Review of the Book:
The Price of Inequality: How Today
Divided Society Endangers our Future
by Joseph E. Stiglitz
H. William Batt
[Review dated 9 July, 2012]
The Price of Inequality is another tour de force by Joe
Stiglitz, the latest in what is coming to be a book about every two
years—with at least another coauthored with others. This one
takes up a theme that has often been argued, once famously by S.M.
Lipset,[1] that the health of a democracy depends
very much upon the strength of a middle class. American society’s
middle class has now been in jeopardy for more than three decades. To
this extent the book is about politics as much as it is economics.
Professor Stiglitz argues (p 76) that “we have created an
economic and social system, and a politics, in which, going forward,
current inequalities are not only likely to be perpetuated but to be
exacerbated; we can anticipate in the future more inequality both in
human capital and in financial capital."
He says this is due in part to changes in our economy: a decline in
manufacturing together with the rise in the information and financial
services industry. But it is explained equally by government policies
that have been captured by the machinations of powerful and
opportunistically situated special interests, able to suck from
society what economists call rents. With the connivance of political
conspirators who have facilitated changes in our laws, these interests
have been able to reorient our economy in ways that extract wealth
from others yet do nothing themselves to earn it. Rent seeking has
reached proportions in American society that make it a high art. “We
have a political system,” he says (pp. 31-32), “that gives
inordinate power to those at the top, and they have used that power
not only to limit the extent of redistribution but also to shape the
rules of the game in their favor, and to extract from the public what
can only be called large 'gifts.'”
Of course lawmakers and economists are not alone in having
accomplished this; it is due as much to what students of cognitive
psychology call framing, “the manipulation of frames, and thus
perceptions and behavior” by which the public makes judgments and
decisions. In explaining how the economics profession has been
captured by a particular faction, and how it in turn has influenced
the economics of the entire public arena, Dr. Stiglitz points to the
insidious influence of the thought today best identified with the “Chicago
school,” and referred to as “market fundamentalism.”
This is the idea that markets left to their own devices are optimally
efficient, and therefore productive, and that government therefore has
a minimal role in directing economic affairs. Yet he points out that
these ideas fly in the face of empirical evidence in almost every
instance. But he is hardly the first to have identified this history.
He cites (p 44) one study done in 1993 by the Alliance for Justice,[2]
tracing this influence, but he could as well have cited Mason Gaffney’s
The Corruption of Economics,[3] which follows in
even greater detail how it was that economic thought was torn from its
traditional three-century-old moorings. As Gaffney shows, the concept
of rent was a pivotal element of classical “political economy,”
but is now trivialized in the teaching of neo-classical economics.
Professor Stiglitz recognizes (p 39), “as rent seeking many of
the ways by which our current political process helps the rich at the
expense of the rest of us. Rent seeking takes many forms: hidden and
open transfers and subsidies from the government, laws that make the
marketplace less competitive, lax enforcement of existing competition
laws, and statutes that allow corporations to take advantage of others
or to pass costs on to the rest of society. The term 'rent' was
originally used to describe the returns to land, since the owner of
the land receives these payments by virtue of his ownership and not
because of anything he does. This stands in contrast to the situation
of workers, for example, whose wages are compensation for the effort
they provide. The term 'rent' then was extended to include monopoly
profits, or monopoly rents, the income that one receives simply from
the control of a monopoly. Eventually the term was expanded still
further to include the returns on similar ownership claims.”
One sees him employing the concept and the word rent in his writing
more and more. Of course he presented one of the original papers in
1977 to introduce what is now known as the “Henry George Theorem,”[4]
but his public finance text,[5] even in the most
recent edition, makes no mention of George or the word rent. So it is
particularly heartening to see, for example, his 2010 monograph,
written for The Roosevelt Institute[6] recognize
that
"One of the general principles of taxation is that
one should tax factors that are inelastic in supply, since there are
no adverse supply side effects. Land does not disappear when it is
taxed. Henry George, a great progressive of the late nineteenth
century, argued, partly on this basis, for a land tax. It is ironic
that rather than following this dictum, the United States has been
doing just the opposite through its preferential treatment of
capital gains."
"But it is not just land that faces a low elasticity of
supply. It is the case for other depletable natural resources.
Subsidies might encourage the early discovery of some resource, but
it does not increase the supply of the resource; that is largely a
matter of nature. That is why it also makes sense, from an
efficiency point of view, to tax natural resource rents at as close
to 100% as possible. The well-designed auctions described earlier
enable government to capture most of the rents derived from
government owned assets."
More recently still, in an interview with a European reporter,[7]
he referred to certain elements of our modern economies as “parasites:”
A lot of American inequality is caused by rent-seeking: monopolies,
military spending, procurement, extractive industries, drugs. We have
some economic sectors that are very good, but we also have a lot of
parasites. The hopeful view is that the economy can grow if we rid
ourselves of the parasites and focus on the productive sectors. But in
any disease there is always the risk that the parasites will devour
the healthy body parts. The jury is still out on that.
Going even further in a just published interview,[8]
Professor Stiglitz urged that some of the bankers most responsible for
creating the current financial crisis should be jailed. His book is a
bit more circumspect; he refers, politely always, to “bankers and
banks,” never to banksters as many now do. But it is clear that
he holds the financial industry primarily accountable for the problems
we face. Our problem is that people see little moral difference today
in how one makes one’s money, as long as it is not illegal. There
are those who regard earning an income as more virtuous than
speculation, but the latter is by no means shameful. The investment
firm Smith Barney years ago ran a television ad featuring John
Houseman, an actor perhaps most widely known as Professor Kingsfield
in the long-running TV series, The Paper Chase. In that advertisement,
the tag line was "We make money the old-fashioned way—we
earn it." It appealed to a sentiment that is becoming rare. It is
not clear that Stiglitz goes so far as to call earned income virtuous
and rent-seeking theft, but he’s getting close.
The problem arises because rent-seeking, or rather capturing rent
that is socially created wealth is, from an economical standpoint,
essentially stealing. Henry George believed that private capture of
that which was God-given was theft, pure and simple: “Thou Shalt
Not Steal!” he told the Anti-Poverty Society of New York in 1887.
It was as immoral to capture freehold ownership of nature as it was to
own other human beings—slaves—as property.[9]
There are contemporary economists that also seem to view rent-seeking
in such a light. Arye Hillman, the author of one current public
finance textbook, says, “Rent seeking is the “competition
for privilege. The form of government affects the extent of rent
seeking that takes place…. In general, whenever personal benefits
depend on decisions made by other people, life can become a quest for
personal favors, and people spend time and effort in rent-seeking
activity.”[10] A contemporary economic
historian has a still more pointed definition: “the use of
resources to get a rent by reducing the welfare of others.”[11]
So if it isn’t theft, it is at best inefficient and anti-social.
Legitimized rent- seeking, or capturing resource rents as capital
gains (that are arguably most if not all rent) explains much economic
inequality and injustice. "The bottom 90 percent of the
population gets less than 10 percent of all capital gains. Under 7
percent of households earning less than $100,000 receive any capital
gains income, and for these households capital gains and dividend
income combined make up an average of 1.4 percent of their total
income. Salaries and wages accounted for only 8.8 percent of the
income of the top 400, capital gains for 57 percent, and interest and
dividends for 16 percent—so 73 percent of their income was
subject to low rates. Indeed, the top 400 taxpayers garner close to 5
percent of the country's entire dividends." (p 72) He concluded
(p 266) that "We have created an economy and a society in which
great wealth is amassed through rent seeking, sometimes through direct
transfers from the public to the wealthy, more often through rules
that allow the wealthy to collect 'rents' from the rest of society
through monopoly power and other forms of exploitation."
There are places where a true Georgist might quibble. For example, he
writes repeatedly of a “housing bubble” and a “real
estate bubble,” when surely he knows that it is land values that
are the cause of the rise. And his book gives essentially no attention
to land rent itself, arguably the greatest single source of
rent-seeking. It was Winston Churchill, after all, that reminded
people,[12]
"It is quite true that land monopoly is not the only
monopoly which exists, but it is by far the greatest of monopolies
-it is a perpetual monopoly, and it is the mother of all other forms
of monopoly. It is quite true that unearned increments in land are
not the only form of unearned or undeserved profit which individuals
are able to secure; but it is the principal form of unearned
increment which is derived from processes which are not merely not
beneficial, but which are positively detrimental to the general
public."
Why then so little attention to land itself and all the rent it
holds? Is it because this is where the middle class gets its dribble
of rent when their homes are sold for a small gain? One might also ask
whether some of what Professor Stiglitz calls rent-seeking arising
from inordinate compensation of corporate CEOs is really rent or
captured interest and dividends. There is more discussion of the high
compensation for corporate executives than there is the palpable rent
from natural resources. That’s not something that I can sort out.
But he does identify in passing the numerous widely recognized
instances of rent-seeking—in mineral and fossil fuel resources,
in the electromagnetic spectrum, in the pharmaceutical industry, and
in the insurance and finance industries among others. He is willing at
least to regard the field of economics as a moral discourse, unlike so
many of his colleagues who regard it as value free. But that judgment
extends for the most part to his view of it as inefficient, and
distributively unfair. It is not clear that he would go so far as to
call others of its practices and judgments immoral. That is what
separates him from those of us who are Georgists: most of us would
prefer to think of economics as a continuation of moral philosophy.
NOTES AND REFERENCES
- SeymourMartinLipset,PoliticalMan:TheSocialBasesofPoliticsNewYork:Doubleday,
1960.
- Justice for Sale:
Shortchanging the Public Interest for Private Gain, a monograph
published by the Alliance for Justice, 1993; accessible (July 10,
2012) at
http://www.afj.org/assets/resources/resources2/Justice-for-Sale.pdf
- Mason Gaffney and Fred
Harrison, The Corruption of Economics. London: Shepheard-Walwyn
Publishers, 1994, accessible online at
http://homepage.ntlworld.com/janusg/coe/!index.htm
- “Theory of Local Public
Goods,” in The Economics of Public Services, M.S. Feldstein
and R.P. Inman (eds.), MacMillan Publishing Company, 1977, pp.
274-333. (Paper presented to IEA Conference, Turin, 1974.)
- Economics of the Public
Sector, Third Edition. New York: Norton. 2000
- “Principles and
Guidelines for Deficit Reduction,” The Roosevelt Institute,
December 2, 2010, Working Paper No. 6.
- Austerity and a New Recession,
an interview with Martin Eiermann, “Politics Is at the Root
of the Problem.” April 23, 2012.
- The Independent, the newest of
British national morning papers, interview with Ben Chu, July 7,
2012; online at
http://blogs.independent.co.uk/2012/07/02/stiglitz-the-full-transcript/
- Henry George, “Thou Shalt
Not Steal,” an Address delivered on 8 May 1887 to the
Anti-Poverty Society, New York City. Henry George argued that
seizing private titles to land, and by extension any elements of
nature, was essentially theft, and was the moral equivalent to
owning slaves. See
http://www.wealthandwant.com/HG/George_TSNS.html
- Arye Hillman, Public Finance
and Public Policies. (New York: Cambridge University Press, 2003
p. 448.
- Karl Gunnar Persson, An
Economic History of Europe: Knowledge, Institutions and Growth,
600 to the Present (Cambridge: Cambridge University Press, 2010):
248.
- Winston Churchill, “The
People’s Land.” One of nine speeches given in 1909 and
then published in a booklet titled The People’s Rights. See
http://www.wealthandwant.com/docs/Churchill_TPL.html
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