Rethinking the theoretical foundations of wealth and income inequality

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.

 

Sources:

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

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9 comments
  1. Bruce E. Woych said:

    It seems to me that flexible categories of definitive terms allows too great a leeway for tranches that turn economic analysis into something parallel to derivatives. If Wealth is being defined (?) as savings than inequality should be assessed as debt (negative savings). If credit is assessed to land and solidly fixed equity (with a floating currency setting the value of money), than liquidity becomes a class structured capture of resources (assessing capital as the transferability of assets to monetary resources either as rent or as convertibility). Ultimately capital conversions begin to look more like the carry trade in financial instruments that include the control of infrastructural assets, but stretch far beyond the actual values. Without reinvestment in building infrastructure, the derivative game and financial instruments are shuffling “wealth” into dark pools while fiat money escapes reality. If land prices are actually now increasing, the distribution is relative to wealth itself…, so capital and wealth cannot be held separately even if the relationship (in real terms: asset based) is inversely diluted by the total mass of what would constitute all wealth combined.

    • Bruce E. Woych said:

      i might add that in this scenario pricing and wealth in relation to land and property values (currency related) become barriers to entry. ‘Quantitatively relieved’ by wealth expansion but categorically denied in the contracted mainstream of the economy that sees debt (credit) as a daily cost of living.

  2. Maria Alejandra Madi said:

    Thanks for your comments. We certainly need further interdisciplinary analysis to cope with the current social and economic changes. I appreciate your ideas about
    a) seeing the scenario of pricing and wealth as a scenario of barriers to entry. This point has important social consequences because of the new barriers to the poors or even to the new poors;
    b) the shortcomings of mainstream economics since the current credit scenario needs to be apprehended as part of the scenario of the global capital reproduction. The daily cost of living is subordinated to the global accmulation process.

  3. Macrocompassion said:

    Wealth and savings money are different things. Wealth is in ownership of durable capital goods, that is investment in producing companies. The good comprise the wealth plus the combination of them for application to production.

    Money is not wealth. It is a certificate allowing one the right for exchanging it for the above kind of wealth and also for consumer goods, and land, its ground-rent and hire fees for the use of capital goods only.

    Land is not capital wealth although it is treated as such by the so called capitalists. A person who has invested in land is not necessarily rich, that term applies only to the capitalists and land owners who command access to the production facilities.

    It is the potential power for production which gives land its value, not the money which may be paid to accquire it. So there may be a difference between land’s cost and its value. When the amount of available land is limited by speculation in its growing value, this land is withheld from full use and this difference grows and eventually leads to the rising bubble of its cost. This is an unstable situation of which sensible govenment should stop by taxing the vale of the land, particularly useful sites that are unused. Thus it is not money control which will stablize the rate of growth or shrinkage of the national economy, but the way the land is used or wasted.

    • Bruce E. Woych said:

      @macrocompassion: Very thought provoking post. I agree with your deconstruction of rudiments intrinsically; but “essentially” or, ‘extrinsically (consequences thereof…)’ i must say that all these are de facto tools that constitute an assemblage of what (componentially) comprises what we call capital and capitalism; albeit missing the critical charge of an added term capitalization itself (implying system intentionality corresponding with systemic capacity).

      Ultimately when you take capitalism apart and assess it componentially, computationally or exponentially… you always end up with left over parts when you try to put it back together again. I think that “de facto” realism of capital is the provisional need over market methods of production control and supply command; tacitly displaced over wants and desires as well as wishful thinking. Unfortunately the de facto reality typically emerges (under that silent iron hand) as greed over needs and the power that it feeds…as Rocko told Humphrey Bogart…MORE>>>more…and never enough!

  4. Maria Alejandra Madi said:

    Thanks for the suggestion. The report is really worth reading!

  5. It’s nice to have a women’s input into the current conversation. It is also nice to know that you give careful consideration to the responses that your thinking provokes. At the end of day however, everything comes down to whether or not a way can be determined and instituted by which to resolve the instability that debt and development issues are driving into global dynamics.

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