Nobel laureate Joseph Stiglitz has been writing about America’s economically divided society since the 1960s. His recent book, The Price of Inequality, argues that this division is holding the country back where rent-seeking increased. His work has been to question the marginal productivity theory, which is the theory that has been prevalent in most economics curriculum.
In a recent interview to the Institute for New Economic Thinking, Stiglitz concludes about the need for the field of economics to come to terms with inequality. He pointed out some relevant issues to address in any attempt the rethink the foundations of wealth and income inequality:
1) Distinction between wealth and capital
In Stiglitz’ opinion, most readers of Piketty’s book (Capital in the Twenty-First Century) get the impression that the accumulation of wealth — savings —is responsible for the rise in inequality. There is, therefore, a link between the growth of the economy — the accumulation of capital— on the one hand and inequality and wealth.
Stiglitz’s recent paper, “New Theoretical Perspectives on the Distribution of Income and Wealth Among Individuals”, begins with the observation that a closer look at what has gone is necessary to apprehend the current trends. Stiglitz suggests that a large fraction of the increase in wealth is an increase in the value of existing assets. Indeed, in addition to an increase in the wealth/income ratio, there is a capitalization of the increase in other kinds of rents, like monopoly rents supported by the market power of firms relative to workers and by government guarantees, for example. Therefore, wealth can increase, but it doesn’t increase capital.
2) The role of credit in wealth expansion
All the recent changes are very closely linked with the credit system. The flow of credit didn’t go to more wealth accumulation as we normally use the term in economics, as capital goods. Through deregulation and lax standards, banks increased lending, but not for creating new business, not for capital goods. The effect of it has been actually to increase the value of land and other fixed resources (buildings, real estate, etc.). Therefore, the link is that credit affects land prices and fixed asset prices, and those go disproportionately to the rich. While that is a major part of the increase in the wealth, the workers, who have no wealth, don’t benefit from that expansion
3) Increased market power
The ratio of wages to productivity is going way down and the ratio of CEO pay to worker pay has gone up suggest increased exploitation founded on increased market power. In the current scenario, weakened worker bargaining power and weaker unions, asymmetric liberalization where only capital moves, corporate governance laws that do not cope with abuses of corporate power by CEOs, there are certainly a number of factors that suggest an increase in market power with consequences in terms of income inequality.
Joseph Stiglitz, The Price of Inequality: How Today’s Divided Society Endangers Our Future, http://www.amazon.com/The-Price-Inequality-Divided-Endangers-ebook/dp/B007MKCQ30
Joseph Stiglitz: Economics Has to Come to Terms with Wealth and Income Inequality, by Lynn Parramore on December 16, 2014, neteconomics.org/institute-blog/joseph-stiglitz-economics-has-come-terms-wealth-and-income-inequality