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J.E. Stiglitz "The price of inequality: how today's divided society endangers our future"
Main - News
Written by Vladimir Shper   
Monday, 22 July 2013 10:58

I have just finished reading of very important (IMHO) book - so my sincere apologies for such a long post: J.E. Stiglitz The price of inequality: how today's divided society endangers our future. - W.W. Norton & Co., Inc. N.Y. – 2012 – 414 P. Very good and very important book. The main ideas:

Markets are neither efficient nor stable (as they are supposed to be); our political and economic systems are fundamentally unfair. We created the system of "one dollar – one vote" instead of "one person – one vote". We created the system in which "…"justice for all" is being replaced by …"justice for those who can afford it"" "America is no longer the land of opportunity". All this is the price we are paying for inequality which was growing steadily in the last twenty years. The author gives a lot of examples and data on inequality in America.

- one out of six who would like to have a full-time job still couldn't find one (p.1);
- 8 million families had been told to leave their homes (ibid);
- By 2007 … the top 0,1 percent of America's households had an income that was 220 times larger than the average of the bottom 90 percent (p.2)
- the ratio of CEO annual compensation to that of the typical worker by 2010 was … 243 to 1 (p.3);
- in 1980 out Gini coefficient was just touching 0,4, today it's 0,47 (p.23);
- AIG got more than $150 billion – more than was spent on welfare to the poor from 1990 to 2006 (180); etc.

What is the cause of this inequality? Stiglitz's answer: this is the theory which is called "marginal productivity theory": "those with higher productivities earned higher incomes that reflected their greater contributions to society. Competitive markets, through the laws of supply and demand, determine the value of each individual's contributions" (p.30). The major theme of the author is that nowadays this theory is a Utopia. "…inequality depends on the distributions of "endowments," of financial and social capital" (p.31). And this distributions depends highly on the government policy which creates the rules of the game. "There are two ways to become wealthy: to create wealth or to take wealth away from others. The former adds to society. The latter typically subtracts from it" (p.32). All next chapters are devoted to detailed explanations of how this process is going in America and what are the arguments of those who defend the existing rules of the game. And "America has a government of the 1 percent, by the 1 percent, and for the 1 percent".
Some important notes.

Stiglitz labels the numerous ways by which current political system helps the rich at the expense of the rest as rent seeking. "Countries rich in natural resources are infamous for rent seeking activities".

"…one can't really separate out any individual's contributions from those of others" (p.78).

Many in business sector are craving for profits "they might garner now". They think of their narrow short-term self-interest (p.90).

CEO's do not earn the money they get - they redistribute them in their own favor.

GDP is a bad metric because when it arises the country's wealth may diminish and the wealth of the 99 percent may worsen.

"The level of real per capita GDP … and the rate at which it is growing, is not a good measure of success" (p.183).

"Individuals can often be better motivated by intrinsic rewards – by the satisfaction of doing the job well – than by extrinsic rewards (money). To take one example, the scientists whose research and ideas have transformed out lives in the past two hundred years have, for the most part, not been motivated by the pursuit of wealth" (p.112).

"…the kinds of incentive pay schemes employed by many corporations, while they create more inequality, are actually counterproductive" (p.114).

Inequality lowers trust, and only those economies flourished where there was a higher level of trust. People must feel confident that they will be treated well, with dignity, fairly. Then they reciprocate…(p.122). "… the financial markets' interests frequently do not coincide with those of the country. The markets are shortsighted and have a political and economic agenda that seeks the advancement of the well-being of financiers rather than that of the country as a whole" (p.139). etc.

So what Stiglitz suggests?!

- Reducing the rent seeking and leveling the playing field (first of all by curbing the financial sector and by tax reform);
- Helping the rest (through changes in the system of education, savings, health care, social protection, control of employment).

"Is there hope?" - asks the author in his last chapter? And answers: "Four years ago there was a moment where most Americans had the audacity to hope. Trends more than a quarter of the century in the making might have been reversed. Instead, they have worsened. Today that hope is flickering" (p.290).