The Government has sought to stem the rise in benefit payments by tightening the criteria for people who say they are too mentally unwell to work.
Work and Pensions Secretary Mel Stride recently warned that “mental health culture” has gone too far, while Prime Minister Rishi Sunak has spoken of the danger of “over-medicalising” normal worries.
However, Mr Stiglitz said it was “cruel” to “deny the reality” of issues like depression and anxiety.
Mr Stiglitz, who won the Nobel Prize for Economics in 2001, also criticised neoliberalism, which is typically used to describe policies that deregulate markets, lower trade barriers and shrink the size of the state.
He said: “Markets are very good at creating crises and problems, but often they can’t solve the problems they’ve created.
“The way our market system has functioned has put a lot of stress on a lot of people and is a source of problems that undermines productivity.
“If you have an economic system where the rungs of the ladder are far apart, if you’re anywhere other than the very bottom, you worry more about falling down that ladder. That actually impairs your ability to move up the ladder.”
People on the brink of poverty focus so much on survival that it impedes innovation and risk-taking, he said.
Mr Stiglitz also called for billionaires like Elon Musk to be taxed more, saying that the Tesla tycoon was a “not self-made” man.
He said: “Tesla received half a billion dollars from the US government at a critical moment. Elon Musk forgot about that and thinks he is a self-made man. He would not be where he is without that money. He now works very hard to forget that.”
