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Joseph Stiglitz: Economics Must Address Wealth and Income Inequality


Yves here. This interview with Joesph Stiglitz is pretty subversive for a talk with a Serious Economist. Stiglitz doesn’t simply talk about the problem of inequality, but the drivers that most mainstream economists choose to ignore, such as the rise of monopoly/oligopoly power, worker exploitation, and how central banks have allowed banks to engage increasingly in speculative rather than productive lending.


By Lynn Parramore, Senior Research Analyst at the Institute for New Economic Thinking. Originally published at the Institute for New Economic Thinking website


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, a topic he has also explored in research supported by the Institute. On December 4th, Stigltiz chaired the eighth Institute for New Economic Thinking Seminar Series at Columbia University, in which he presented a paper, “New Theoretical Perspectives on the Distribution of Income and Wealth Among Individuals.” In the interview that follows, Joseph Stiglitz explores the themes of this paper, the work of Thomas Piketty, and the need for the field of economics to come to terms with the growing gulf between haves and have-nots.


Lynn Parramore: You’ve mentioned that economic inequality was the subject of your Ph.D studies. How did you come to be interested in how income and wealth get divided up in society?


Joseph Stiglitz: Firstly, when you grow up as I did in Gary, Indiana, it was sort of prototypical of a divided America. You had lot of people in poverty. We didn’t have the 1 percent, but we had the 5 percent. I had no idea what real inequality was like, but we had a lot of people at the bottom. And secondly, it goes back to the years I went to college and the Civil Rights Movement. You remember Martin Luther King’s march was a march for the end of discrimination and for economic empowerment. So I think a lot of us realized at that time that we weren’t going to fully address the problems of a divided America — of race discrimination — if we didn’t do something about the economic differentials.


LP: What’s new in your recent work on the distribution of income and wealth among individuals?


There are several things. There’s some debate about this, but I think 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 and that there is, therefore, in a way, a link between the growth of the economy — the accumulation of capital— on the one hand and inequality and wealth. My paper begins with the observation that in fact, you cannot explain what has happened to the wealth/income ratio by that analysis. A closer look at what has gone on suggests that a large fraction of the increase in wealth is an increase in the value of land, not in the amount of capital goods.


LP: When you say “land,” you’re not talking about land in the Jane Austen sense, that is, agricultural land under the ownership of the lord of the manor.


JS: It’s not agricultural land, it’s the value of urban land, and I would include in that, broadly, rents associated with natural resources. It’s the value of existing assets. As a footnote, some of what has gone on, in addition to an increase in the wealth/income ratio, is a capitalization of the increase in other kinds of rents, like monopoly rents. If monopoly rents get increased, if the market power of firms relative to workers gets increased, as when you have the ability of a few, like the banks, to get government guarantees — the value of that is increased and gets capitalized. And that increases wealth but it doesn’t increase capital. So it’s that distinction between wealth and capital that turns out to be critical. That’s the first idea.


The reason that’s important is that you then begin an inquiry into the sources, the explanations, of why the value of the land or other sources of the value of rents would have gone up. A lot of my book, The Price of Inequality, is about why rent-seeking may have increased, but the other part is more external in terms of the value of land or the value of assets. That, I suggest, is very closely linked with the credit system. So if you get a flow of credit increasing, as we’ve seen in the last few years —that flow of credit didn’t go to more wealth accumulation as we normally use the term in economics, as capital goods. What you got is an increase in bubbles of one kind or another.

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