“Every alternative social order has built-in consequences, some rough and some smooth, that cannot be sorted out from one another.”

In his new book The Price of Inequality (2012)1, Professor Joseph E. Stiglitz nearly completes his metamorphosis from left-leaning but serious scholar to severe prosecutor. The readers owes him thanks, for the book carries the germs of interesting conclusions, though they are the very opposite to which Professor Stiglitz seeks to lead him.

The author who, according to the New York Times, holds the “commanding position” in the storm troop of unorthodox economists, has earned his Nobel Prize for his work on asymmetric information in exchanges between a well-informed seller and a poorly informed buyer on terms that are on some definition, inefficient, false and can subjectively be condemned as unjust. In his new book, Professor Stiglitz remains faithful to the asymmetric information that has earned him fame as an observer. He now makes massive use of it, but no longer as an observer. Now he is the seller, bowling the buyer over with an avalanche of arguments supported by eloquent statistics. The statistics are selective and serve the purposes of the selector. If the reader buys the argument, he does so mainly because he is less informed than the author about the existence of masses of alternative statistics that tell a different story but are kept out of the book.

The lead proposition we are invited to buy is that inequality has drastically increased and is still doing so, not because of globalization or labour-saving technologies, but because the rich and powerful used their influence to rig taxation, expenditures and public policy in general to weaken government, undermine the bargaining power of labour, destroy some of the regulatory framework and bias what was left of it, reduce competition—the heads of the indictment are rolling out in a seemingly endless sequence. The word “inequality” stands for the lot as a whole. This inequality imposes a huge cost on society—hence the title of the book.

The price of inequality is paid in three ways: in the degradation of the market economy, in the loss of social justice and in the threat to democracy.

The degradation of the economy manifests itself in the incapacity of the market to generate growth and employment. It is true enough that in much of the Western world, growth is sluggish and unemployment scandalously high. But it is totally arbitrary to claim that lack of growth and inequality are causally linked. South Korea has had more than half-century of stellar growth accompanied by extreme inequality of income and wealth as well as in what Mr. Stiglitz more vaguely calls “power”. Much the same is true, to a lesser extent, of Taiwan, Hong Kong, Singapore, China, India, Chile and Peru. Western Europe is distinctly more egalitarian than the United States, but does not show any convincing capacity for faster growth and seems clearly less able usefully to employ its population. Japan is as close as any developed country to an equal income distribution, and has had near-zero economic growth for the last two decades. Are all these big and small, developed and undeveloped countries exceptions to the rule Professor Stiglitz asks us to believe in, and if so, what is left of the rule? One might more plausibly interpret the statistics as evidence that growth goes with inequality, stagnation with equality. In fact, however, such a reading of the numbers would be just as questionable as its opposite. This is surely one conclusion Mr. Stiglitz did not mean us to draw. Like it or not “other things are not equal” and it is “other things” that tell true stories.

Another way in which we are supposed to pay a grievously heavy price for inequality is the lost sense of social justice. In the United States, the income of the lawyers, medical specialists and hedge fund managers in the top 1 per cent of the income spectrum has risen from 200 to 300 times the average household income. The latter, at $50,000, has in real terms been stagnant for two decades. This, we are told from all sides, is creating bitter resentment. Dire consequences may follow.

For a one-on-one interview with Nobelist Joseph Stiglitz on his book, plus additional suggested readings and comments, see Stiglitz on Inequality. EconTalk podcast, July 9, 2012.

The idea is tricky and must be handled with care. As likely as not, resentment would be no less bitter if top incomes were 30 or only 3 times the median than it is when they are 300 times higher. The trigger of resentment may well be the change in inequality rather than its level; and there is little doubt that a large segment of the population resents any inequality, whether the top incomes are 300 times or merely 3 times its own. Professor Stiglitz’s proposed 70 per cent income tax for the top bracket may elicit a grunt of satisfaction on the Left, but no easing of the resentment. It is reasonable to suppose, in addition, that the bitterness felt in the middle and low-income groups is due as much to the persistent stagnation of their real incomes as to the rich getting richer in a hurry.

For some supporting columns by Anthony de Jasay, see “Low Pay”, July 2, 2007, and “Class War by Judo”, May 7, 2012. Library of Economics and Liberty.

Contrary to the author’s claim that the rich are getting richer, not due to underlying economic trends, but by using their power and influence to enrich themselves, I have in this column more than once suggested that the real reason is the enormous expansion of the world supply of unskilled and semi-skilled labour brought about by falling transport costs and trade barriers. With globalization, a billion or more rural people in Asia could be recruited into the urban industrial sector and produce the tradeable goods that undersell the goods hitherto produced in the United States and Europe. Until this new Asian labour is wholly absorbed and its wages rise to Western levels, U.S. and European unskilled wages will remain depressed and the share of profits in value added will rise. Ironically, while this sharpens inequality in the West, it promotes equality on a world scale as Asian and eventually also African peoples are lifted out of misery.

None of this, however, has much of anything, to do with justice. Resenting something does not make it unjust. The Stiglitz technique, the same as has been employed by the majority of opinion-makers for the last half-century or more, is to use “equality” as synonymous, interchangeable with “social justice”. Once the habit of using either of the two as meaning the other has taken root, inequality has become tautologically the same as a violation of social justice. It became as good as impossible to defend inequality, for you could not possibly argue in favor of injustice. But realizing as we do that Stiglitz, together with the whole soft Left, relies on a linguistic trick to drive home his claims may well lend us the intellectual courage to reject the entire attack on inequality more radically than if the recourse to justice had not been so ambitiously employed.

Finally, we are warned, inequality exacts a heavy price by menacing our cherished form of government, democracy itself. Votes are to a large extent bought for money; with income and wealth distributed unequally, the rich have much more money than the poor; the rich will buy votes for the Right and pre-empt the votes that would have gone to the Left. Votes for the candidates of the rich makes the rich more influential, hence richer, which enables them to buy even more votes the next time round. Their reign becomes unbreakable, self-perpetuating.

Oddly enough the Stiglitz reasoning is once again out of luck. For the 2008 presidential election, $745m was raised for Barack Obama, twice the $368m raised for John McCain. The Left duly won, presumably because the so-called fat capitalists raised much less money for vote-buying than minorities, Hollywood actors, labour unions, and students. The Stiglitz theory of the rich buying the votes works a little better for Congressional elections, but the buying is not done always for the Right but as often as not for the Left, according to whether it is the Republican or the Democratic candidate who can better serve particular local and special interests. Contrary to Europe, the American legislator may be less ideological and more venal, but his venality serves more to preserve a messy distributional status quo than to making it ever more unequal.

Even if the Stiglitz thesis did not get it wrong too often, it would still be a failure on one fundamental score: it tacitly ignores the rule that you must take the rough with the smooth. Inequality, if he is to be believed, has countless painful consequences that amount to a heavy price. Tacitly and sometimes overtly, he invites the reader to go for remaking it, to smooth out the rough and accept only the smooth with the smooth. This, however, cannot be done. Every alternative social order has built-in consequences, some rough and some smooth, that cannot be sorted out from one another. Equality also has a price like every other system of collective choice rules, and it suffices to think of the late Soviet Union, North Korea, Cuba and many less acute examples to suspect that its price could be a awesome one, even if imposed in less exotic countries. It is always tempting for the would-be social engineer to propose reforms that promise to smooth out the rough and reduce the price of the social order. Before yielding to the temptation, it is well to remember that everything has a price, but the price of everything is very hard to recognize, let alone to predict.


Footnotes

Joseph E. Stiglitz, The Price of Inequality: How Today’s Divided Society Endangers Our Future. New York: W. W. Norton and Company, 2012.


 

*Anthony de Jasay is an Anglo-Hungarian economist living in France. He is the author, a.o., of The State (Oxford, 1985), Social Contract, Free Ride (Oxford 1989) and Against Politics (London,1997). His latest book, Justice and Its Surroundings, was published by Liberty Fund in the summer of 2002.

The State is also available online on this website.

For more articles by Anthony de Jasay, see the Archive.