extraordinarily potentially helpful.

I still worry a great deal about the consequences for highly indebted countries that, especially in the aftermath of the Russian invasion of Ukraine, with the soaring prices of oil and food, may find it very difficult to meet their debt obligations, to be able to buy the food and energy that they need. But individuals on their own could not have responded adequately, and needed a public effort. And in this context, we need a global public effort to protect these vulnerable countries.

So in conclusion, what I want to argue is that COVID-19 illustrates, as well as almost anything else we could imagine, the importance of the balance between the market and the government in responding to the kinds of shocks that the world keeps facing, and will inevitably face going forward. It has many lessons—some countries did better than others—and will provide an important area of study so that we can learn: How can we make the government in the market work better together? How can we improve public policy so that the lives of our citizens are better protected, and our economy works better? Thank you.