The Price of Inequality
by Joseph E. Stiglitz
Allen Lane (London 2012). Penguin pbk. 523 pages. £10.99
Societies have always been unequal, often spectacularly so. At least since Neolithic times they have been dominated by small, powerful elites of great wealth, who have tried to reshape the world in their interest. Ordinary people – the 'plebs' – could only look on with amazement. So why the current preoccupation with banker's bonuses and inequality?
Part of the answer is that in what we call 'Modern Times' – often understood to begin with the revolutionary call for Liberty, Equality and Fraternity – people have come to see things differently. Societies would now be places of common opportunity, capitalistic maybe in the creation of wealth but also democratic, reflecting the will of the majority and characterised by growing equality.
Nowhere has this been more true than the USA. Yet over the last three decades a profound change has been taking place in American life – recently termed 'The Unwinding' – which has seen the return of poisonous levels of inequality (in 2012 CEOs collected 380 times the average wage and the top 400 were paid $97,000 an HOUR). All of the wealth accumulation has gone to the top.
Joseph Stiglitz has been brooding on this situation for some time. Though only one of many writers and academics analysing this dramatic change, he is perhaps the most distinguished. A former Chief Economist at the World Bank he resigned in 2000 over its handling of the Asian financial crisis of the 1990s and launched a scathing attack on the destructive policies of the International Monetary Fund and their effects on poor countries. He subsequently won a Nobel laureate for his theory of 'asymmetric information' explaining how individuals, or elites, with access to privileged knowledge corrupt 'free' markets, with destructive outcomes for wider society (the Libor rate fixing scandal is a perfect example): it is 'asymmetry' (or inequality) which is at the heart of global poverty and instability.
Stiglitz writes as an American and his authoritative critique explains why the present economic system is failing most Americans and the American dream of opportunity. The reality is that this is now a myth. Not only are the chances of a citizen making it from the bottom to the top less than in other advanced industrial countries, the vast majority – the 99% – are suffering as median wealth and wages decline. Stiglitz argues that the 'tacit agreement' between the rich and the rest – which provided prosperity for the masses even if the bonuses for the rich were bigger – has now come apart, as the 1% walk off with all the riches and leave nothing but 'anxiety and insecurity to the 99%'. So, growth in national prosperity has been paralleled by a growth in general poverty.
The Price of Inequality spells out the pernicious consequences: all the statistics of the growing social deprivation consequent to the growth in inequality are shocking. But inequality also creates 'an economic system that is less stable and less efficient, with less growth and a democracy that has been put into peril'. The whole political system becomes corrupted, or 'captured', by moneyed interests, which ultimately destroy confidence in democracy: 'Extreme concentration of income is incompatible with real democracy,' (Paul Krugman). There is also a moral dimension as the wealth gained by the elites arises, 'out of their ability and willingness to take advantage of others'.
There are many who, like Marx two centuries ago, would see this is as no more than the nature of capitalism. But this is a new inverted – or perverted – form of capitalism with state subsidies for corporate failure and tax breaks for success: what has been dubbed, 'the socialism of the rich.' Stiglitz and others see this as a radical new development, indicative of something more malign, even criminal. This 'crony capitalism' of super elites – the product of a market economy but also stifling it: nothing gets done as finance becomes an end in itself. Any criticism is brushed aside as either sour grapes or socialism, but as Warren Buffet commented, 'It is class war and we won!'
So, is there another way forward? Stiglitz thinks there is and concludes by outlining a reform agenda not only to curb economic excess by individuals but also to restrict corporate control of the political process, 'making the markets work like markets – more competitive, less exploitive – and tempering their excesses.' He is hopeful that a change of direction can deliver a fairer and more equal society that will also deliver greater prosperity for all: 'looking out for the other guy isn't just good for the soul; it's good for business.' Others are less sanguine: so deeply entrenched is the social divide that there is a radical (and growing) disconnect between the rich and the poor – a bit like pre-revolutionary France!