I am just back from the American Economic Association/Allied Social Sciences meetings in Boston. It was a hit-and-run affair for me: I could go just for my session, and then back to New York. Nine hours on the train in order to speak for 15 minutes (a 36 to 1 ratio for the lovers of inequality). The panel on “Inequality: challenge of the century?” was organized by Jamie Galbraith, the author (among other books) of “Inequality and Instability”. The panelists were Olivier Giovannoni (Bard College), Stephen Rose (Georgetown), Joe Stiglitz and I.
I would like to share a few very fresh reflections on Stiglitz’s presentation. It followed very much the lines of the presentation of his new very long paper (practically several papers) on inequality (see here, and which I discussed in a previous blog) – but there were some new points.
1) Economic theories, says Stiglitz, dealing with inequality fall into two groups. First, those that are based on marginal productivity and the neoclassical production function where the earnings of the factors of production are supposed to be determined impersonally by the market, or where returns to capital are explained by “abstinence” as in the case of Nassau Senior (explicitly mentioned by Stiglitz), or “waiting” (as in the case of Marshall). The second group of theories regards incomes as determined largely by exploitation, political or economic power, rent-seeking, cronyism, imperfect information or monopolies. Stiglitz clearly saw himself as belonging to the latter group.
But, I thought, his work combines both. His original 1967 paper, on which Stiglitz is drawing in his new work on the long-run wealth distribution, is fully neoclassical, with an equilibrium wealth distribution, determined by the differences in saving rates and population growth. But in his other work (including in “Price of Inequality”) Stiglitz’s emphasis is on the second strand of literature. So, while his classification is useful, I thought that the real decision is whether one subscribes 100% to the marginal productivity theory (that is, all incomes are determined by the market) in which case there is little to say about distribution of income as such, or we accept that it is only, say 80% or 50% or 20% of all incomes that are thus determined. Perhaps one could argue that today in the US, only 50% of all incomes are determined by the market and that it used to be 80%.
Only Marx’s theory of exploitation among those listed by Stiglitz would be different, because capital earnings there do not appear as unfair, or due to some departure from a “normal” functioning of capitalism, as in rent-seeking, but are indeed part of the normal functioning of capitalism, moreover its very definition.
2) Stiglitz proposed an interesting view of drivers of inequality in today’s US. The principal role belongs to finance (where he agrees with Galbraith) which made credits more easily available which in turn led to over-investment in housing, and to the increase in the wealth/GDP ratio, discussed by Piketty. But that increase, while real, was not conducive to greater productivity because what increased was value of land, not the physical quantity of productive capital. Banks, instead of lending to companies to invest in new capital, lent to the public which spent the money on housing and unproductive assets. Stiglitz here rejoins, with some twists, Kumhoff and Rancière, and Rajan, and even (if I may say so) myself who wrote about that in March 2009. But Stiglitz presents it as a solution to the “Piketty puzzle”: how come that the wealth/income ratio went up but the marginal product of capital did not go down and, most importantly, wages did not increase.
3) An important implication, if you hold that a significant number of incomes are determined by the “second” theories (exploitation and market failure) is that there is no trade-off between inequality and growth. On the contrary, lower top incomes reduce inequality and increase growth.
4) Finally, Stiglitz thought that the sources of inequality in the United States today are so profound that small tinkering with the minimum wage, more affordable education etc. will not go to the root of the problem. He thought that more radical approaches, possibly a cap on the highest incomes, significantly increased tax rates etc. were necessary. But, to the best of my recollection, he was not very specific about the actual “more radical” measures.
This is all that I had to say about Stiglitz’s presentation. One aspect in the discussions on inequality that I find strangely absent is the broader ownership of capital. If one of the drivers of inequality are capital incomes (and “allied” incomes like those of top management), this is because they are heavily concentrated. “Deconcentration” of capital incomes, that is much wider ownership, particularly of equities, is then a solution. But it is seldom mentioned.
This post was first published on Branko Milanovic’s Blog
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