Nick Rowe criticised him for engaging in the "lump of labor fallacy." However it turns out that many criticize the lump of labor fallacy itself as a fallacy, notably the reader-at Nick Rowe, he also dropped by here during the discussion-Sandwichman.
For the background please see here http://diaryofarepublicanhater.blogspot.com/2011/12/more-on-lump-sum-fallacy.html
However in the above linked post the reader Nanute made me aware of a paper that another reader at Nick Rowe had mentioned. This was a longer academic paper he wrote at the Journal of Economic Association.
http://onlinelibrary.wiley.com/doi/10.1111/j.1542-4774.2011.01030.x/pdf
As this reader suggested if you want to fairly appraise Stiglitz, this is where to do it not a small Vanity Fair piece where he necessarily can only get into so much detail. If you read his Abstract it becomes pretty clear that he is not claiming that new structural changes in the economy singlehandedly caused the current Lesser Depression or that the structural changes in the agricultural sector before the Great Depression caused that.
"The standard macroeconomic models have failed, by all the most important tests of scientific theory.
They did not predict that the financial crisis would happen; and when it did, they understated its effects. Monetary authorities allowed bubbles to grow and focused on keeping inflation low, partly because the standard models suggested that low inflation was necessary and almost sufficient for efficiency and growth.
"After the crisis broke, policymakers relying on the models floundered. Notwithstanding the diversity of macroeconomics, the sum of these failures points to the need for a fundamental re-examination of the models—and a reassertion of the lessons of modern general equilibrium theory that were seemingly forgotten in the years leading up to the crisis. This paper first describes the failures of the standard models in broad terms, and then develops the economics of deep downturns, and shows that such downturns are endogenous."
"Further, the paper argues that there have been systemic changes to the structure of the economy that made the economy more vulnerable to crisis, contrary to what the standard models argued. Finally, the paper contrasts the policy implications of our framework with those of the standard models."
Maybe this is the more important sin of Stiglitz? While the criticism of him makes it sound as if he failed to use the standard models right-today's standard model in macroeconomics is DSGE-perhaps what is really held against him is that he is denying their efficacy in principle?
DSGE is the standard model of most marcoeconomists today, and has been since the failure of monetarism as the dominant model in the late 80s. This is true for the New Keynesians as well as the Market Monetarists, as well as other mainstream approaches. DSGE-Dynamic Stochastic General Equilibirium- which assumes the rational agent is what Stiglitz is questioning.This is sure to raise hackles.
This is a topic that may well move front and center in the future. Those who believed that Stiglitz was overstating the structural changes in the economy should read the paper. Bottom line is that it is natural for the standard model to be questioned when as he puts it there was a failure to either predict this crisis-certainly Bernanke-and many others-failed to predict the crisis, believing it would be relegated to the subprime sector and has also failed to adequately deal with the problem now.
A little more info on DSGE:
At present two competing schools of thought form the bulk of DSGE modeling
"Real business cycle (RBC) theory builds on the neoclassical growth model, under the assumption of flexible prices, to study how real shocks to the economy might cause business cycle fluctuations. The paper of Kydland and Prescott (1982) is often considered the starting point of RBC theory and of DSGE modeling in general.[1] The RBC point of view is surveyed in Cooley (1995)."
"New-Keynesian DSGE models build on a structure similar to RBC models, but instead assume that prices are set by monopolistically competitive firms, and cannot be instantaneously and costlessly adjusted. The paper that first introduced this framework was Rotemberg and Woodford (1997). Introductory and advanced textbook presentations are given by Galí (2008) and Woodford (2003). Monetary policy implications are surveyed by Clarida, Galí, and Gertler (1999)."
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