Nobel Laureate Economist Says American Inequality Didn’t Just Happen. It Was Created.

How to keep power at the top of society

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By Joseph E. Stiglitz

American inequality didn’t just happen. It was created. Market forces played a role, but it was not market forces alone. In a sense, that should be obvious: economic laws are universal, but our growing inequality— especially the amounts seized by the upper 1 percent—is a distinctly American “achievement.” That outsize inequality is not predestined offers reason for hope, but in reality it is likely to get worse. The forces that have been at play in creating these outcomes are self-reinforcing.

America’s current level of inequality is unusual. Compared with other countries and compared with what it was in the past even in the United States, it’s unusually large, and it has been increasing unusually fast. It used to be said that watching for changes in inequality was like watching grass grow: it’s hard to see the changes in any short span of time. But that’s not true now.

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Addressing inequality is of necessity multifaceted—we have to rein in the excesses at the top, strengthen the middle, and help those at the bottom. Each goal requires a program of its own. But to construct such programs, we have to have a better understanding of what has given rise to each facet of this unusual inequality.

Distinct as the inequality we face today is, inequality itself is not something new. The concentration of economic and political power was in many ways more extreme in the precapitalist societies of the West. At that time, religion both explained and justified the inequality: those at the top of society were there because of divine right. To question that was to question the social order, or even to question God’s will.

However, for modern economists and political scientists, as also for the ancient Greeks, this inequality was not a matter of a preordained social order. Power—often military power— was at the origin of these inequities. Militarism was about economics: the conquerors had the right to extract as much as they could from the conquered. In antiquity, natural philosophy in general saw no wrong in treating other humans as means for the ends of others. As the ancient Greek historian Thucydides famously said, “right, as the world goes, is only in question between equals in power, while the strong do what they can and the weak suffer what they must.

Those with power used that power to strengthen their economic and political positions, or at the very least to maintain them. They also attempted to shape thinking, to make acceptable differences in income that would otherwise be odious.

As the notion of divine right became rejected in the early nation-states, those with power sought other bases for defending their positions. With the Renaissance and the Enlightenment, which emphasized the dignity of the individual, and with the Industrial Revolution, which led to the emergence of a vast urban underclass, it became imperative to find new justifications for inequality, especially as critics of the system, like Marx, talked about exploitation.

The theory that came to dominate, beginning in the second half of the nineteenth century—and still does—was called “marginal productivity theory”; those with higher productivities earned higher incomes that reflected their greater contribution to society. Competitive markets, working through the laws of supply and demand, determine the value of each individual’s contributions. If someone has a scarce and valuable skill, the market will reward him amply, because of his greater contribution to output. If he has no skills, his income will be low.

Technology and scarcity, working through the ordinary laws of supply and demand, play a role in shaping today’s inequality, but something else is at work, and that something else is government.

Inequality is the result of political forces as much as of economic ones. In a modern economy government sets and enforces the rules of the game—what is fair competition, and what actions are deemed anticompetitive and illegal, who gets what in the event of bankruptcy, when a debtor can’t pay all that he owes, what are fraudulent practices and forbidden. Government also gives away resources (both openly and less transparently) and, through taxes and social expenditures, modifies the distribution of income that emerges from the market, shaped as it is by technology and politics.

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Finally, government alters the dynamics of wealth by, for instance, taxing inheritances and providing free public education. Inequality is determined not just by how much the market pays a skilled worker relative to an unskilled worker, but also by the level of skills that an individual has acquired. In the absence of government support, many children of the poor would not be able to get basic health care and nutrition, let alone the education required to acquire the skills necessary for enhanced productivity and high wages. Government can affect the extent to which an individual’s education and inherited wealth depend on those of his parents.

The way the American government performs these functions determines the extent of inequality in our society. In each of these arenas there are subtle decisions that benefit some group at the expense of others. The effect of each decision may be small, but the cumulative effect of large numbers of decisions, made to benefit those at the top, can be very significant.

Competitive forces should limit outsize profits, but if governments do not ensure that markets are competitive, there can be large monopoly profits. Competitive forces should also limit disproportionate executive compensation, but in modern corporations, the CEO has enormous power—including the power to set his own compensation, subject, of course, to his board—but in many corporations, he even has considerable power to appoint the board, and with a stacked board, there is little check. Shareholders have minimal say. Some countries have better “corporate governance laws,” the laws that circumscribe the power of the CEO, for instance, by insisting that there be independent members in the board or that shareholders have a say in pay. If the country does not have good corporate governance laws that are effectively enforced, CEOs can pay themselves outsize bonuses.

Progressive tax and expenditure policies (which tax the rich more than the poor and provide systems of good social protection) can limit the extent of inequality. By contrast, programs that give away a country’s resources to the rich and well-connected can increase inequality.

Our political system has increasingly been working in ways that increase the inequality of outcomes and reduce equality of opportunity. This should not come as a surprise: we have a political system 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.” Economists have a name for these activities: they call them rent seeking, getting income not as a reward to creating wealth but by grabbing a larger share of the wealth that would otherwise have been produced without their effort. Those at the top have learned how to suck out money from the rest in ways that the rest are hardly aware of—that is their true innovation.

Indeed, some of the most important innovations in business in the last three decades have centered not on making the economy more efficient but on how better to ensure monopoly power or how better to circumvent government regulations intended to align social returns and private rewards.

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Rent Seeking

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 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. If the government gave a company the exclusive right to import a limited amount (a quota) of a good, such as sugar, then the extra return generated as a result of the ownership of those rights was called a “quota-rent.”

Rent-seeking behavior is not just endemic in the resource rich countries of the Middle East, Africa, and Latin America. It has also become endemic in modern economies, including our own. In those economies, it takes many forms, some of which are closely akin to those in the oil-rich countries: getting state assets (such as oil or minerals) at below fair-market prices.

Another form of rent seeking is the flip side: selling to government products at above market prices (noncompetitive procurement). The drug companies and military contractors excel in this form of rent seeking. Open government subsidies (as in agriculture) or hidden subsidies (trade restrictions that reduce competition or subsidies hidden in the tax system) are other ways of getting rents from the public.

Not all rent seeking uses government to extract money from ordinary citizens. The private sector can excel on its own, extracting rents from the public, for instance, through monopolistic practices and exploiting those who are less informed and educated, exemplified by the banks’ predatory lending. CEOs can use their control of the corporation to garner for themselves a larger fraction of the firms’ revenues. Here, though, the government too plays a role, by not doing what it should: by not stopping these activities, by not making them illegal, or by not enforcing laws that exist. Effective enforcement of competition laws can circumscribe monopoly profits; effective laws on predatory lending and credit card abuses can limit the extent of bank exploitation; well-designed corporate governance laws can limit the extent to which corporate officials appropriate for themselves firm revenues.

By looking at those at the top of the wealth distribution, we can get a feel for the nature of this aspect of America’s inequality. Few are inventors who have reshaped technology, or scientists who have reshaped our understandings of the laws of nature. Think of Alan Turing, whose genius provided the mathematics underlying the modern computer. Or of Einstein. Or of the discoverers of the laser (in which Charles Townes played a central role) or John Bardeen, Walter Brattain, and William Shockley, the inventors of transistors. Or of Watson and Crick, who unraveled the mysteries of DNA, upon which rests so much of modern medicine. None of them, who made such large contributions to our well-being, are among those most rewarded by our economic system.

Instead, many of the individuals at the top of the wealth distribution are, in one way or another, geniuses at business. Some might claim, for instance, that Steve Jobs or the innovators of search engines or social media were, in their way, geniuses. Jobs was number 110 on the Forbes list of the world’s wealthiest billionaires before his death, and Mark Zuckerberg was 52. But many of these “geniuses” built their business empires on the shoulders of giants, such as Tim Berners- Lee, the inventor of the World Wide Web, who has never appeared on the Forbes list. Berners-Lee could have become a billionaire but chose not to—he made his idea available freely, which greatly speeded up the development of the Internet.

A closer look at the successes of those at the top of the wealth distribution shows that more than a small part of their genius resides in devising better ways of exploiting market power and other market imperfections—and, in many cases, finding better ways of ensuring that politics works for them rather than for society more generally.

Excerpted from The Price of Inequality: How Today’s Divided Society Endangers Our Future by Joseph E. Stiglitz. Copyright © 2013, 2012 by  Joseph E. Stiglitz. With permission of the publisher, W. W. Norton & Company, Inc. All rights reserved.

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  • Shaun Johnston

    One aspect of modern rentseeking lies in coming up with terms for describing a market: who the participants are, what the commodities involved are, and what constitutes value. You could say of a market, what constitutes value is the happiness of the greatest number of people. Then the entire general public is a participant to be considered and value is measured in terms of its reports of happiness. Example, Marxism, I suppose, Keynes too, sometimes. Problem: who are the other participants you need to make this work? Or you could say, value consists of access to the material goods people like most at a price they can afford. Primary participants are consumers with money for goods and entrepreneurs skilled at making them available. Problem: how do you limit inequality by getting money flowing back from entrepreneurs to consumers? Or you could redefine value altogether, for example as what leads to the fewest suicides in a society. The commodity would be social interactions making for the greatest life satisfaction, participants would be those inclining to suicide and those delivering those interactions, either by running conversation clubs or studying what kinds of life satisfactions we’ve evolved to appreciate most. Problem: you’d have to start looking at evolution that way. Well, I’m working on it. See “Neither Darwin Nor Deity.”

    • Proof of work


  • red_slider

    Good as far as it goes, but it doesn’t go nearly far enough. His remedies all rely on tinkering with the balances of power through some kind of regulatory schema and adjustment. I don’t believe any amount of tinkering is bold enough to challenge the devices of power, and certainly offers little more than momentary obstruction which wealth and power will always find ways to circumvent.

    In my opinion, the bottom line on wealth distribution is where it attaches the ability to hold labor (tenant or productive) hostage to being deprived of the necessities of life if they refuse to comply with its demands. As long as an economic system permits that threat to be exercised by landlords or corporate owners, there is really no way to constrain it. Fiddling with taxation or enhancing market competition can’t do it. No matter how redistributed the wealth, or how much monopolistic practice is reduced, an economy in aggregate will work to advantage itself and its market-values (for which there is ample calculus) over the advantage of the labor and the real-valued interests that maintain it (for which there is no calculus at all). In short, political systems designed to serve the people remain vulnerable to economic systems that encourage the aggregate expansion of their own power. Left-leaning systems do a little better, but remain unable to constrain these tendencies. Those alternatives either simply replace the centers of economic control by changing the names of certain classes, or cut into the bone and muscle of economic vitality to the point of collapse (as we have seen historically).

    So its not an easy trick to devise a system which is both self-regulatory and sustainable. Not impossible, but not achieved by tinkering with existing structures along the lines that Stiglitz suggests. As long as an economy can hold labor hostage to its bidding and where “take this job and shove it” is only a myth, we will not be able to uncreate a system that insists people are made for the purpose of serving their economy rather than the other way around.

    • Josh McGee

      sounds like we need to implement a Basic Income

      • red_slider

        A ‘basic guaranteed income’ is a step in the right direction. But still falls far short, and does leave the problem of ‘free-loading’ on the labor of others, which is a real problem, whether the left wishes to recognize it or not. On balance, there is no excuse for anyone in a society doing with out the necessities (otherwise, what is a society and its “social contract” for?)

        But I think it is possible to devise economic systems which do not raise the specter of deprivation or conditional economic survival. As a demonstration, I devised one, a “Paying Forward” economy. It is not the best or without flaw. But it does demonstrate that systems which are neither Capitalist, Socialist nor, strictly speaking hybrids, can be imagined. My description of Paying Forward is at

        • Josh McGee

          I agree that freeloading is a problem, but it’s not something that’s done by people on welfare, it’s done by billionaires whose employees do the real work for them while they hide their wealth in tax havens.

          Can you quickly summarize the concept? that is so long to read…

          • red_slider

            I apologize for that. But in truth, Josh, that little thought experiment I call ‘Paying Forward’ is a quick summary of a very complex idea. Unfortunately, that’s the way it is with concepts that are really not based on conventional ideas, nor simply attempts to reformulate historical ideas or “correct” their flaws. Perhaps you might skip down to the section ‘The Proposal’ and read from there to get an idea of the substance of ‘Paying Forward’.

            With truly new approaches to a subject, it actually takes longer to correct all the misconstructions that follow an attempt to understand a quick summary, than it is to go ahead and read through its general description. I wish it were otherwise, but even language conspires against people letting loose of familiar ideas, if only for a moment, to understand things that are outside of our current paradigms.

            I’ll be glad to answer any questions, if I can. But I see no alternative to first reading the paper, if it has interest for you.

            I generally agree with your remark about free-loading, though I believe the problem arises more in perceptions about what ‘free loading’ means, than who does it. Defining an economy in terms of market-values, rather than real-values permits the very wealthy to appear as if they are ‘earning their keep’ and the poor are just begging. That is not so, of course, but the context makes it seem as if it is, and that’s what people find objectionable and fearful.

    • Moslerfan

      Agree. I’m surprised the artucle doesn’t talk more about ongoing undermining of the power of labor through economic policies that keep unemployment high, and also through right to work laws, card check laws and other anti-union legislation.

    • BryanKavanagh

      Joe Stiglitz has it pretty right. He clearly sees a difference between economic rents and taxes. Therefore capturing unearned incomes should not be confused with “fiddling with taxation”. Understanding rent-seeking is to see how wages and profits are being squeezed by speculation in economic rents.The rentier economy into which we’ve morphed has not only constructed a vast wealth gap, but it is patently grinding economies to a halt. The fact that we have we left the rent-seeking gate open suggests we have learned nothing at all from the leveraged sins of Wall Street which led to the 2007 property bust. I would have thought we need to set our sights on capturing these super profits if we are to free up wages and capital. Such a switch was employed constructively during the Progressive Era which followed the 1890s depression. Failing to capture a far greater proportion of economic rent will almost certainly consign us to the Japanese disease and greater poverty. If I may amend Benjamin Franklin: “The only certainties in life are are death and economic rents.” As rent occupies some 25% of the economy, the term ought to be commonplace instead of being hidden under the carpet.

  • The problem is celebrity is more valued than actual productivity or the value of that productivity. Money itself has become a substitute for value. In other words, the people who make the most money and who have the most celebrity (there’s a strong correlation) are the whose words are considered to have more value than the words of an average person (something I disagree with). Because of this worship of money and celebrity, people also take more than they need, or tend to hoard.

    Watson and Einstein weren’t poor people. Neither is Tim-Berniers Lee or Linus or Stallman or many others. But they’ve been more principled and more satisfied with what they had (monetarily) than others. One of a memes I’ve read on the Internet about taking only what you need resonated with me. And as far as people like Gates and Jobs, perhaps they weren’t fully motivated by money but the business culture we have is and punishes you if you’re not monetarily successful, i.e., if the company you run doesn’t make money/profit. The end result of all this is as you note, make money from money has become the game and everyone’s in a race to do so.

    As someone whose income and wealth would put me in the 1% nominally I see how the game is to be played, and I even play it nominally. But I don’t think this is a good way to live. This is my prerogative and others may have theirs, but what is unfortunate is that the lower rungs of Maslow’s Hierarchy are not satisfied for all in a wealthy country like ours. I think without this, and the without cooperating instead of competing, humanity risks extinction itself. We see it played out in the way we stress our planetary boundaries. Humanity faces a bottleneck with accelerating technological change which I believe will make the need for traditional work obsolete. When that occurs, we’re going to have a population of billions of people and if their needs aren’t satisfied, it will be chaos. People will do what they need to in order to survive.

  • Todd McKissick

    Professor Stiglitz,

    Thank you for writing this article. It outlines one of the most egregious aspects of failures in our economy both today and going back at least a century. I commend you on bringing these issues to light in a more mainstream venue than is usually used. However, I would suggest that your analysis of the how and why behind these problems is similar to the argument that cars are bad for the environment because of the grass that is killed for the parking process. Yes, it’s valid and insightful but it barely touches on the scope of the problem nor does it go deep enough into the issue to begin assigning any causes to effect. Might I add a couple more points?

    That wealth begets regulatory capture which then begets inequality is a given, especially in the myriad ways regulator capture can be broadened, as you cite. Most people know this even if it is unspoken in mainstream circles. What people don’t know is the root cause or the most base solutions. Simply stating that it must be changed, either in general or in more detail, is far too passive to have any effect. After all, just consider how simple the process is for a captured regulation to change it back. No. What’s needed is a sea change that corrects incentives and aligns accountabilities back to the decision makers.

    Our democratic system is broken and it has become that way because our economic system has lost the checks and balances on its power. Mainly, the political and economic power lost by labor to capital has devolved to include that wage, social and purchasing power is also lost to business. Let that thought mature a bit before continuing because it contains many ramifications.

    By way of a summary, we could simply reduce it down to discretionary wealth being the measure of one’s ability to wield power in all forms and as such, manifests as one’s status on the social ladder.

    It is the discretionary wealth, that which is left over after maintaining one’s social and living standards, that provides the mechanism by which one is able to make any gains. This means that everyone whom is a slave to enough debt, rents, emergency or commercialism (by far the least significant factor), has too little power to effect any changes in society to profit from. In most cases, people have enough negative discretionary wealth to ensure they are easy prey to others that would further their downfall.

    We’ve seen this in the Great Depression and Recessions where houses are taken by contracts that don’t compensate for equity obtained. We’ve seen it by income tax regulation which is skewed against the progressive status it publicly holds. Other ways this has manifested include banking and finance rules allowing fraud, embezzlement, theft and other felonies (felonies in other markets) to become legalized in the name of worship to almighty growth; hyper-commercialization of markets dissuading products that people want by psychological influence; the rent seeking and subsidy games you cite above; the promotion of easy credit card access in the 70’s; the switch from savings to a rigged investment system as a store of wealth; the destruction and predatory finance of the education system; the commercialism of complicated investment schemes; and arguably the entire empire building system of guns/oil/gold/democracy/resource wars.

    These problems have been repelled by the ill-fated actions of the people which have only led to a reinforcement of such problems. Things like accepting compound interest terms; allowing corporations to include perpetual commercial entities instead of fixed term community projects; becoming a two-income family; borrowing on revolving credit; placing too much faith in higher education (higher than necessary causing high inflation); and trading long term sustainable decisions for short term stability, all those efforts have not only not paid off but they have resulted in a snowball effect that both hurts the individual and migrates the market to further entrench such actions.

    One major issue now beginning to have irreversible damage is that the benefits of technology have not been dispersed equally. As 50 farm workers were reduced to 2 though farming innovation, the profits first went to the owners of the farms (not the workers who then received pay reductions) and then those farms were commercialized – bought up by corporations with no local accountability. This then turned the farm “owner” into a renter / worker, migrating the control and accountability and profits to a group of stock holders. To further poison the pot, the shareholders were then legally absolved of any personal liability for social, environmental, wage, political and even illegal activities. As this has taken place in every single industry across the suite, it’s no wonder this system morphed into the corrupt, misguided one we have today.

    The progress of that technological advancement has also progressed to the point that we are now seeing a net decline in jobs and a self-supporting trend of exponential acceleration. Most would argue the number of jobs is sufficient to keep many people working but they would be wrong. Robotics and automation are not only advancing in capabilities but also in cost effectiveness. The current wage equivalent of an entry level robot in a menial job is $4/hr – half the minimum wage there and for professional jobs, it is about $25/hr – still far below most paid labor it might compete with.

    So, to argue that subsidies and rent shenanigans need to be fixed, especially without positing a method for such task, is like a ‘save the grass’ awareness campaign in the metaphor above.

    The good news is that while we are approaching the breaking point of this unbalanced game, we are also at the precipice of a new trend which has far more power to counter it. If you’re unfamiliar with the term “abundance” as it applies to economics, I encourage you to investigate it. It is a change where products are no longer players in a scarce market but where multiple avenues are available to make either the product or the end service it would have provided, available in abundant supply. This the flies in the face of all current economic theory which is dependent on growth, debt, inflation and scarcity for markets to work. Instead, we will see industry after industry being disrupted and prices deflated to the point where those industry can only support small, niche, local markets. Add to that the fact that all of these disruptive offerings are no longer subject to regulation meaning there is no defense against their advancement.

    To drive this point home, consider how many industries offer a product which can be produced locally by an individual in a small garage, using only locally sourced materials and open sourced information. The unfamiliar opinion might today suggest this list amounts to only plastic trinkets produced from error-prone 3D printer adventures. A more educated opinion would include thousands of other goods and services. This disruption includes all business office and finance related activities though free software; plastic, metal, ceramic and concrete products via the latest 3D printers; all centrally distributed utility type services of energy, water, sewage, internet, education, information and entertainment via smart, cheap and distributed “owned” equipment; many organic foods like fresh produce via high tech hydroponic and aquaponic systems; all recipe-based goods like liquids, detergents, lubricants, medicines, cosmetics, adhesives and coatings via open-sourced information and material automation; and even directly democratic governance at all levels. In short, the costs of maintaining a stable and even an increasing standard of living will plummet low enough that even a 5-8 year career will be able to support a lifetime with a high standard of living. And after a brief period, that may even undercut the viability of all monetary systems altogether.

    This general path is basically a mathematical certainty. The only questions are its speed and how we respond. We can only hope that during this rapidly approaching transition, the cost of living deflation can keep up with the decline in jobs still needed. However, since that has a minimal chance of occurrence, the only policy-based solution I’ve come across is a global transaction tax which funds a universal basic income for all. Unfortunately, that is hardly pallet-able in today’s environment. As I see this entire discussion, this is the debate of the future encroaching on the present. It is much more paramount and with more perilous results than policy on how to impose a reduction in short term inequality. As such, we should introduce these discussions to the mainstream immediately.

    Again, thank you for writing this article as it is a much needed first step. I would just urge you to investigate a bit deeper to see what the near term future holds. Please contact me directly for details on any of the included sub-topics since each could have multiple books written on them and I can offer numerous insights to give quite a head start.

  • antonw

    I have a problem with

    Rent Seeking “…has also become endemic in modern economies, including our own.”
    The word become is not correct. Using it leads people to believe this country has all of a sudden all these problems because of this new problem called rent seeking. Rent seeking is part of pure capitalism and requires continued control.
    Said controls were needed early as in the US when Europeans took Indian land in the colonies at a cheap prices. Roger Williams objected and he was force to Providence RI.

    Most colonists got their tea from people like Smuggling King John-Hancock who later started an insurance company. He was unhappy with all the British attention and taxes and financed the Sons of Liberty helped by Sam Adams who eventually went into the beer business.

    After the war Massachusetts politicians set up the tax and legal systems to benefit themselves over war veterans who were now farmers. Soon the farmers led by Daniel Shea rebelled in 1786. Politicians were unhappy with the anarchy. Sam Adams had been the most aggressive revolutionary leader when it came to English oppression but now he was a member of the establishment who wanted harsh treatment even including execution against the conspirators.

    • tadzio308

      The John Hancock Insurance Company was chartered in 1862, 69 years after John Hancock’s death. He had nothing to do with it.

  • Yes, and so good policy reinforces and insures market competition – it doesn’t replace it with political edicts. Sad that the “inequality” party likes to ignore this underpinning of a free society, while the other party pays it lip service. The democratization of ownership and control is the key out of this lockbox.

  • Edward Mycue

    Before the owner, Brodart a library supply company on the East coast, closed the shop in 2009, Staceys in San Francisco had been in business 85 years, books by Joseph Stiglitz ‘s books were shelved by me a bookclerk for the last dozen years of Staceys bookstore’s life in the heart of the City. That’s how I started to read him, flipping pages while loading the books on the shelves. A collection of his shorter pieces grabbed my attention first. He was so driven by history and influenced me in the direction of speculating about it as in the following squib from yesterday:

    HISTORY – the ghost announcement
    If it is
    true that history,

    which is a
    structured series of refined filtering systems,

    has been
    lost along with the combines of core samples

    of an era
    (other than personal diaries and memories),

    what is
    left? Anecdotes?

    Can you,
    still and all, now and then

    Recall “absent

    Again with
    no evidence

    surviving meaning?

    And but
    before saying our goodbyes,

    must certain
    validated pasts be found

    still and
    all, now and then

    again with
    no evidence

    surviving meaning

    saying our goodbyes?

    Must certain
    validated pasts be found?

    © Edward Mycue 18 March 2016

  • Swami

    Thanks for posting this article on this site, Dr Stiglitz.

    I strongly agree that rent seeking — or more appropriately — privilege seeking, is destructive to widescale prosperity, and you do us all proud by condemning it. I have some nits though.

    First, I am not at all sure that rent seeking is becoming more prevalent over the longer scale arch of the last century or so. Indeed, I think we can agree that rent seeking is a small fraction of what it was in prior eras with class-based privileges common in the pre modern era. I certainly agree we should stamp it out in all forms though.

    Second, it is improper to only count the rent seeking that comes from those at the top of the income distribution. To be specific, closed shop unions and trade restrictions are also types of rent seeking, and it is well known that unions compress wage differentials and trade restrictions beggar our neighbors. International and state competition and global trade networks have pretty much eliminated union privilege in non government sectors of the US (thankfully). Thus the net impact of less rent seeking of these types is higher inequality within nations (though lower inequality globally as developing nation workers get a fair shot at life.)

    This takes me to a more important point. Globally, poverty and inequality are plummeting and doing so at a historically unprecedented pace. The big picture isn’t just positive, it is the most positive it has ever been since the invention of fire. Fewer people living in poverty, fewer dying prematurely, more literacy, more equality of opportunity. My guess is you both know this is true and know that within-developed-nation inequality is partly a side effect of this broader trend. My question, assuming you are adequately informed on the topic, is why you are highlighting a negative side effect of a larger positive trend as a negative? Please do explain. When someone goes around widely condemning Mother Theresa because she has bad breath, it makes me question the critic’s intentions.

    My next push back is you are assuming there is a proper level of inequality and that number is lower rather than higher. The US, does have higher inequality, but it also has among the highest median incomes, lowest unemployment rates and highest GDP growth rates of developed nations. As Hanushek has illustrated, the US is among the higher skill payoff nations, with more inequality but higher levels of innovation and growth promotion. Indeed, Acemoglu and others have argued convincingly that it is the “cuddly capitalism” lower inequality nations which are free riding on US creativity and skill based differentials.

    In addition, when you look at periods of wide-scale growth and prosperity within developed nations, the correlation between inequality and wider prosperity is not conducive to your concerns. Periods where inequality DECREASED tended to be bad times. Inequality decreased fastest during the world wars and the Great Depression, and during the recent Great Recession. The turn of the 20th C was the time of greatest inequality and growth rates in median income and technology were simply phenomenal. I certainly agree that not all inequality is good (see rent seeking above), but inequality in and of itself is not strongly correlated with negative wider prosperity. See Bagchi and Svejnar’s recent analysis for more on this.

    But back to the desirability or undesirability of inequality, it simply is not true that more is worse and less is good. It depends upon the causes and nature of inequality. A 42 to zero football game isn’t proof of something institutionally wrong with football. It could be a fair outcome of a fairly played game. Indeed, efforts to correct the outcome to make the points more even could themselves backfire and lead to unfair rules and iatrogenic effects (where attempted solutions actually stimulate problems as may be true with our current welfare state which promotes children born out of wedlock, and which is a factor overwhelmingly associated with negative inequality and poverty.

    I do agree that a healthy society needs to have adequate safety nets for the poor. But, the poor in the US are in the top quintile globally. Our poor are part of the global rich (an income of $5k per year puts one in the top twenty percent).

    In summary, I agree with your concerns with rent seeking (in all its forms), but find your attacks on inequality in and of itself as being misplaced.

    • God points. A couple of complementary ones:

      — It is unclear what they correct measure of “inequality” is. I suspect that is because “inequality” in current discussion is an attempt to quantify a general sense that things are unfair rather than any more specific complaint of injustice. Only when you identify the injustice can you devise an appropriate way to measure it.

      — Even if you were to eliminate rent seeking the odds are slim that you would eliminate a trend toward greater inequality. It would not surprise me if that that trend may abated for other reasons. (Not that I can predict what they might be– its just that things that cannot go on forever don’t.)

      • Todd McKissick

        The proper definition of inequality is power and that is determined by discretionary income. Here’s how it works.

        For any given person, they have a specific social status to maintain. It is very low in poor countries and very high in wealthier ones. It is human nature to compete with each other to achieve and/or maintain that social status, and as such, people will psychologically compromise every non-essential need to do so. Rent seeking takes advantage of this by over pricing (both in cost and long term deals) the necessities to maintain said status in said society because they know the people will pay whatever it takes.

        The result is that the people fall prey to all kinds of rent seeking schemes (from marketing, social and political forces) because they have no power to change them. The only way to change these balances of power is to spend money. For political, they need cash to lobby, cash and/or time to organize or time to gather a movement… all of which being poor removes. For social power, they need to have money to be taken seriously in social circles. For market power, they need cash to buy the products they desire as opposed to the ones they can only afford (this includes wage negotiation and job choice discretion). So, because the masses have lost their ability to effect change in every area of their world, that power is even more concentrated in the hands of those who do have power, and by extension, those changes now further bolster their ability to take advantage of rent seeking techniques to perpetuate the circle.

        Fortunately, the outcome of the self and local movements of manufacturing, survival and commerce is the creation of what I call “magic boxes”. These class of products disrupt monopolistic, rent seeking products and services with better results for cheaper, “own it” based products. To date, there is a magic box product either on the market or soon to be, which provides for every rational want one could have. Early examples include off grid solar or mesh internet/cell service or even turnkey aquaponics but suffice it to say they will all be here very soon. And when they do, they will decrease the costs of living which will increase discretionary income, which will increase power and, coupling that with global information, will lead to corrections in this failed system.

        The only question remaining is whether the transition will be evenly distributed enough to avoid chaos from people falling through the cracks. That one does need a “policy” type of solution but it still doesn’t need to be a government one. There is a way to do it via a private policy.

  • George H. Blackford

    It is obvious to all but free-market ideologues that the incomes people receive, and the wealth people are able to accumulate as they participate in an unregulated market economy, do not necessarily correspond to how hard they work or how productive they are or by how much they contribute to the society as a whole. It is also obvious that the accomplishments of individuals are not achieved by their own efforts alone, but are crucially dependent of the social system in which they live that makes their individual accomplishments possible.

    No one can deny that the fortunes accumulated by Bill Gates, Paul Allen, Steve Jobs, Steve Wozniak, Robert Noyce, Gordon Moore, Andrew Grove, and countless others who have made immeasurable contributions to the micro computer revolution over the past forty years are comparable to their immeasurable contributions to the well being of the society as a whole and are well deserved on that account alone. They are living examples of everything the mythical world of unregulated, free-market capitalism is supposed to be about.

    It is also true, however, that they did not achieve their immense accomplishments on their own. Their accomplishments were built on the backs of giants throughout history who developed the science that made their successes possible and depended crucially on the university system that has evolved over the centuries that made that science possible. Their successes would have been impossible without the tremendous technological breakthroughs in the aerospace program and as a result of government sponsored computer research during World War II, and there is a certain amount noncompetitive monopoly power that has contributed to the size of their fortunes. At the same time, it is impossible to deny that luck played a major role in determining the size of their fortunes as well—that had they been born in a different era or into families living in desperate straits in Sub-Saharan Africa or some other desperate place in the world rather than in this era and into moderately well to do families in the United States they would have been far less successful in life. As a result of all of these social factors, and many more, they owe an immense debt of gratitude to the society that made it possible for them to flourish in the way they have flourished:

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  • garyknott

    I like this essay, but, yes, the remedies are weak. Also:
    Alan Turing did not develop the mathematics underpinning
    electronic digital computers (although he did a lot of great
    mathematics). There is no substantial mathematical
    theory underlying computers – just Boolean algebra and
    a lot of facts about vacuum tubes transposed to transistors.
    There is a lot of ingenuity however. See “The Art of Computer
    Programming” Volumes.

    It is certainly true that Steve Jobs, Bill Gates, and to a lesser
    degree, Mark Zuckerberg, built their businesses on the
    research and development of others. However it is not
    at all clear that Tim Berners-Lee could have been a billionaire.
    Being a billionaire usually requires knowing how to attract capital,
    and how to usefully spend capital – mostly in the cause of marketing.
    (Warren Buffet being an exception, in that his spending of capital
    had nothing to do with marketing.)

    Indeed, one way we can improve our economy is to make
    capital available to all or most reasonable proposals for businesses.

  • DoctorFranklin

    Over the years all possible expressions of power have been used to get people to work for the common good and always the powerful corrupt the status quo for their own benefit such that the common good is invariably best served by the disruption of established power.

  • Leave A Mark

    “America’s current level of inequality is unusual. Compared with other countries and compared with what it was in the past even in the United States, it’s unusually large, and it has been increasing unusually fast.”

    “Inequality is the result of political forces as much as of economic ones. In a modern economy government sets and enforces the rules of the game”

    A case in point: A recent study of the past 20 years of legislative law found; “The preferences of the average American appear to have only a miniscule, near-zero, statistically non-significant impact upon public policy.”

    “The central point that emerges from [*study] research is that economic elites and organized groups representing business interests have substantial independent impacts on U.S. government policy, while mass-based interest groups and average citizens have little or no independent influence.”

    * Princeton University study: Public opinion has “near-zero” impact on U.S. law. See [Testing Theories of American Politics: Elites, Interest Groups, and Average Citizens]

    In other words, they compared what the public wanted to what the government actually did. What they found was extremely unsettling: The opinions of 90% of Americans have essentially been subverted by influence of the economic elites control of the politically powerful.

    Robert Reich said. “The establishment doesn’t get that most Americans couldn’t care less about economic growth because for years they’ve got few of its benefits, while suffering most of its burdens in the forms of lost jobs and lower wages.”

    In an article entitled ‘Anger Over Failed Economy is Shaping US Election’ they reported, “Inequality is shaping the 2016 U.S. presidential election, as voters disillusioned by the financial crisis and Wall Street greed increasingly turn to populist candidates like Bernie Sanders, who has made economic inequality a central platform of his campaign, Nobel Prize-winning economist Joseph Stiglitz said on Wednesday.

    “There are a lot of people that are described as angry and they finally figured out that they’re not doing very well,” Bloomberg reports Stiglitz as saying during an event at the Resolution Foundation, a London-based research group. “They’re not doing as well as their parents; some Americans aren’t doing as well as their grandparents.”

    “Americans have seen lots of injustices—people were thrown out of their houses that didn’t owe money, and none of the bankers were held accountable” for their roles in the financial crisis, Stiglitz said. “I think that really has motivated the anger across the spectrum.”

    The working poor, beset by resource deficiencies, continue to be ignored by our Democratic Party winners. That demographic, who have already lost everything, do not fear the conjecture of “the lesser evil”; that hyperbole holds no reason to those who have lost jobs, benefits, homes, retirement, health and wealth.

    Which brings us to the central political question: Robert Reich wrote, “Who should decide on the rules, and their major purpose? If our democracy was working as it should, presumably our elected representatives, agency heads, and courts would be making the rules roughly according to what most of us want the rules to be. The economy would be working for us.”

    “Instead, the rules are being made mainly by those with the power and resources to buy the politicians, regulatory heads, and even the courts (and the lawyers who appear before them). As income and wealth have concentrated at the top, so has political clout. And the most important clout is determining the rules of the game.”

    It’s time we teach the economic elite … we determine the rules of the game.

    • Todd McKissick

      I’d be interested in your response to my comment above.

  • iRon_Mrx

    “Good as far as it goes.”? Everyone is a critic, it’s so easy. How about “a great start, let’s do it!”?
    This is an idea first enumerated by FDR and refreshed for us a half a century later. Bravo, Prof. Stiglitz, bravo!

  • Yes, and no. In a competitive system, someone must win and someone must lose. While it is a political choice, that is the nature of the rules. Blaming the 1% is as false as blaming the poor. Here is a better way of understanding inequality:

    “How does someone who makes $10 per hour afford the services of someone who makes $100 per hour? If an automobile requires 40 hours of factory labor, and the parts collectively required 100 hours of labor from various suppliers, then the cost of a car should be 140 hours of labor. Everyone should be able to afford a new car with less than one month’s work.

    If the automobile is sold for $15,000.00, then the cost comes out to $107.14 per hour for 140 hours. For the person earning $10 per hour, it will take 1500 hours of labor, approximately 38 weeks. For the person making $100 per hour, the same car would take less than a month to afford. Obviously, that explains why the rich have more stuff and better quality stuff than the poor. They can consume ten times more rapidly because they are paid ten times more.

    Since people who are paid more also spend more, it doesn’t take a business genius to figure out that those are the best people to whom to market your wares. Luxury car salesmen make more money selling to rich people than average car salesmen make selling to average people. When more money is on the table, the same percentage has a much larger return. For example, a 2% commission on a $40,000 auto is $800, a 2% commission on a $15,000 auto is $300. If it takes 6 hours to sell a car, the two salesmen in the same industry have a different income: $50 per hour versus $133 per hour. It is likely, however, that the percentages they will be paid are not the same. In fact, the percentages will change from car to car and buyer to buyer. The salesman will always try to sell high. The more money put on the table, the better for the dealer and the better for the salesman.

    Car salesman have no interest in sharing their commissions so that they all make the same, even in the dealerships that claim to offer fixed pricing. Sell more and you get paid more, but only if you are in the right product. The salesman selling average priced vehicles may sell more but earn less than the salesman selling fewer higher priced vehicles. This is a chicken or the egg problem. Was the income inequality caused by the difference in automobile prices, or did differences in income create different automobile prices?

    Would the dealership owner be willing to make the same pay as his employees? Not by a longshot. Everybody who works there makes a different income. The service technicians, the managers, the secretaries and accountants all fight for more income, but never for equal income. Yet, when they each walk out the door to buy a gallon of milk, the milk is priced the same for everyone. Behind the chain of businesses that provided the milk: the farmer, veterinarian, bottle manufacturer, equipment manufacturer, retailer, etc., every organization has the same paradigm of tiered incomes which makes it impossible for us to be an equal society. We tolerate inequality and economic volatility because there is a well established intellectual disconnect between cause and effect. Nobody alive today authored this system, but we are all complicit in its perpetuation.

    Volatility is a direct result of income inequality. A chain is only as strong as its weakest link. Regardless of income level, negative changes can cause collapse. Since every part of every supply chain based is based on unequal incomes internally within every business, it should be no surprise that this inequality creates change pressures. Some business finances must collapse, some individuals finances must collapse, but not because of the natural forces of the marketplace. It is our unnatural way of pricing labor and goods, the tolerated imbalance between time and reward, which is the cause. Changes in demand, like seasonal changes, should not create instability, but the mathematical echo of price and pay differences must strike balance sheets negatively. Boom is bust.

    Apologists will claim risk or genius deserve more reward, but the greatest reward, and why all revolutions were fought, is because equality gives everyone the best of both worlds: as an individual and as a collective. Freedom has always meant equality. Without economic equality political freedom is practically meaningless. Hierarchies of talent can easily exist within narrow compensation ranges. Even the captain of a pirate ship only made twice as much as the lowest deckhand. As we migrate from sailing ships to spaceships, we all need to recognize that income equality is not something to fear but something we must expect and demand within every team. In a true free market, trade and plenty come easily. Just as rights are universal, so too should the ability to produce and consume with ease. Equality does not require a huge oppressive government, just basic common sense and moral clarity.”

  • Stop_being_lied_to

    A relatively good effort at “dumbing down” what’s at play, it makes clear why utilizing a high tax base, along with “behavioral” deductions, both incentivizes high productivity, while it eliminates trickle down and replaces it with societal irrigation.
    Overall, he reminds us why Adam Smith titled his seminal work, “The Wealth of NATIONS”, not the wealth of individuals.

  • M A J Jeyaseelan

    I am sorry to keep repeating myself. I am helpless since there are so many economists who keep repeating half truths all the time. It is important to tell people the full truth and the full truth is that inequalities are the result of economic theories in vogue.

    “There is no point in just lamenting over growing inequalities. There is also no point in relying on re-distributive taxes to promote more equality. There is no way to stop this economic madness without plugging the basic loopholes in extant economics that not only cause and abet inequalities but also sanctify and glorify the mechanisms that help the richest to suck out all the cream. It is a sort of legitimised density based material separation process in which wealth gets attached to wealth. Science teaches only a limited number of methods. However, economics is full of methods and mechanisms that help the richest to steal from the poor legitimately and legally.

    The real irony is that economists who shed crocodile tears over concentration of wealth hardly ever own up their own responsibility in the wealth skimming process. The richest class uses several types of suction pumps to draw in wealth. While the list is too long, I am giving below a few of the bigger income and wealth suction pumps.

    1) The banking system including the central banks are the biggest of all the suction pumps used by the rich. Banks create credit over and above the savings deposited with them . Central banks add bonds and print currencies without creating a penny of economic value. Both pass on these extra claims in the form of loans to the rich at insanely low rates of interest but the rich use these loans in multiple ways to generate far higher rates of return. These returns are earned by the rich with the help of money, bonds, and credits illegitimately created by the banking system.

    2) The speculative markets are the next most significant channels used by the rich to siphon away wealth without creating it. With the money borrowed from the banks at atrociously low rates of interest, the rich keep manipulating stock prices with the help of orchestrated bulk purchases or sales. All speculative market transactions involve only transfer of values. All profits made in the stock market are a kind of legitimised looting. There are also other stock market instruments such as the buy back arrangements that result in double whammies. Usually buybacks are thrust upon companies at unreasonably high prices . In order to make up for the lost profits, such companies often raise the prices of their products and services unfairly

    3) Public debt and taxation: This is one of the most innocuous looking suction pumps that is hidden from the view of the public. Who owns this debt? It is the rich and the richest. The most hurtful feature of debt is that interest must be paid irrespective of the way one makes use of such debt. Usually, governments earn negative returns on expenditure incurred with help of public debt. Yet, governments pay interest to the lenders, even when the economy is down in the dumps. Governments are least bothered about both the quantum of public debt and growing interest burden. They simply increase tax rates or impose new taxes. What most citizens do not take into reckoning is the fact that a larger part of the taxes paid by them goes towards interest payments. In some countries, interest payments constitute over two thirds of government budgets. In my view, it would be very fair to say that most governments simply tax the poor to pay the rich.

    4) Market mechanism: This is the most rampant source of inequalities. Markets as these are designed in extant economics give enormous powers to the rich to manipulate markets in their favour. Companies and traders with deep pockets always manipulate supplies and create artificial shortages that result in unfair prices – transferring in this process, more economic values to the sellers than what their products or services are worth by themselves. The same happens with the help of marketing and advertising that play on the mindset of the consumers and con them into paying higher prices than warranted. Some companies also adopt premium pricing policies by enticing customers with their one-up-ness strategies.

    In nutshell, there can be no inequality without the help of unfair exchanges. All unfair exchanges are actually blessed by extant economics. There is no way to end inequalities without correcting the unfair exchange processes. There is no way to end unfair economic exchanges without rewriting economics.

    If you would like to know more about the need for rewriting economics, please do read my article hyper linked below