The Great Divide, by Joseph Stiglitz

Rising inequality can be addressed without taking to the barricades, Victoria Bateman suggests

April 30, 2015

“You’ve never had it so good.” I would dare any current politician to offer up words of that order. There was once a time when we were filled with optimism and could look forward to a better life for our children and grandchildren. Today, a seemingly hopeless gloom has descended. And according to Joseph Stiglitz’s provocative new book, based on a recent series of articles written for The New York Times, his native US is no longer home to the American Dream, but instead to a “Great Divide”.

 

The facts marshalled here by Stiglitz, a Nobel laureate and former chief economist of the World Bank, are staggering. One-fifth of America’s children live in poverty; the average wage of male high-school leavers has declined by 12 per cent in the past 25 years; and the pay of CEOs has swelled from 30 times the average worker’s wage to 300 times. Viewed globally, the US now ranks alongside Russia and Iran in measures of inequality; even more worryingly, the economic and employment prospects of the top-performing students of poor families in the US are now lower than those of the weakest-performing students in families in the top quartile. And if our habit of following in the footsteps of the US is anything to go by, the UK should be worried.

That’s the bad news. Now for the good: Stiglitz’s rallying cry is that “widening and deepening inequality is not driven by immutable economic laws, but by laws we have written ourselves”. His approach is refreshing, and his analysis not only level-headed but also accompanied by proposals for achievable solutions. If you are heading for the barricades, I am afraid that you are therefore going to be bitterly disappointed with what he has to offer. Conversely, if what you would most like to see is a return to Thatcherism, stop here. If, however, what you want for the future is more balance – an end to the ideological divisions that have fettered us in the past – I urge you to read this book.

To those on the Left, capitalism is the key culprit behind growing inequality. In the recent best-seller Capital in the Twenty-First Century, Thomas Piketty argued that rising inequality is hard-wired into capitalism. However, we must remember that since we left the age of hunters and gatherers behind, our natural societal state has not been one of equality but one of inequality: of an elite exploiting and suppressing the masses to support their own luxurious lifestyles. Seen in this light, and over the long span of history, capitalism has helped to bring opportunity. After all, the first time that we “peasants” had the opportunity to free ourselves from landed elites was when the market – the possibility of freely buying and selling – presented itself. The merchants this freedom created constituted a challenge to the previous order.

By the late 18th century, invention and creativity also started to pay off. Now it was the turn of the industrialists as well as the merchants to rival the landed classes. These newcomers – in the UK, northern families such as the Gregs, whose textile business was the subject of the recent Channel 4 drama The Mill – were now the “new money” challenging the old elites. For quite some time now, financial markets have allowed those with a good idea but without their own capital to borrow and so to build their own businesses. In other words, we cannot ignore the fact that capitalism has helped to bring opportunities.

Of course, not everyone gets to the top, but nevertheless capitalism, when it is accompanied by the right kinds of state interventions, such as publicly funded education, has the power to help deliver on both prosperity and fairness. It can help to provide opportunities that had not been possible previously. In contrast, alternative political systems reward social connections and run on political favours and loyalty to leaders who are, more often than not, unelected. Even those whose talent is able to shine soon find that they are swept into a world of blackmail and political manoeuvring, as the 2006 film The Lives of Others, set in East Germany in the 1980s, so starkly portrayed. In such systems, it can be best to keep your head down – to hide your light under a bushel. And that doesn’t help anyone but the already powerful.

In fact, as Stiglitz points out, one of the key reasons that inequality has increased in recent years is not so much that we have pursued free markets, but instead that we have failed to accord with them. Big banks that use their power to manipulate and exploit their position, and big businesses that use their headline-grabbing profits to pay enormous salaries to those at the top (rather than to present a cheaper or better quality product to consumers) are inimical to the free-market model. Any truly free-market economist would tell you that these problems should be tackled. Inevitably, therefore, part of the solution to rising inequality will have a Thatcherite flavour: as Stiglitz puts it, “making markets act like markets would be a good place to start”. This will also require the US to tackle a system of political party funding that has allowed special interest groups, such as big businesses, to wield excessive amounts of power and to influence policy in their favour.

However, while capitalism and free markets are not the entirely ruthless beasts that we sometimes make them out to be, Stiglitz is clear that they do not offer a complete solution to the problems we face. In particular, while we can all accept that some degree of income inequality is the price we pay for making sure that talent and hard work are rewarded, less acceptable are the dynamics that this can entrench – the way in which inequality of income can adversely affect equality of opportunity. As the political scientist Robert Putnam explores in his new book Our Kids: The American Dream in Crisis, higher income earners are able to provide their children with advantages that can help to protect them from falling down the social ladder. By contrast, at the other end of the ladder, poverty can corrode talent, eat away at one’s health and erode the capacity for entrepreneurial risk-taking. Or, to paraphrase Sendhil Mullainathan and Eldar Shafir, authors of 2013’s Scarcity: Why Having Too Little Means So Much, living in poverty taxes the mind.

Here, then, is where we need politicians to act, and Stiglitz comes armed with plenty of useful suggestions. His central message is that governments have a responsibility to work hard to battle the vicious-circle dynamics of inequality. Unless they do so, the most important thing our economy possesses, human talent, will go to waste. And just as worryingly, the social divisions that inequality produces will eat away at the trust on which a successful economy depends.

In the trauma of the present, it is easy to blame capitalism for the problems we all face. However, to solve the problem of inequality we must embrace solutions from both sides of the political divide: we need not only a return to the kinds of competitive markets seen in economics textbooks – policies that would break down the monopoly power of big business – but also more activist economic and social policies that push against the vicious dynamics in which we so easily find ourselves.

As we get closer and closer to the ballot box, arguably what The Great Divide highlights most clearly is that neither of the UK’s two main political parties is fully armed and ready to tackle the elephant in the room that is inequality. In addressing this subject with such clarity, balance and insight, Stiglitz’s excellent book may just help us to find a new way forward.

The Great Divide

By Joseph Stiglitz
Penguin, 464pp, £20.00
ISBN 9780241202906
Published 20 April 2015

The author

Nobel laureate Joseph Stiglitz, who holds the post of university professor at Columbia University, lives in New York City with his wife, Anya Schiffrin, who is director of the International Media, Advocacy and Communications Specialization at Columbia’s School of International and Public Affairs.

As senior vice president and chief economist of the World Bank, Stiglitz was its “rebel within”. “Multilateral institutions like the World Bank and the IMF are vital to global governance, and for implementing coordinated policies on a large scale. So we have to try to reform them,” he says. “The problem was that, for too long, they were beholden to economic theories that weren’t grounded in fact.

“There has been some success in response to the many calls for reform – the IMF, for instance, has come around to recognising how damaging inequality is for economies and for societies; they have now recognised that unfettered flows of short term capital may be destabilising – something that I argued in one of my earlier books, Globalization and its Discontents, and which they viewed as a heresy at the time. Unfortunately, the US Congress has refused to ratify some of the reforms in the rules governing these institutions – even though there has been a global consensus in favour of these changes,” he observes. 

Stiglitz’s 2012 book The Price of Inequality focused on concepts such as “the 99% and the 1%”, and in its wake have come a number of books on the subject by fellow economists, scholars in other disciplines, and public figures, and a greater media focus on these issues. But is popular awareness of these issues likely to do any good?

“Very much so,” he insists. “Indeed, I think it is already bearing fruit. Even conservative candidates in the US are beginning to talk about inequality and what can be done about it.”

What is his view, as an academic, on recent calls by students and scholars to reform the teaching of economics in universities?

“It must happen, and I think the process has already begun. The Institute for New Economic Thinking, with which I work closely, is leading the charge in reforming the discipline. Many of us have been arguing for years that the standard models in economics are inadequate. The financial crisis really drove the point home, and I know that, as a result, we’re finally starting to see widespread interest in teaching economics differently. 

“One of the subjects that was traditionally left out of economics was the distribution of income. Students were taught little about the origins of our inequality, why it was growing, or what could be done about it.”

Does Stiglitz believe that higher education itself, and the segments of society that traditionally have not had access to it, will be well served by the rise of massive open online courses? Are online courses the way to create, as he has argued, a “learning society”?

“Moocs are a great tool, and will likely change access to education in interesting ways in the coming years. But the agenda for Creating a Learning Society that I describe in my book with Bruce Greenwald is much wider. We’re talking about how government can use policy to help nurture not just short-term growth, but long-term transformations of economies so that they are enduringly innovative. The basic idea is that the ability to innovate and learn are themselves qualities that can be learned, and that they are some of the most important qualities that governments can support – especially in developing countries, but even in the advanced countries.”

What is Stiglitz’s view of living wage campaigns in the UK and elsewhere? Does he see their benefit as extending beyond the potential to make the pay of the workers in question fairer, toward a general consciousness-raising among the better-off of the reality of badly paid work?

“It’s exactly right to say that these campaigns have a double benefit. On the one hand they will, I hope, lead to increased wages for the groups they represent (this hasn’t yet been fully accomplished for US fast food workers). On the other hand, they’ve helped make the media and the public take notice of how widespread are unliveable, low and exploitative wages. I hope they will also help remind us the major costs that workers are bearing as a result of the weakening of unions and other collective bargaining mechanisms. This public awareness is essential if there is to be the necessary actions that have to be taken within the political sphere,” says Stiglitz.

And can shame and moral arguments ever be effective weapons in tackling inequality?

“Sure. The unemotional, dispassionate language and logic of economics is important, but not sufficient, for bringing about the changes in policy that we need to decrease inequality. It is important to understand that inequality has economic consequences – that it can lead to poorer economic performance, lower growth and more instability. But the moral narrative is at least as vital. Most non-economists are probably more engaged with the latter.”

Asked for his thoughts about whether the imminent general election in the UK may lead a greater resolve to tackle inequality, the former chair of the University of Manchester’s Brooks World Poverty Institute says, “Both Labour and the Scottish National Party have shown a concern about inequality. Ed Miliband co-chaired a report with a US thinktank on inequality. It laid out an important agenda. I do have some concerns that it doesn’t go far enough.”

Scotland is, he adds, the subject of one of The Great Divide’s essays. “The SNP has become a role model for the implementation of policies that over the long run could actually reverse inequality.”

In 2010, Stiglitz advised Greece’s government of the day, and he has argued that it is Germany, not Greece, that is the free rider in the Eurozone. Does he hold out hope that Syriza’s election victory earlier this year will force a change that will benefit the country and the Eurozone as a whole? 

“Syriza is rightly demanding a change in the policies that the Troika has foisted on Greece and the other afflicted countries in the Eurozone – policies which were predicted by me and others to fail, and which have failed. Unfortunately, many of those responsible for these policies have been not only reluctant to recognise these predictable and predicted failures, but also have been stubborn, refusing to allow modifications in the ‘programme’ that hold out the promise of recovery. What happens now is a matter of politics.”

The Spanish anti-austerity movement has also received Stiglitz’s support. Does he hold out hope that electoral success for Podemos will do alter Spain for the better?

“Podemos holds out the prospect of a change in policy which might reverse the course of the country,” he replies.

“The policies of austerity in Spain – as elsewhere – have been a dismal failure. Even if Spain’s unemployment rate has declined slightly from its peak, it will take years and years on the current course before any semblance of full employment is reached. Meanwhile, a whole generation of young people are having their life prospects destroyed. Future potential growth for the country will be lowered. So too, even if growth is stronger in Spain than in other countries of the Eurozone, it is a low benchmark. GDP per capita is still below the pre-crisis level. Spain is facing the prospects of a lost decade or more.”

What gives him hope? “As an Indianan, I suppose I’m naturally hopeful: Midwestern Americans are known for being optimistic, sometimes to a fault. At the moment there are a lot of
reasons to hope that societies and governments around the world will make the right choices as they face important turning points,” he says.

“The US has the chance to acknowledge and deal with its damaging inequality. Developing countries are realising that they have growing clout in the global economy, and that they don’t have to follow the questionable lead of Western countries as they choose paths that are more equitable and economically stable. China and other countries have the opportunity to confront the environmental costs of their phenomenal growth, and adopt policies that will maintain the strength of their economies while keeping their air and water clean, and preserving natural resources.”

Stiglitz concludes: “Of course, any of these opportunities for success are also opportunities for failure, so my optimism is heavily qualified. But I think the hopeful point is in realising that humans have a choice in these matters. The global discourse today is markedly different from what it was two decades ago.”

Karen Shook

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Reader's comments (1)

Stiglitz is one of the most brilliant economists of his generation and we can all profit from listening to what he has to say.

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