Joseph Stiglitz Says Standard Economics Is Wrong. Inequality and Unearned Income Kills the Economy

The rules of the game can be changed to reverse inequality

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By Joseph Stiglitz

In the middle of the twentieth century, it came to be believed that ‘a rising tide lifts all boats’: economic growth would bring increasing wealth and higher living standards to all sections of society. At the time, there was some evidence behind that claim. In industrialised countries in the 1950s and 1960s every group was advancing, and those with lower incomes were rising most rapidly.

In the ensuing economic and political debate, this ‘rising-tide hypothesis’ evolved into a much more specific idea, according to which regressive economic policies— policies that favour the richer classes— would end up benefiting everyone. Resources given to the rich would inevitably ‘trickle down’ to the rest. It is important to clarify that this version of old-fashioned ‘trickle-down economics’ did not follow from the postwar evidence. The ‘rising-tide hypothesis’ was equally consistent with a ‘trickle-up’ theory— give more money to those at the bottom and everyone will benefit; or with a ‘build-out from the middle’ theory— help those at the centre, and both those above and below will benefit.

Today the trend to greater equality of incomes which characterised the postwar period has been reversed. Inequality is now rising rapidly. Contrary to the rising-tide hypothesis, the rising tide has only lifted the large yachts, and many of the smaller boats have been left dashed on the rocks. This is partly because the extraordinary growth in top incomes has coincided with an economic slowdown.

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The trickle-down notion— along with its theoretical justification, marginal productivity theory— needs urgent rethinking. That theory attempts both to explain inequality— why it occurs— and to justify it— why it would be beneficial for the economy as a whole. This essay looks critically at both claims. It argues in favour of alternative explanations of inequality, with particular reference to the theory of rent-seeking and to the influence of institutional and political factors, which have shaped labour markets and patterns of remuneration. And it shows that, far from being either necessary or good for economic growth, excessive inequality tends to lead to weaker economic performance. In light of this, it argues for a range of policies that would increase both equity and economic well-being.

Explaining inequality

How can we explain these worrying trends? Traditionally, there has been little consensus among economists and social thinkers on what causes inequality. In the nineteenth century, they strived to explain and either justify or criticise the evident high levels of disparity. Marx talked about exploitation. Nassau Senior, the first holder of the first chair in economics, the Drummond Professorship at All Souls College, Oxford, talked about the returns to capital as a payment for capitalists’ abstinence, for their not consuming. It was not exploitation of labour, but the just rewards for their forgoing consumption. Neoclassical economists developed the marginal productivity theory, which argued that compensation more broadly reflected different individuals’ contributions to society.

While exploitation suggests that those at the top get what they get by taking away from those at the bottom, marginal productivity theory suggests that those at the top only get what they add. The advocates of this view have gone further: they have suggested that in a competitive market, exploitation (e.g. as a result of monopoly power or discrimination) simply couldn’t persist, and that additions to capital would cause wages to increase, so workers would be better off thanks to the savings and innovation of those at the top.

More specifically, marginal productivity theory maintains that, due to competition, everyone participating in the production process earns remuneration equal to her or his marginal productivity. This theory associates higher incomes with a greater contribution to society. This can justify, for instance, preferential tax treatment for the rich: by taxing high incomes we would deprive them of the ‘just deserts’ for their contribution to society, and, even more importantly, we would discourage them from expressing their talent. Moreover, the more they contribute— the harder they work and the more they save— the better it is for workers, whose wages will rise as a result.

The reason why these ideas justifying inequality have endured is that they have a grain of truth in them. Some of those who have made large amounts of money have contributed greatly to our society, and in some cases what they have appropriated for themselves is but a fraction of what they have contributed to society. But this is only a part of the story: there are other possible causes of inequality. Disparity can result from exploitation, discrimination and exercise of monopoly power. Moreover, in general, inequality is heavily influenced by many institutional and political factors— industrial relations, labour market institutions, welfare and tax systems, for example— which can both work independently of productivity and affect productivity.

That the distribution of income cannot be explained just by standard economic theory is suggested by the fact that the before-tax and transfer distribution of income differs markedly across countries. France and Norway are examples of OECD countries that have managed by and large to resist the trend of increasing inequality. The Scandinavian countries have a much higher level of equality of opportunity, regardless of how that is assessed. Marginal productivity theory is meant to have universal application. Neoclassical theory taught that one could explain economic outcomes without reference, for instance, to institutions. It held that a society’s institutions are simply a facade; economic behaviour is driven by the underlying laws of demand and supply, and the economist’s job is to understand these underlying forces. Thus, the standard theory cannot explain how countries with similar technology, productivity and per capita income can differ so much in their before-tax distribution.

The evidence, though, is that institutions do matter. Not only can the effect of institutions be analysed, but institutions can themselves often be explained, sometimes by history, sometimes by power relations and sometimes by economic forces (like information asymmetries) left out of the standard analysis. Thus, a major thrust of modern economics is to understand the role of institutions in creating and shaping markets. The question then is: what is the relative role and importance of these alternative hypotheses? There is no easy way of providing a neat quantitative answer, but recent events and studies have lent persuasive weight to theories putting greater focus on rent-seeking and exploitation.

Rent-seeking and top incomes

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 or his ownership and not because of anything he or she does. The term was then extended to include monopoly profits (or monopoly rents)— the income that one receives simply from control of a monopoly— and in general returns due to similar ownership claims. Thus, rent-seeking means getting an income not as a reward for creating wealth but by grabbing a larger share of the wealth that would have been produced anyway. Indeed, rent-seekers typically destroy wealth, as a by-product of their taking away from others. A monopolist who overcharges for her or his product takes money from those whom she or he is overcharging and at the same time destroys value. To get her or his monopoly price, she or he has to restrict production.

Growth in top incomes in the past three decades has been driven mainly in two occupational categories: those in the financial sector (both executives and professionals) and non-financial executives. Evidence suggests that rents have contributed on a large scale to the strong increase in the incomes of both.

Let us first consider executives in general. That the rise in their compensation has not reflected productivity is indicated by the lack of correlation between managerial pay and firm performance. As early as 1990 Jensen and Murphy, by studying a sample of 2,505 CEOs in 1,400 companies, found that annual changes in executive compensation did not reflect changes in corporate performance. Since then, the work of Bebchuk, Fried and Grinstein has shown that the huge increase in US executive compensation since 1993 cannot be explained by firm performance or industrial structure and that, instead, it has mainly resulted from flaws in corporate governance, which enabled managers in practice to set their own pay. Mishel and Sabadish examined 350 firms, showing that growth in the compensation of their CEOs largely outpaced the increase in their stock market value. Most strikingly, executive compensation displayed substantial positive growth even during periods when stock market values decreased.

There are other reasons to doubt standard marginal productivity theory. In the United States the ratio of CEO pay to that of the average worker increased from around 20 to 1 in 1965 to 354 to 1 in 2012. There was no change in technology that could explain a change in relative productivity of that magnitude— and no explanation for why that change in technology would occur in the US and not in other similar countries. Moreover, the design of corporate compensation schemes has made it evident that they are not intended to reward effort: typically, they are related to the performance of the stock, which rises and falls depending on many factors outside the control of the CEO, such as market interest rates and the price of oil. It would have been easy to design an incentive structure with less risk, simply by basing compensation on relative performance, relative to a group of comparable companies. The struggles of the Clinton administration to introduce tax systems encouraging so-called performance pay (without imposing conditions to ensure that pay was actually related to performance) and disclosure requirements (which would have enabled market participants to better assess the extent of stock dilution associated with CEO stock option plans) clarified the battle lines: those pushing for favourable tax treatment and against disclosure understood well that these arrangements would have facilitated greater inequalities in income.

For specifically the rise in top incomes in the financial sector, the evidence is even more unfavourable to explanations based on marginal productivity theory. An empirical study by Philippon and Reshef shows that in the past two decades workers in the financial industry have enjoyed a huge ‘pay-premium’ with respect to similar sectors, which cannot be explained by the usual proxies for productivity (such as the level of education or unobserved ability). According to their estimates, financial sector compensations have been about 40 percent higher than the level that would have been expected under perfect competition.

It is also well documented that banks deemed ‘too big to fail’ enjoy a rent due to an implicit state guarantee. Investors know that these large financial institutions can count, in effect, on a government guarantee, and thus they are willing to provide them funds at lower interest rates. The big banks can thus prosper not because they are more efficient or provide better service but because they are in effect subsidised by taxpayers. There are other reasons for the super-normal returns to the large banks and their bankers. In certain of the activities of the financial sector, there is far from perfect competition. Anti-competitive practices in debit and credit cards have amplified pre-existing market power to generate huge rents. Lack of transparency (e.g. in over-the-counter Credit Default Swaps (CDSs) and derivatives) too have generated large rents, with the market dominated by four players.  It is not surprising that the rents enjoyed in this way by big banks translated into higher incomes for their managers and shareholders.

In the financial sector even more than in other industries, executive compensation in the aftermath of the crisis provided convincing evidence against marginal productivity theory as an explanation of wages at the top: the bankers who had brought their firms and the global economy to the brink of ruin continued to receive high rates of pay— compensation which in no way could be related either to their social contribution or even their contribution to the firms for which they worked (both of which were negative). For instance, a study that focused on Bear Sterns and Lehman Brothers in 2000– 2008 has found that the top executive managers of these two giants had brought home huge amounts of ‘performance-based’ compensations (estimated at around $ 1 billion for Lehman and $ 1.4 billion for Bear Stearns), which were not clawed back when the two firms collapsed.

Still another piece of evidence supporting the importance of rent-seeking in explaining the increase in inequality is provided by those studies that have shown that increases in taxes at the very top do not result in decreases in growth rates. If these incomes were a result of their efforts, we might have expected those at the top to respond by working less hard, with adverse effects on GDP.

The increase in rents

Three striking aspects of the evolution of most rich countries in the past thirty-five years are (a) the increase in the wealth-to-income ratio; (b) the stagnation of median wages; and (c) the failure of the return to capital to decline. Standard neoclassical theories, in which ‘wealth’ is equated with ‘capital’, would suggest that the increase in capital should be associated with a decline in the return to capital and an increase in wages. The failure of unskilled workers’ wages to increase has been attributed by some (especially in the 1990s) to skill-biased technological change, which increased the premium put by the market on skills. Hence, those with skills would see their wages rise, and those without skills would see them fall. But recent years have seen a decline in the wages paid even to skilled workers. Moreover, as my recent research shows, average wages should have increased, even if some wages fell. Something else must be going on.

There is an alternative— and more plausible— explanation. It is based on the observation that rents are increasing (due to the increase in land rents, intellectual property rents and monopoly power). As a result, the value of those assets that are able to provide rents to their owners— such as land, houses and some financial claims— is rising proportionately. So overall wealth increases, but this does not lead to an increase in the productive capacity of the economy or in the mean marginal productivity or average wage of workers. On the contrary, wages may stagnate or even decrease, because the rise in the share of rents has happened at the expense of wages.

The assets which are driving the increase in overall wealth, in fact, are not produced capital goods. In many cases, they are not even ‘productive’ in the usual sense; they are not directly related to the production of goods and services.  With more wealth put into these assets, there may be less invested in real productive capital. In the case of many countries where we have data (such as France) there is evidence that this is indeed the case: a disproportionate part of savings in recent years has gone into the purchase of housing, which has not increased the productivity of the ‘real’ economy.

Monetary policies that lead to low interest rates can increase the value of these ‘unproductive’ fixed assets— an increase in the value of wealth that is unaccompanied by any increase in the flow of goods and services. By the same token, a bubble can lead to an increase in wealth— for an extended period of time— again with possible adverse effects on the stock of ‘real’ productive capital. Indeed, it is easy for capitalist economies to generate such bubbles (a fact that should be obvious from the historical record, but which has also been confirmed in theoretical models. ) While in recent years there has been a ‘correction’ in the housing bubble (and in the underlying price of land), we cannot be confident that there has been a full correction. The increase in the wealth– income ratio may still have more to do with an increase in the value of rents than with an increase in the amount of productive capital. Those who have access to financial markets and can get credit from banks (typically those already well off) can purchase these assets, using them as collateral. As the bubble takes off, so does their wealth and society’s inequality. Again, policies amplify the resulting inequality: favourable tax treatment of capital gains enables especially high after-tax returns on these assets and increases the wealth especially of the wealthy, who disproportionately own such assets (and understandably so, since they are better able to withstand the associated risks).

The role of institutions and politics

The large influence of rent-seeking in the rise of top incomes undermines the marginal productivity theory of income distribution. The income and wealth of those at the top comes at least partly at the expense of others— just the opposite conclusion from that which emerges from trickle-down economics. When, for instance, a monopoly succeeds in raising the price of the goods which it sells, it lowers the real income of everyone else. This suggests that institutional and political factors play an important role in influencing the relative shares of capital and labour.

As we noted earlier, in the past three decades wages have grown much less than productivity — a fact which is hard to reconcile with marginal productivity theory but is consistent with increased exploitation. This suggests that the weakening of workers’ bargaining power has been a major factor. Weak unions and asymmetric globalisation, where capital is free to move while labour is much less so, are thus likely to have contributed significantly to the great surge of inequality.

The way in which globalisation has been managed has led to lower wages in part because workers’ bargaining power has been eviscerated. With capital highly mobile— and with tariffs low— firms can simply tell workers that if they don’t accept lower wages and worse working conditions, the company will move elsewhere. To see how asymmetric globalisation can affect bargaining power, imagine, for a moment, what the world would be like if there was free mobility of labour, but no mobility of capital. Countries would compete to attract workers. They would promise good schools and a good environment, as well as low taxes on workers. This could be financed by high taxes on capital. But that’s not the world we live in.

In most industrialised countries there has been a decline in union membership and influence; this decline has been especially strong in the Anglo-Saxon world. This has created an imbalance of economic power and a political vacuum. Without the protection afforded by a union, workers have fared even more poorly than they would have otherwise. Unions’ inability to protect workers against the threat of job loss by the moving of jobs abroad has contributed to weakening the power of unions. But politics has also played a major role, exemplified in President Reagan’s breaking of the air traffic controllers’ strike in the US in 1981 or Margaret Thatcher’s battle against the National Union of Mineworkers in the UK.

Central bank policies focusing on inflation have almost certainly been a further factor contributing to the growing inequality and the weakening of workers’ bargaining power. As soon as wages start to increase, and especially if they increase faster than the rate of inflation, central banks focusing on inflation raise interest rates. The result is a higher average level of unemployment and a downward ratcheting effect on wages: as the economy goes into recession, real wages often fall; and then monetary policy is designed to ensure that they don’t recover.

Inequalities are affected not just by the legal and formal institutional arrangements (such as the strength of unions) but also by social custom, including whether it is viewed as acceptable to engage in discrimination.

At the same time, governments have been lax in enforcing anti-discrimination laws. Contrary to the suggestion of free-market economists, but consistent with even casual observation of how markets actually behave, discrimination has been a persistent aspect of market economies, and helps explain much of what has gone on at the bottom. The discrimination takes many forms— in housing markets, in financial markets (at least one of America’s large banks had to pay a very large fine for its discriminatory practices in the run-up to the crisis) and in labour markets. There is a large literature explaining how such discrimination persists.

Of course, market forces— the demand and supply for skilled workers, affected by changes in technology and education— play an important role as well, even if those forces are partially shaped by politics. But instead of these market forces and politics balancing each other out, with the political process dampening the increase in inequalities of income and wealth in periods when market forces have led to growing disparities, in the rich countries today the two have been working together to increase inequality.

The price of inequality

The evidence is thus unsupportive of explanations of inequality solely focused on marginal productivity. But what of the argument that we need inequality to grow?

A first justification for the claim that inequality is necessary for growth focuses on the role of savings and investment in promoting growth, and is based on the observation that those at the top save, while those at the bottom typically spend all of their earnings. Countries with a high share of wages will thus not be able to accumulate capital as rapidly as those with a low share of wages. The only way to generate savings required for long-term growth is thus to ensure sufficient income for the rich.

This argument is particularly inapposite today, where the problem is, to use Bernanke’s term, a global savings glut. But even in those circumstances where growth would be increased by an increase in national savings, there are better ways of inducing savings than increasing inequality. The government can tax the income of the rich, and use the funds to finance either private or public investment; such policies reduce inequalities in consumption and disposable income, and lead to increased national savings (appropriately measured).

A second argument centres on the popular misconception that those at the top are the job creators, and giving more money to them will thus create more jobs. Industrialised countries are full of creative entrepreneurial people throughout the income distribution. What creates jobs is demand: when there is demand, firms will create the jobs to satisfy that demand (especially if we can get the financial system to work in the way it should, providing credit to small and medium-sized enterprises).

In fact, as empirical research by the IMF has shown, inequality is associated with economic instability. In particular, IMF researchers have shown that growth spells tend to be shorter when income inequality is high. This result holds also when other determinants of growth duration (like external shocks, property rights and macroeconomic conditions) are taken into account: on average, a 10-percentile decrease in inequality increases the expected length of a growth spell by one half. The picture does not change if one focuses on medium-term average growth rates instead of growth duration. Recent empirical research released by the OECD shows that income inequality has a negative and statistically significant effect on medium-term growth. It estimates that in countries like the US, the UK and Italy, overall economic growth would have been six to nine percentage points higher in the past two decades had income inequality not risen.

There are different channels through which inequality harms the economy. First, inequality leads to weak aggregate demand. The reason is easy to understand: those at the bottom spend a larger fraction of their income than those at the top. The problem may be compounded by monetary authorities’ flawed responses to this weak demand. By lowering interest rates and relaxing regulations, monetary policy too easily gives rise to an asset bubble, the bursting of which leads in turn to recession.

Many interpretations of the current crisis have indeed emphasised the importance of distributional concerns. Growing inequality would have led to lower consumption but for the effects of loose monetary policy and lax regulations, which led to a housing bubble and a consumption boom. It was, in short, only growing debt that allowed consumption to be sustained. But it was inevitable that the bubble would eventually break. And it was inevitable that, when it broke, the economy would go into a downturn.

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Second, inequality of outcomes is associated with inequality of opportunity. When those at the bottom of the income distribution are at great risk of not living up to their potential, the economy pays a price not only with weaker demand today, but also with lower growth in the future. With nearly one in four American children growing up in poverty, many of them facing not just a lack of educational opportunity but also a lack of access to adequate nutrition and health, the country’s long-term prospects are being put into jeopardy.

Third, societies with greater inequality are less likely to make public investments which enhance productivity, such as in public transportation, infrastructure, technology and education. If the rich believe that they don’t need these public facilities, and worry that a strong government which could increase the efficiency of the economy might at the same time use its powers to redistribute income and wealth, it is not surprising that public investment is lower in countries with higher inequality. Moreover, in such countries tax and other economic policies are likely to encourage those activities that benefit the financial sector over more productive activities. In the United States today returns on long-term financial speculation (capital gains) are taxed at approximately half the rate of labour, and speculative derivatives are given priority in bankruptcy over workers. Tax laws encourage job creation abroad rather than at home. The result is a weaker and more unstable economy. Reforming these policies— and using other policies to reduce rent-seeking— would not only reduce inequality; it would improve economic performance.

It should be noted that the existence of these adverse effects of inequality on growth is itself evidence against an explanation of today’s high level of inequality based on marginal productivity theory. For the basic premise of marginal productivity is that those at the top are simply receiving just deserts for their efforts, and that the rest of society benefits from their activities. If that were so, we should expect to see higher growth associated with higher incomes at the top. In fact, we see just the opposite.

Reversing inequality

A wide range of policies can help reduce inequality. Policies should be aimed at reducing inequalities both in market income and in the post-taxand-transfer incomes. The rules of the game play a large role in determining market distribution— in preventing discrimination, in creating bargaining rights for workers, in curbing monopolies and the powers of CEOs to exploit firms’ other stakeholders and the financial sector to exploit the rest of society. These rules were largely rewritten during the past thirty years in ways which led to more inequality and poorer overall economic performance. Now they must be rewritten once again, to reduce inequality and strengthen the economy, for instance, by discouraging the short-termism that has become rampant in the financial and corporate sector.

Reforms include more support for education, including pre-school; increasing the minimum wage; strengthening earned-income tax credits; strengthening the voice of workers in the workplace, including through unions; and more effective enforcement of anti-discrimination laws. But there are four areas in particular that could make inroads in the high level of inequality which now exists.

First, executive compensation (especially in the US) has become excessive, and it is hard to justify the design of executive compensation schemes based on stock options. Executives should not be rewarded for improvements in a firm’s stock market performance in which they play no part. If the Federal Reserve lowers interest rates, and that leads to an increase in stock market prices, CEOs should not get a bonus as a result. If oil prices fall, and so profits of airlines and the value of airline stocks increase, airline CEOs should not get a bonus. There is an easy way of taking account of these gains (or losses) which are not attributable to the efforts of executives: basing performance pay on the relative performance of firms in comparable circumstances. The design of good compensation schemes that do this has been well understood for more than a third of a century, and yet executives in major corporations have almost studiously resisted these insights. They have focused more on taking advantages of deficiencies in corporate governance and the lack of understanding of these issues by many shareholders to try to enhance their earnings— getting high pay when share prices increase, and also when share prices fall. In the long run, as we have seen, economic performance itself is hurt.

Second, macroeconomic policies are needed that maintain economic stability and full employment. High unemployment most severely penalises those at the bottom and the middle of the income distribution. Today, workers are suffering thrice over: from high unemployment, weak wages and cutbacks in public services, as government revenues are less than they would be if economies were functioning well.

As we have argued, high inequality has weakened aggregate demand. Fuelling asset price bubbles through hyper-expansive monetary policy and deregulation is not the only possible response. Higher public investment— in infrastructures, technology and education— would both revive demand and alleviate inequality, and this would boost growth in the long-run and in the short-run. According to a recent empirical study by the IMF, well-designed public infrastructure investment raises output both in the short and long term, especially when the economy is operating below potential. And it doesn’t need to increase public debt in terms of GDP: well-implemented infrastructure projects would pay for themselves, as the increase in income (and thus in tax revenues) would more than offset the increase in spending.

Third, public investment in education is fundamental to address inequality. A key determinant of workers’ income is the level and quality of education. If governments ensure equal access to education, then the distribution of wages will reflect the distribution of abilities (including the ability to benefit from education) and the extent to which the education system attempts to compensate for differences in abilities and backgrounds. If, as in the United States, those with rich parents usually have access to better education, then one generation’s inequality will be passed on to the next, and in each generation, wage inequality will reflect the income and related inequalities of the last.

Fourth, these much-needed public investments could be financed through fair and full taxation of capital income. This would further contribute to counteracting the surge in inequality: it can help bring down the net return to capital, so that those capitalists who save much of their income won’t see their wealth accumulate at a faster pace than the growth of the overall economy, resulting in growing inequality of wealth. Special provisions providing for favourable taxation of capital gains and dividends not only distort the economy, but, with the vast majority of the benefits going to the very top, increase inequality. At the same time they impose enormous budgetary costs: 2 trillion dollars from 2013 to 2023 in the US, according to the Congressional Budget Office. The elimination of the special provisions for capital gains and dividends, coupled with the taxation of capital gains on the basis of accrual, not just realisations, is the most obvious reform in the tax code that would improve inequality and raise substantial amounts of revenues. There are many others, such as a good system of inheritance and effectively enforced estate taxation.

Redefining economic performance

We used to think of there being a trade-off: we could achieve more equality, but only at the expense of overall economic performance. It is now clear that, given the extremes of inequality being reached in many rich countries and the manner in which they have been generated, greater equality and improved economic performance are complements.

This is especially true if we focus on appropriate measures of growth. If we use the wrong metrics, we will strive for the wrong things. As the international Commission on the Measurement of Economic Performance and Social Progress argued, there is a growing global consensus that GDP does not provide a good measure of overall economic performance. What matters is whether growth is sustainable, and whether most citizens see their living standards rising year after year.

Since the beginning of the new millennium, the US economy, and that of most other advanced countries, has clearly not been performing. In fact, for three decades, real median incomes have essentially stagnated. Indeed, in the case of the US, the problems are even worse and were manifest well before the recession: in the past four decades average wages have stagnated, even though productivity has drastically increased.

As this essay has emphasised, a key factor underlying the current economic difficulties of rich countries is growing inequality. We need to focus not on what is happening on average— as GDP leads us to do— but on how the economy is performing for the typical citizen, reflected for instance in median disposable income. People care about health, fairness and security, and yet GDP statistics do not reflect their decline. Once these and other aspects of societal well-being are taken into account, recent performance in rich countries looks much worse.

The economic policies required to change this are not difficult to identify. We need more investment in public goods; better corporate governance, antitrust and anti-discrimination laws; a better regulated financial system; stronger workers’ rights; and more progressive tax and transfer policies. By ‘rewriting the rules’ governing the market economy in these ways, it is possible to achieve greater equality in both the pre- and post-tax and transfer distribution of income, and thereby stronger economic performance.

screen-shot-2016-06-16-at-15-39-47-415x610Adapted (with permission) from Rethinking Capitalism: Economics and Policy for Sustainable and Inclusive Growth,  edited by Michael Jacobs and Mariana Mazzucato, (Political Quarterly Monograph Series), WILEY Blackwell.

2016 September 9

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  • You are right that growth does not solve inequality. In fact, as you scale up the difference gets larger, which is what we are experiencing. However, your solutions don’t hold much water. What exactly should be done differently?

    In the game Monopoly, everyone gets paid exactly the same. Yet, market forces lead to all the wealth concentrating. All the growth ends up in the hands of one person. The assumption that you can regulate and transfer wealth ignores that this model proves that EVEN WITH EQUAL PAY INEQUALITY FOLLOWS. The government can’t fix a problem that is not understood.

    So, how should we understand the problem? Read my book. It gets a lot closer to the underlying nature of the math. In a nutshell: buy low-sell high is inequality in every transaction. Growth compounds the inequality. The solution is buy low-sell low, but there is still the issue of the next generation not having any capital. There are lots of things that need to be changed, but first we need a good comprehensive analysis of the problem.

    Progressive taxes, like the minimum wage increase, are really too little too late. (There are no taxes in Monopoly, only rent). The problem is in the private sector. The government can only regulate the private sector properly if it doesn’t make the problem worse, which taxes do. The more taxes, the more profit rates go up. In the arms race between profit and taxes, inflation is the only winner. Everyone loses.

    • cynthia curran

      Yeah, and the 1950’s were not that great. The poverty rate for whties was 22 percent. Lots of liberals never read this or that Johnson did his great society programs mainly in the south which were rural and wages did not rise much in the rural areas in the 1950’s. Today, poverty looks worst because rental housing is high and there are more homeless as a percentage of the population than in the 1950’s even though white poverty is lower today around 12 to 13 percent.

  • HalMorris

    “The ‘rising-tide hypothesis’ was equally consistent with a ‘trickle-up’
    theory— give more money to those at the bottom and everyone will benefit”.

    I don’t think it’s just “equally consistent”; there is plenty of evidence that “trickle up” can work. Of course anything can fail if done badly enough, so I won’t say it’s bound to work, but broader education, government backed research, time to do more than mindless work (i.e. 40 hour workweek or something in that range) have led to a tremendous scientific and engineering work force, which has gotten the top layers of society out of drafty castles, away from old age blighted by gout, and very likely chance of dying of plague or some such thing.

  • HalMorris

    “The reason why these ideas justifying inequality have endured is that they have a grain of truth in them.”

    That’s part of the reason, but there are many other factors like the skill and genius of the people described in Jane Mayer’s Dark Money. As one little example, I was just listening to NPR’s Freakonomics and they bring on Brian Caplan, introduced as a “George Mason University professor of economics” to talk about the “irrational voter”. Voters are irrational but rather than try to fix that, Caplan sounds like he just wants to attack democracy. Caplan is, like amost every George Mason econ prof basking in publicity, also a member of the Koch-funded Mercatus center and “adjunct scholar at the Cato Institute”, and NPR doesn’t even point out these other connections. I would demand they at very least point out that a Geo Mason prof has these loyalties conflicting with the “marketplace of ideas” they are presented as representatives of. And in the past, Wm F. Buckley and Milton Friedman achieved their widest fame with the help of Public Television.

    Basically the very very rich benefit from all this ignorance, or think they are benefitting (very likely not in the long run as they wreck the system that made them), and they have a huge machine that is successfully convincing a majority to vote their way, changing election laws greatly to their benefit, disenfranchising people either outright or through Gerrymandering, and keeping their message dominant over any alternative.

  • Lexi Mize

    The solution is simple. No need for 5000 words to get the topic told.

    Humanity needs to learn to share (again). We used to share, when we lived as small bands 12,000-70,000 years ago; a time when we evolved into the species that we are. But sometime along the path between tribes and trans-global corporations, we forgot how to share. Greed took over. Avarice gripped humanity by the base of the skull and stared it in the eye and said “You will take all that you can and leave your brothers and sisters groveling in the dirt.”

    So, we need to learn to share again. The way to start that process is to whip the primary culprit — corporations — into submission. Corporations are the singular means of converting a sharing economy into a capitalistic, covetous one. The way to beat them back is through legislation which imposes, first, reductions in their fascist control of government, and then eliminates their ability to changed said government.

    I’ve made a list:
    1) First off: corporations ARE NOT PEOPLE.
    2) Corporations’ lobbyists should have reduced impact on our legislators: Non-Sequential terms for Congress.
    3) Lastly, equal influence in our elections: campaign contributions limited to one avg. day’s wage per candidate, per annum, per Citizen.

    • HalMorris

      While I agree with your general impulse, and a number of your points, there are some flaws to the argument.

      “sometime along the path between tribes and trans-global corporations, we forgot how to share”

      That happened independently in a big way at the very (preliterate or semi-literate) beginnings of the civilized era, and in more than one independent origin of civilization. Look at the cruelty of early Mesopotamian, Aztec, Inca, Maya, and early Chinese civilization. I believe all practiced human sacrifice at some point, if not as systematically and routinely as the Aztecs, at least in some instances where something like a ruler’s entire court was slaughtered to accompany him in the afterlife. This is just one extreme aspect of those societies, and while there may b less direct evidence I think it’s safe to say the peasants were treated like the dirt they lived off of.

      “The way to start that process is to whip the primary culprit — corporations — into submission.”

      Whip them with what? Such impulses, based on a Gods-eye view of (A) how things are, and (B) how you think they should be, and some simple picture of how to get from A to B is as big a source of suffering as what you want to stop from happening. It’s what drove some academics and public intellectuals (making an imperfect diagnosis in the post-WWII era of Fascist and Communist totalitarianism), to react against any claim of a globally objective point of view, which has lead to a widespread syndrome of “the best lack all convictions” (Wm. Butler Yates, “The Second Coming”).

      History suggests to me that the tendency to push the majority along the path to destitution) is a structural problem of post paleolithic large scale society, which humankind has managed to tame more or less, only intermittently, so part of what I think is that we need to make a very close study of how we ever managed to do that. Fukuyama’s 2-volume history of the evolution of positive political order (he is mostly over Hegel) is helpful, as is Robertson and Acemoglu’s How Nations Fail. The Federalist papers, which spell out many principals of how to engineer non-perverse incentives is another place to look.

      Finally I think we need a whole new philosophy and practice of political order from the bottom up, which requires a huge cultural change if the majority is to
      be fit for a suitably responsible role. “Mr. Small Government” Thomas Jefferson believed, as I do that a people suitable for and practicing democracy is then only think that can reliably support liberty and the ability to pursue happiness.

      Sound more difficult than “whipping the primary culprits”? Probably so, but appearances can be deceiving. I think it is a bare sketch of something we could possibly actually do to good effect, while the direct pursuit of “whipping the primary culprits” is too likely to produce a result like the old Soviet Union, benefiting almost noone.

      Re your specific action items, (1) and (3) are good, but I don’t think non-sequential political terms would be helpful. They might seem like a solution to the drawbacks of careerism in the legislature, but IMO would lead to alternation between terms in congress, and terms in think tanks, and other organs of “movement conservatism” in particular and of other political groupings to a lesser extent. I doubt the liberal machine is as well organized to facilitate that sort of thing, though I won’t insist upon that point. At any rate, as an example, when Rick Santorum was voted out of office in 2006, his political career did not miss a stride:

      In January 2007, Santorum joined the Ethics and Public Policy Center, a D.C.-based conservative think tank as director of its America’s Enemies Program focusing on foreign threats to the United States, including Islamic fascism, Venezuela, North Korea and Russia.[125] In February 2007, he signed a deal to become a contributor on the Fox News Channel, offering commentary on politics and public policy.

      Santorum earned $1.3 million in 2010 and the first half of 2011. The largest portion of his employment earnings—$332,000—came from his work as a consultant for industry interest groups, including Consol Energy and American Continental Group. Santorum also earned $395,414 in corporate director’s fees and stock options from Universal Health Services, and $217,385 in income from the Ethics and Public Policy Center think tank.
      [source Wikipedia: note the phrase “Islamic fascism” which shows that conservative sources have helped to write this article]

      Meanwhile, he made two primary runs for the presidency. Many more examples could be given, for any major political tendency.

  • franciscolopezus

    One of the main cause of inequality is that workers tend to be paid the imperfect market monopsonistically induce price for their work,instead of the adjusted to risk and competition monetary value of their marginal productivity. The difference goes upward in the food chain as a form of tax from the private sector to workers(the government, if using a progressive tax, impose this on the owners of capital, alleviating a bit this). At lest this article is from an economist. Many of the articles here are well written but seemly by people who never went beyond and intermediate undergraduate course.

  • laura mezzanotte

    old wisdom: give money to the poor and they will spend it. give money to the rich and they will keep it. They already have whatever they wants.

  • “The economic policies required to change this are not difficult to identify. We need more investment in public goods; better corporate governance, antitrust and anti-discrimination laws; a better regulated financial system; stronger workers’ rights; and more progressive tax and transfer policies. By ‘rewriting the rules’ governing the market economy in these ways, it is possible to achieve greater equality in both the pre- and post-tax and transfer distribution of income, and thereby stronger economic performance.”

    While this is written from an US perspective, and I live in Germany with at least remnants of ordoliberalist, social democrat and christian conservative regulation protecting citizens against the effects of unbalanced market forces and coercive power of economic resources, I am not in favor of paying more taxes.

    If more money is to be redistributed, which seems reasonable, then it must come from the resources used by the state bureaucracies. Polticians have to much more engage in questions of how to organize state activities effectively and efficiently, getting rid of constraints induced by outdated, historically grown multilayered complex processes. Working roughly half a year plus for ‘the society’ is just too much. There is a lot of efficiency reserves in the way our local, federal and national bureaucracies are organized and at the same time it is much less tolerable, if other sectors of the economy, i.e. society, have (had to) made use of these possibilities – and also bear the associated burdens.

    The political revolution that liberated in 1989 Eastern Europe has not nearly been adequately reflected in an analogous liberalization of the *bureaucratic system* of western democracies. Neither have the parallel technological advances been made use of and associated potential economic gains been properly pursued.

    Hence, no wonder that democratic consensus is declining and dogmatic, autocratic proposals on both radical ends of the political spectrum as well as in the (former?) middle are gaining ground.

  • Zaslav

    It’s great to see Mr. Stiglitz speaking truth about inequality often. I disagree with one or two points. He says “The reason why these ideas justifying inequality have endured is that they have a grain of truth in them.” That’s the logical answer. But as we’ve seen recently in rearkably obvious ways, a grain of truth is hardly necessary. The principal reason these ideas endure is that they justify inequality. No more than that. The grain of truth enables a veneer of reality to convince the unwitting but it’s not the fundamental reason. Money talks and big money yells; forgetting that for a moment is a mistake.

  • Robert Bostick

    Professor Stiglitz’s, why do you insist on telling us that our government, which issues a non-convertible, fiat currency, with a flexible exchange rate, and no debt in a foreign currency, needs to have revenue per se to fund expenditures designed to eliminate much of this society’s economic and social dysfunction?

    You explicitly tell us that revenue must be generated via various forms of taxation to fund your recommended solutions. By definition, dollars are I.O.U.s, which when used to pay taxes are never recycled. The I.O.U. is destroyed. Government simply issues new I.O.U.s. It doesn’t need or want dollars since it creates them ad hoc. It wants the goods and services provided in exchange for the dollars.

    Therein lies the flaw with conventional economics. It’s a gold standard and an accounting constraint which, operationally does not prevent the government from issuing dollars. All the government needs to complete the act of spending is an appropriation, not tax revenue or revenue from bond sales.

    Tax policy should manage price stability, income distribution and acceptance of the currency. With abandonment of gold standard rubrics our government should finally be free from financial markets. But conventional economists cynically and subversively distort the historical facts and thereby contribute to economic hardship and deprivation affecting 99.9% of Americans.

    Were it not for a few heterodox economists and social thinkers many of us would never realize the above, indisputable facts about our fiscal policy.

    You know full well that our federal government never faces a solvency issue, involuntarily.

    You can’t deny the fact that when the federal government deficit spends it creates to the penny net financial assets/savings for all of us in the private sector. And when it reduces its spending so too are net savings reduced to the point that forces us to incur higher debt loads to maintain living standards.

    The inequality you speak of is best resolved not by taxing the rich but by inducing much higher levels of income for working and middle class families. America survives on sales. Absent adequate incomes (Basic Income = $40,000 and up depending on family size and current income) sales decline. It’s that simple. No taxes are needed for redistribution from rich to poor. The Fed can do for the 99% what it did for the 1%; mark up accounts with their computers. Clearly, a Basic Income Policy is the optimal vehicle with which to sustain consumption, and eliminate the scourge of poverty.

    Bernanke told economists: “Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”

    • leif

      Maybe an understanding of scarcity would explain why. Thinking that MMT can change the behavior of how people perceive value (meaning), is a bit naive. We have so many biases that lead us to irrational ideologies,we are chained to Irrational exuberance, the Matthew effect , gamblers fallacy and oh so many more. Of course the US is a sovereign currency issuer, that doesn’t mean that the people who control those switches want a more egalitarian world, for the scarcity of actual money for the majority of the population leads to a perception of scarcity and one must be aware of what scarcity does to systems of value. Give a few much and the many will chase it, give the many much and no one will care. As Stiglitz pointed out in Free fall “economics is the study of behavior”.

      • Robert Bostick

        Oh, please with the homilies. Few mainline economists and academic economists can, without fear of the Fed withdrawing privileges, tell America that our federal government never needs revenue per se to spend. That taxes do not fund the federal government, and solvency is never an issue. Greenspan, opened the door in 1997. But few entered.

        “Let me begin with a nation’s sovereign credit rating. When there is confidence in the integrity of government, monetary authorities—the central bank and the finance ministry—can issue unlimited claims denominated in their own currencies and can guarantee or stand ready to guarantee the obligations of private issuers as they see fit. This power has profound implications for both good and ill for our economies.

        Central banks can issue currency, a noninterest-bearing claim on the government, effectively without limit. They can discount loans and other assets of banks or other private depository institutions, thereby converting potentially illiquid private assets into riskless claims on the government in the form of deposits at the central bank.

        That all of these claims on government are readily accepted reflects the fact that a government cannot become insolvent with respect to obligations in its own currency. A fiat money system, like the ones we have today, can produce such claims without limit. To be sure, if a central bank produces too many, inflation will inexorably rise as will interest rates, and economic activity will inevitably be constrained by the misallocation of resources induced by inflation. If it produces too few, the economy’s expansion also will presumably be constrained by a shortage of the necessary lubricant for transactions. Authorities must struggle continuously to find the proper balance. ”

    • oldngrumpy1

      While taxes do not fund spending, they can, if appropriately applied, direct investment. The high top marginal rates of the 50s-60s didn’t collect revenue as much as they directed investors to take more shareholder equity to their bottom line in lieu of cash. When RayGun took away this stick he left all of the carrots dangling in front of investors to entice them into low risk financial instruments instead of start ups and industrials. Consequently, since 83 the financial sector has grown from 7% of GDP to over 20% and the bulk of productivity gains have been sequestered away from any velocity in the economy.

  • Brian Gladish

    We only need look to Venezuela for confirmation of Stiglitz’s assertions. Nominal income is rising arbitrarily quickly while real income is trending to zero, eliminating inequality. With no income there can hardly be unearned income, and connected politicians who still see, if not an income, perks from their connections, certainly earned those perks as they lay the foundations for Venezuelan prosperity.

  • Dick Burkhart

    Common sense recommendations. Except that the real issue is that none of this will happen without some kind of crisis or political revolution that overthrows the power of the current plutocracy, an elite of executives and the rich that has controlled both political parties in recent years. Both Bernie and Trump, in radically different ways, represent warning shots across the bow of the ship plutocracy. “Interesting times” lie ahead, especially since none of Stiglitz’s common sense solutions will solve the underlying limits-to-growth problem.

  • Curt Welch

    “The economic policies required to change this are not difficult to identify. …”

    Well, yes all those are ways to attack the problem. Or we could do something far simpler and stronger. Tax all income (wages and capital income as well as corporate profits) at a flat rate and fund a Basic Income to directly tax and fix the inequality.

    Not only will this increase the income of the bottom 80% while lowering the income of the top 20%, it will give labor strong bargaining power without any need to create or support unions. Workers that have a family supported by a Basic Income can choose to walk away from a bad job. With Basic Incomes, we lower labor supply (people have the freedom to work less), which raises labor demand and pay, increase wage share of GDP, while driving down return to capital, that drives down profits, land value, as well as CEO pay — all automatically, without having to legislate any direct attack on those issues. With the extra income and security of Basic Income, more kids can afford to stay in school and finish a degree, or take time off from work, to spend more time with education. Again, no special programs needed to improve worker education — give them the power to self educate and pay for their own form of education that fits their needs.

    There are many other advantages to using a Basic Income to fix the inequality but it alone is the one program, that can directly attack and fix, all the problems pointed out in this article.

  • Harquebus

    No fiat currency has ever survived. None. Ever.
    “Fiat” did not even once occur in this article.
    Fiat currencies are intrinsically worthless and for the first time in history, all currencies are fiat.

    • oldngrumpy1

      Unless you are pegging currency to a consumable commodity that is regularly traded for its inherent value “ALL” currency, including gold, has always been fiat. The origination of currency was accomplished by deficit spending and taxation which gave value to the currency at the point of a spear or barrel of a gun. The government created a currency to fund itself and then created a tax to cause people to want the currency to avoid whatever penalty was attached to nonpayment of the tax. That is why we will always have taxation. Governments, even with gold standards limiting currency creation, always waived those restrictions to wage war, and ours is no different today. If you think tax and debt have funded the American war machine that has grown to the 8th largest consumer of oil if it were a separate nation I have this great bridge you should look at.

    • Robert Bostick

      Nor has species.

  • Jason West

    You’re talking about marginal revenue productivity in an economic sense (max out the quantity of labor until there’s no marginal benefit) and you’re talking about it in an accounting sense – (
    we made $100.00 using 10 people therefore marginal productivity equals $10.00) These are incompatible ideas. They are apples and oranges.

  • ChrisTavareIsMyIdol

    One-eyed nonsense. If you look at the world only through what has happened in the US then it looks like wages have not increased. On a global scale however over 1 billion people have been taken out of poverty in just 20 years. Do they not matter because they don’t live in the US?

    Stiglitz wants globalisation but doesn’t want the consequences – a leveling down of average US wages while the poor (and the rich) grow relatively richer.

    • Jim Sack

      Of those one billion most are in one country, China.

  • Larry
  • Pingback: My Homepage()

  • janardhana anjanappa

    In order to eliminate inequality and poverty it is essential to improve labor to capital ratio and capital accumulation in all the sectors. This can be eliminated by greater access to low-cost funds, aces to infrastructure (Soft and Hard), access to affordable technology, production techniques, and greater importance is given to developing human capital. All in all, improve total factor productivity (TFP). Thereby, key sectors like agriculture, manufacturing, and services will contribute highly towards external sector and greater contribution to GDP. This will eliminate labor mobility between sectors, problem of labor unions and greater participation of private sector in the all sector.

  • Robert Bostick

    Roger Malcolm Mitchell offers this much more realistic set of reforms:Ten Steps To Prosperity:


    *FICA is the most regressive tax in American history, widening the Gap by punishing the low and middle-income groups, while leaving the rich untouched, and
    *The federal government, being Monetarily Sovereign, neither needs nor uses FICA to support Social Security and Medicare.

    This article addresses the questions:
    *Does the economy benefit when the rich can afford better health care than can the rest of Americans?
    *Aside from improved health care, what are the other economic effects of “Medicare for everyone?” *How much would it cost taxpayers? *Who opposes it?”

    3. PROVIDE AN ANNUAL ECONOMIC BONUS TO EVERY MAN, WOMAN AND CHILD IN AMERICA, AND/OR EVERY STATE, A PER CAPITA ECONOMIC BONUS (The JG (Jobs Guarantee) vs the GI (Guaranteed Income) vs the EB) Or institute a reverse income tax.

    Monetarily non-sovereign State and local governments, despite their limited finances, support grades K-12. That level of education may have been sufficient for a largely agrarian economy, but not for our currently more technical economy that demands greater numbers of highly educated workers.

    Because state and local funding is so limited, grades K-12 receive short shrift, especially those schools whose populations come from the lowest economic groups. And college is too costly for most families.An educated populace benefits a nation, and benefitting the nation is the purpose of the federal government, which has the unlimited ability to pay for K-16 and beyond.

    Even were schooling to be completely free, many young people cannot attend, because they and their families cannot afford to support non-workers. In a foundering boat, everyone needs to bail, and no one can take time off for study. If a young person’s “job” is to learn and be productive, he/she should be paid to do that job, especially since that job is one of America’s most important.

    Corporations themselves exist only as legalities. They don’t pay taxes or pay for anything else. They are dollar-transferring machines. They transfer dollars from customers to employees, suppliers, shareholders and the government (the later having no use for those dollars).
    Any tax on corporations reduces the amount going to employees, suppliers and shareholders, which diminishes the economy. Ultimately, all corporate taxes come around and reappear as deductions from your personal income.

    Federal taxes punish taxpayers and harm the economy. The federal government has no need for those punishing and harmful tax dollars. There are several ways to reduce taxes, and we should evaluate and choose the most progressive approaches.

    Cutting FICA and corporate taxes would be a good early step, as both dramatically affect the 99%. Annual increases in the standard income tax deduction, and a reverse income tax also would provide benefits from the bottom up. Both would narrow the Gap.


    There was a time when I argued against increasing anyone’s federal taxes. After all, the federal government has no need for tax dollars, and all taxes reduce Gross Domestic Product, thereby negatively affecting the entire economy, including the 99.9%.

    But I have come to realize that narrowing the Gap requires trimming the top. It simply would not be possible to provide the 99.9% with enough benefits to narrow the Gap in any meaningful way. Bill Gates reportedly owns $70 billion. To get to that level, he must have been earning $10 billion a year. Pick any acceptable Gap (1000 to 1?), and the lowest paid American would have to receive $10 million a year. Unreasonable.


    Banks have created all the dollars that exist. Even dollars created at the direction of the federal government, actually come into being when banks increase the numbers in checking accounts. This gives the banks enormous financial power, and as we all know, power corrupts — especially when multiplied by a profit motive.

    Although the federal government also is powerful and corrupted, it does not suffer from a profit motive, the world’s most corrupting influence.

    10. INCREASE FEDERAL SPENDING ON THE MYRIAD INITIATIVES THAT BENEFIT AMERICA’S 99.9% How many agencies benefit the lower- and middle-income/wealth/ power groups, by adding dollars to the economy and/or by actions more beneficial to the 99.9% than to the .1%?

    Save this reference as your primer to current economics. Sadly, much of the material is not being taught in American schools, which is all the more reason for you to use it.

    • oldngrumpy1

      Progressive marginal tax rates drive investments into productive use if the right exclusions are legislated. This certainly doesn’t include halving the tax burden on income classified as capital gains. When one has more money than the next 10 generations of inbred spawn can squander it makes little difference if much of it is reflected in shareholder equity instead of cash.

      The tax code should never again be regarded as a source of revenue, as it simply isn’t needed with a sovereign currency. It should be a brake lever to be pulled should the economy become inflated and it should direct behavior so that existing currency recycles to maintain velocity in the economy. Velocity of capital/currency should always be the goal of fiscal policy and the “debt” should be immediately renamed to “private sector reserves/wealth” so the average voter can grasp where the money went and support policy accordingly instead of applying property rights where it has no application.

  • Andy White

    We need to be clear about the confluence of ideas….. and about the truth of slogans.


    This comes from post WW2 growth, when the 1st world was rebuilding itself (generator of production and work), it comes a time of high unionization of the labour force (the invisible hand of). It happens in the shadow of the red revolution, the great depression and the rise of fascism which generated within the elite a fear/understanding that they could not “do that again”, it also came with guiding light of Keynesian economics, FDR, the Marshall plan and other ideas that bound people, societies and nations together.


    Trickle down was a joke first thrown at Hubert Hoover during the great depression, but became popular during the late 70s and 80s as both Margaret Thatcher and Ronald Reagan embraced the philosophical and ideology of Ayn Rand and economic belief that wealth was generated by great people, and that those great people were held back by government regulations, were decentivised by taxation and that “the market” would make sure that the cream would rise to the top and that this cream would would benefit us all. (Rather than be something else that floated and remained after flushing).


    Marginal production is about post fact justification, it’s a self fulfilling prophecy dressed as “Father Christmas”. The belief that what a person “takes home” is a true reflection of a person’s value to society were those with the greatest wealth are deemed to be the most valuable. What this willfully ignores is a) the ability of those in control/at the top to set their own wages b) what those at the top do to earn their wealth c) regards the elite as above “the law, regulation and control” d) self perpetuating mythology. (It is possible to add hundreds more items to this list but these 4 give a clear picture).

    Trickle down and marginal productivity are what undermine the truth of a rising tide, as they allow for the Ayn Randian übermensch to assert their elite status, give them both the means and justification to rig the game to their own advantage, whilst undermining the ability of people to challenge them…. Unions, Government regulation, Market regulation, redistributive wealth mechanisms, education, tax spending on the national interests and state requirements are all deemed as things that should be controlled not by the masses but by the elite.

  • abe1000

    Publicly owned banks would be a boon to the economy. For instance, if CalPers and the State of California parked it’s money in a bank owned by the State it could lend money back to the state. Keep it all in house and there are no losses to the thieving banking system.

  • temesgen abate

    Lucid clear-eyed cogent … it is befuddling to watch cantankerous windy contorted arguments when made by congressmen or senators during and after elections!

  • Peter

    200 years ago people battled in revolutions against inequality of the wealth distribution and against taxes paid to the king. Today it is same inequality in the world, like 200 years ago.
    People have democratic system, in democratic countries they are free, they have human rights, they don´t need to pay taxes to king , but must to the government, they can vote democratic government, but anyhow they are so poor.
    Because there is basic rule in all democratic societies and systems: supply and demand of market mechanism. Prices for all human needs as food, homes and other are determined by market forces. Result of these market power is, that many people use the whole their wages for basic human needs only. They don´t have any rest money to create any property.
    In my previous article on facebook page New society, I described cash flow in society. Money flows from companies as wages to people and than back to companies as paid for goods and services. Also people pay taxes to government, which flows through government goods and orders back to companies. Companies pay taxes to the government as well and get them back through government orders. So all money are cumulated in companies, corporation and their owners. Therefore they are so incredibly reach.
    To do something against inequality in wealth distribution, we have two possibilities:
    1. Regulate cash flow in society in all relationships between companies, people and government
    2. Remove people from market with basic human needs (food, home, etc) and this market will be between companies only. People will be on labour market only, in case they want more than basic human needs.

    1. Many economists are against market regulations. But anyhow governments supported banks in crisis in 2008 as they were too big to fail or governments pay for expensive orders to companies for their goods and services. Similar regulations should make governments for people as well, according to cash flow described above and cancel taxes for people, decrease prices for government orders, cancel lobbing and subsidies for companies, etc.

    2. Remove people from market mechanism means, that companies will finance all basic human needs in society for people as following: food, home, wear, health care, education, transport etc.
    If people want more needs like hobby, holiday, sport, amusement, culture, etc, people should come to labour market. In detail I described this point in my article on facebook page New society.

  • Johnathan Holifield

    Excellent article. To complement a “redefining economic performance,” there also must be a new definition of “U.S. economic competitiveness” and a new thrust toward Inclusive Competitiveness. I’ve written a new book on this subject, The Future Economy and Inclusive Competitiveness

  • Excellent article. Don’t forget the need to ensure society’s culture aligns with the shifting economics ideas. Without it, the shifts are very likely to fail. With it, the ideas in this article are very important to create a new dynamic for a flourishing humanity.

  • disqus_NrkWMn1KOM

    Wow, for a ‘Nobel Economist’, Mr. Stiglitz doesn’t know much about how people actually engage in economic activity. Nice fantasy though, maybe good for a movie script?

  • M A J Jeyaseelan

    It is time economists stopped blaming governments and focused their attention on the fundamental flaws in the very science of economics, which are the real root causes of the growing miseries and inequalities faced by the contemporary society.

    The first truth that every economist must admit is that inequalities are the direct result of bad economics that they teach and preach.

    The second truth, which every economist must understand and appreciate is that redistribution of incomes and wealth has become necessary because of the economic instruments that help the street-smart persons to take away from the economic system far more than the real value addition they contribute.

    A corollary of the above two truths is that redistributive measures might at best help overcome part of the inequalities created in the past but, can in no way stop the rich getting richer in the present and in the future.

    The only effective way to arrest the growing trend in inequalities would be to eliminate the use of the economic instruments and mechanisms that make it easy for people to indulge in unequal exchange of economic values.

    What are those economic instruments and mechanisms that enable the rich to usurp and amass incomes and wealth that is not legitimately theirs. The list is endless but, there are three that top the list.

    First is opportunity cost based pricing that legitimises the charging of prices that are far higher than the fair cost of production.

    Second is money creation by the central banks far in excess of the real value additions in the economy and credit creation by the banks far in excess of the savings deposited with the banks. Excess money and credit flows primarily to the rich and the recipients of such loans get to demand corresponding pounds of flesh from the real economy without having created a penny’s worth of real values.

    The third and most dangerous of all the economic weapons in the hands of the rich is speculative markets. Speculative markets do not create even a penny’s worth of real values and yet help siphon away large volumes real values into the hands of the rich. The rich investors actually force companies to effect large buy backs so as to hike up the sale prices of their stocks.

    A corollary of the above three processes is business cycles. The funniest thing about business cycles is that the poor are worst hit by both inflation and recession.

    What I have stated above is corroborated by data. An analysis of the sources of incomes for the rich would clearly show that the rich get richer through capital gains and interest incomes.

    There is no way to extricate the world economy from its aggravating miseries without re-writing the entire fundamental science of economics from the bottom up. If you do want to understand the root causes of economic problems do read my article hyper linked below.

  • M A J Jeyaseelan

    It is time economists stopped blaming governments and focused their attention on the fundamental flaws in the very science of economics, which are the real root causes of the growing miseries and inequalities faced by the contemporary society.

    The first truth that every economist must admit is that inequalities are the direct result of bad economics that they teach and preach.

    The second truth, which every economist must understand and appreciate is that redistribution of incomes and wealth has become necessary because of the economic instruments that help the street-smart persons to take away from the economic system far more than the real value addition they contribute.

    A corollary of the above two truths is that redistributive measures might at best help overcome part of the inequalities created in the past but, can in no way stop the rich getting richer in the present and in the future.

    The only effective way to arrest the growing trend in inequalities would be to eliminate the use of the economic instruments and mechanisms that make it easy for people to indulge in unequal exchange of economic values.

    What are those economic instruments and mechanisms that enable the rich to usurp and amass incomes and wealth that is not legitimately theirs. The list is endless but, there are three that top the list.

    First is opportunity cost based pricing that legitimises the charging of prices that are far higher than the fair cost of production.

    Second is money creation by the central banks far in excess of the real value additions in the economy and credit creation by the banks far in excess of the savings deposited with the banks. Excess money and credit flows primarily to the rich and the recipients of such loans get to demand corresponding pounds of flesh from the real economy without having created a penny’s worth of real values.

    The third and most dangerous of all the economic weapons in the hands of the rich is speculative markets. Speculative markets do not create even a penny’s worth of real values and yet help siphon away large volumes real values into the hands of the rich.

    A corollary of the above three processes is business cycles. The funniest thing about business cycles is that the poor are worst hit by both inflation and recession.

    There is no way to extricate the world economy from its aggravating miseries without re-writing the entire fundamental science of economics from the bottom up. If you do want to understand the root causes of economic problems do read my article hyper linked below.

  • Sabbie

    The author is confused, inequality is a symptom, it is not the disease. Growing up in the 70s, 80s, 90s nobody was making a big deal about inequality. Why? Because most of us still had reasonable access to the middle class lifestyle. Stop worrying that some other guy is making more money than you, and start thinking about the deviation between your wages and the cost of living. Why are rents up 50% and your wages only up 2%? The reason is Central Bank racketeering, and it’s enabled by Krony Kapitalism- the unholy marriage of government and corporate power. The cure is to be found in restoring a market based system.

  • the Swamp Fox

    Stiglitz is a Grade A moron, this fool supported the Iraq war, the subsidized lending that created the housing Crisis and Hugo Chavez