Review of The Price of Inequality

Joseph Stiglitz2

In his new book, The Price of Inequality, Nobel Prize-winning economist and former Chief Economist of the World Bank Joseph Stiglitz provides one of the most thoughtful repudiations of austerity economics. In addition he offers some profound thinking on why reversing current and corrosive trends of greater social and economic inequality is the most important remedy to the depression now in its fifth year with no end in sight, while literally billions around the world suffer at the same time the rich are doing better than ever.

In a recent essay summarizing the arguments of his book, he opens with the subject of markets.

Markets have clearly not been working in the way that their boosters claim. Markets are supposed to be stable, but the global financial crisis showed that they could be very unstable, with devastating consequences. The bankers had taken bets that, without government assistance, would have brought them and the entire economy down. But a closer look at the system showed that this was not an accident; the bankers had incentives to behave this way.

The virtue of the market is supposed to be its efficiency. But the market obviously is not efficient. The most basic law of economics - necessary if the economy is to be efficient - is that demand equals supply. But we have a world in which there are huge unmet needs - investments to bring the poor out of poverty, to promote development in less developed countries in Africa and other continents around the world, to retrofit the global economy to face the challenges of global warming. At the same time, we have vast underutilized resources - workers and machines that are idle or are not producing up to their potential. Unemployment - the inability of the market to generate jobs for so many citizens - is the worst failure of the market, the greatest source of inefficiency, and a major cause of inequality.

As of March 2012, some 24 million Americans who would have liked a full-time job couldn't get one.

In the United States, we are throwing millions out of their homes. We have empty homes and homeless people.

But even before the crisis, the American economy had not been delivering what had been promised. Since 1975 disposable income for workers has gone down or remained flat in all but a couple of years in the tech boom of the 90's. GDP  was growing, but American workers were no longer getting their share, or any share of the increase. For most American families, even before the onset of recession, incomes adjusted for inflation were lower than they had been a decade earlierr.

Stiglitz describes the purpose of his book:

This book is about why our economic system is failing for most Americans, why inequality is growing to the extent it is, and what the consequences are. The underlying thesis is that we are paying a high price for our inequality - an economic system that is less stable and less efficient, with less growth, and a democracy that has been put into peril. But even more is at stake: as our economic system is seen to fail for most citizens, and as our political system seems to be captured by moneyed interests, confidence in our democracy and in our market economy will erode along with our global influence. As the reality sinks in that we are no longer a country of opportunity and that even our long-vaunted rule of law and system of justice have been compromised, even our sense of national identity may be put into jeopardy.

The problem is global, not just a US phenomenon. In some countries the Occupy Wall Street movement has become closely allied with the antiglobalization movement.  Stiglitz has long held that the problem is not that globalization is bad or wrong but that "...governments are managing it so poorly - largely for the benefit of special interests. The interconnectedness of peoples, countries, and economies around the globe is a development that can be used as effectively to promote prosperity as to spread greed and misery."


Stiglitz has the same basic attitude toward markets as globalization: "...the power of markets is enormous, but they have no inherent moral character. We have to decide how to manage them. At their best, markets have played a central role in the stunning increases in productivity and standards of living in the past two hundred years - increases that far exceeded those of the previous two millennia."

However government has played no less a role in these advances, a fact that free-market advocates without exception fail to acknowledge. Alongside tremendous advances in productivity, markets have also "concentrate[d] wealth, pass[ed] environmental costs on to society, and abuse[d] workers and consumers. For all these reasons, it is plain that markets must be tamed and tempered to make sure they work to the benefit of most citizens. And that has to be done repeatedly, to ensure that they continue to do so. That happened in the United States in the Progressive Era, when competition laws were passed for the first time. It happened in the New Deal, when Social Security, employment, and minimum-wage laws were passed."

Of course it was never rational or moral capitalists or business interests that drove either of these reform eras. It was the rise of the multitudes of millions of working and oppressed peoples that compelled the economy, markets and governance to adjust and redress inequality.

The message of Occupy Wall Street - and of so many other protesters around the world - is that markets once again must be tamed and tempered, regulated and, in some cases,  with respect to goods such as health care and other human rights, they must be removed from markets. The consequences of doing otherwise can be no meaningful democracy, where the voices of ordinary citizens are not heard; whereas in fact those voices must not only be heard, but must indeed rule.  If the  system year after year makes citizens worse-off, one or the other will have to give - either democracy, or inequality.

Inequality and Unfairness

The promise of equal opportunity, embedded in the founding documents of our nation, and in two and a half centuries of struggle, is often betrayed by markets, even when they are stable. "More than anything else, a sense that the economic and political systems were unfair is what motivates the protests around the world. In Tunisia and Egypt and other parts of the Middle East, it wasn't merely that jobs were hard to come by but that those jobs that were available went to those with connections."

In the United States and Europe, things seemed more fair, but only superficially so. Those who graduated from the best schools with the best grades had a better chance at the good jobs. But the system was stacked because wealthy parents sent their children to the best kindergartens, grade schools, and high schools, and those students had a far better chance of getting into the elite universities.


The financial crisis has unleashed a new realization that our economic system is not only inefficient and unstable but also fundamentally unfair. Many in the financial sector -- the bankers -- walked off with outsize bonuses, while those who suffered from the crisis brought on by these bankers went without a job. Government bailed out the banks, but was dragged kicking and screaming to even extend unemployment insurance for those who could not get employment after searching for months and months. Government failed to provide anything except token help to the millions who were losing their homes.

On Opportunity to Revisit the notion of CLASS

One aspect of fairness that is deeply ingrained in American values is opportunity. America has always thought of itself as a land of opportunity. Horatio Alger stories, of individuals who made it from the bottom to the top, are part of American folklore. But, increasingly, the American dream that saw the country as a land of opportunity began to seem just that: a dream, a myth reinforced by anecdotes and stories, but not supported by the data. The chances of an American citizen making his way from the bottom to the top are less than those of citizens in other advanced industrial countries.

There is a corresponding myth - rags to riches in three generations - suggesting that those at the top have to work hard to stay there; if they don't, they (or their descendants) quickly move down. But this too is largely a myth, for the children of those at the top will, more likely than not, remain there.

If President Obama and our court system had found those who brought the economy to the brink of ruin "guilty" of some malfeasance, then perhaps it would have been possible to say that the system was functioning. There was at least some sense of accountability. In fact, however, those who should have been so convicted were often not charged, and when they were charged, they were typically found innocent or at least not convicted. A few in the hedge fund industry have been convicted subsequently of insider trading, but this is a sideshow, almost a distraction. The hedge fund industry did not cause the crisis. It was the banks. And it is the bankers who have gone, almost to a person, free.

If no one is accountable, if no individual can be blamed for what has happened, it means that the problem lies in the economic and political system.

The slogan "we are the 99 percent" may have marked an important turning point in the debate about inequality in the United States. Americans have always shied away from class analysis; America, we liked to believe, is a middle-class country, and that belief helps bind us together. There should be no divisions between the upper and the lower classes, between the bourgeoisie and the workers. But if by a class-based society we mean one in which the prospects of those at the bottom to move up are low, America may have become even more class-based than old Europe, and our divisions have now become even greater than those there. Those in the 99 percent are continuing with the "we're all middle class" tradition, with one slight modification: they recognize that we're actually not all moving up together. The vast majority is suffering together, and the very top - the 1 percent - is living a different life. The "99 percent" marks an attempt to forge a new coalition - a new sense of national identity, based not on the fiction of a universal middle-class but on the reality of the economic divides within our economy and our society.


It warms my heart to finally hear a major US economist address the concept of class. The weakness of a class approach to social and political life may be the strongest ideological barrier to overcoming the the political divide between the left and mainstream politics in the US. Typical macroeconomic analysis asserts "the rational consumer", or the "rational producer" individual as the elementary actor in economic life. Thus, even Paul Krugman -- the most important voice "walking point every day" in the ideological battle against austerity -- is compelled to reduce the most important economic fallacy behind austerity to a paradox -- the paradox of thrift. Simply stated, this paradox says: When an individual is in debt, it is rational for him to reduce his spending; but when a society is in debt in a depression, reducing spending leads to greater debt, and prolonged depression.  In a social context,  my spending is your income, and vice versa. The head-scratching "paradox" arises from making an individual, rather than a class, the elementary component in analysis. I am not saying looking at economic activity from an individual point of view is of no value; but -- it tends to make political economy more of a mystery than it really is.

Stiglitz goes deeper yet. He questions the capitalist system itself, at least in the form it has acquired in recent decades.

Is our market system eroding fundamental values?

While this book focuses on equality and fairness, there is another fundamental value that our system seems to be undermining - a sense of fair play. A basic sense of values should, for instance, have led to guilt feelings on the part of those who were engaged in predatory lending, who provided mortgages to poor people that were ticking time bombs, or who were designing the "programs" that led to excessive charges for overdrafts in the billions of dollars. What is remarkable is how few seemed - and still seem - to feel guilty, and how few were the whistleblowers. Something has happened to our sense of values, when the end of making more money justifies the means, which in the U.S. subprime crisis meant exploiting the poorest and least-educated among us.

Much of what has gone on can only be described by the words "moral deprivation." Something wrong happened to the moral compass of so many of the people working in the financial sector and elsewhere. When the norms of a society change in a way that so many have lost their moral compass, it says something significant about the society.

Capitalism seems to have changed the people who were ensnared by it. The brightest of the bright who went to work on Wall Street were like most other Americans except that they did better in their schools. They put on hold their dreams of making a lifesaving discovery, of building a new industry, of helping the poorest out of poverty, as they reached out for salaries that seemed beyond belief, often in return for work that (in its number of hours) seemed beyond belief. But then, too often, something happened: it wasn't that the dreams were put on hold; they were forgotten.

If markets had actually delivered on the promises of improving the standards of living of most citizens, then all of the sins of corporations, all the seeming social injustices, the insults to our environment, the exploitation of the poor, might have been forgiven. But to the young indignados and protestors elsewhere in the world, capitalism is failing to produce what was promised, but is delivering on what was not promised - inequality, pollution, unemployment, and, most important of all, the degradation of values to the point where everything is acceptable and no one is accountable.

Failure of Political System

One thesis of Daron Acemoglu and James Robinson's important book "Why Nations Fail" is the negative impact of inequality on democratic institutions around the world. Over time they are captured by the rich and  powerful and the voices of the working and middle classes are nullified. Government's important role in insuring that rising economic activity lifts all boats is replaced with a growing corporate or military dictatorship that transfers even greater wealth to the 1%. Stiglitz amplifies this critique:

The political system seems to be failing as much as the economic system. Given the high level of youth unemployment around the world - near 50 percent in Spain and 18 percent in the United States - it was perhaps more surprising that it took so long for the protest movements to begin than that protests eventually broke out. The unemployed, including young people who had studied hard and done everything that they were supposed to do ("played by the rules," as some politicians are wont to say), faced a stark choice: remaining unemployed or accepting a job far below that for which they were qualified. In many cases there was not even a choice: there simply were no jobs, and hadn't been for years.

One interpretation of the long delay in the arrival of mass protests was that, in the aftermath of the crisis, there was hope in democracy, faith that the political system would work, that it would hold accountable those who had brought on the crisis and quickly repair the economic system. But years after the breaking of the bubble, it became clear that our political system had failed, just as it had failed to prevent the crisis, to check the growing inequality, to protect those at the bottom, to prevent the corporate abuses. It was only then that protesters turned to the streets.

Americans, Europeans and people in other democracies around the world take great pride in their democratic institutions. But the protesters have called into question whether there is a real democracy. Real democracy is more than the right to vote once every two or four years. The choices have to be meaningful. The politicians have to listen to the voices of the citizens. But increasingly, and especially in the United States, it seems that the political system is more akin to "one dollar one vote" than to "one person one vote." Rather than correcting the market's failures, the political system was reinforcing them.

This brings me to one of the central theses of [my] book: while there may be underlying economic forces at play, politics have shaped it in ways that advantage the top at the expense of the rest. Any economic system has to have rules and regulations; it has to operate within a legal framework. There are many different such frameworks, and each has consequences for distribution as well as growth, efficiency, and stability. The economic elite have pushed for a framework that benefits them at the expense of the rest, but it is an economic system that is neither efficient nor fair. I explain how our inequality gets reflected in every important decision that we make as a nation - from our budget to our monetary policy, even to our system of justice - and show how these decisions themselves help perpetuate and exacerbate this inequality.


Stiglitz concludes with alternative frameworks which reinforce and preserve the key role of government in guaranteeing effective redistribution of wealth arising out of the chaos of commodity markets.

The picture I paint today is bleak: we are only just beginning to grasp how far our country has deviated from our aspirations. But there is also a message of hope. There are alternative frameworks that will work better for the economy as a whole and, most importantly, for the vast majority of citizens. Part of this alternative framework entails a better balance between markets and the state - a perspective that is supported, as I shall explain, both by modern economic theory and by historical evidence. In these alternative frameworks, one of the roles that the government undertakes is to redistribute income, especially if the outcomes of market processes are too disparate.

I have no argument with this. However, there is a missing piece. Recovery from the depression indeed requires a new framework of government that insures, fundamentally, that popular "wealth" rises proportionately with productivity.  But it is also true that a rising proportion of that "wealth" must be in public goods, not commodities. Food, water, clean air, and many other environmental issues in a dense society mandate some serious changes in transportation, housing, education, retirement and health care. That means some serious lifestyle changes. It means, among other things, more socialism and less capitalism.

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  • His book offers very informative views on the world economy, and why the economy crashed the way it did. Even though I have studied economics, I was still able to learn many things about economy that was not taught in school. It would be beneficial to investors to take note of some of the concepts in the book.

    Posted by Simon, 10/05/2012 3:20am (5 years ago)

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