Stiglitz is the author of more than twenty-five scholarly and popular books, including Globalization and Its Discontents (2002), Fair Trade for All (2006), and his co-authored economic analysis of U.S. engagement in Iraq, The Three Trillion Dollar War (2008). The selection in this chapter is taken from his 2012 New York Times bestselling book, The Price of Inequality. Here, Stiglitz examines the root causes of the inequalities in wealth and income in American society—inequalities that have risen precipitously since the recession of 2008. "American inequality didn't just happen," he argues. "It was created." The main goal of The Price of Inequality is to explain the forces that created it.
In the chapter excerpted here, Stiglitz defines an important factor that contributes to our current economic inequality: the phenomenon that economists call "rent seeking." His discussion uses a very old definition of the word "rent." Today, rent refers to the fee paid to the owner of a piece of property or equipment. Historically, though, it referred to any government allowance that permitted somebody to make an income without doing any work. Today, rent seeking is the process by which those at the top—the wealthiest 1 percent—receive income not by creating wealth, but by taking a larger portion of wealth, that could be redistributed to others, for themselves.
Stiglitz draws on several examples and theoretical arguments to argue that rent- seeking activities on the part of wealthy individuals and large corporations have transferred wealth from the poorest members of society to the wealthiest, capturing a larger share of existing wealth for the rich rather than creating new wealth to
benefit the entire society. Government actions are necessary to solve the problem of economic inequality, he concludes, because government is the source of the problem.
American inequality didn't just happen. It was created. Market forces played a role, but it was not market forces alone. In a sense, that should be obvious: economic laws are universal, but our growing inequality—especially the amounts seized by the upper 1 percent[288]—is a distinctly American "achievement." That outsize inequality is not predestined offers reason for hope, but in reality it is likely to get worse. The forces that have been at play in creating these outcomes are self-reinforcing.
By understanding the origins of inequality, we can better grasp the costs and benefits of reducing it. . . . Even though market forces help shape the degree of inequality, government policies shape those market forces. Much of the inequality that exists today is a result of government policy, both what the government does and what it does not do. Government has the power to move money from the top to the bottom and the middle, or vice versa. . . .
America's current level of inequality is unusual. Compared with other countries and compared with what it was in the past even in the United States, it's unusually large, and it has been increasing unusually fast. It used to be said that watching for changes in inequality was like watching grass grow: it's hard to see the changes in any short span of time. But that's not true now.
Even what's been happening in this recession is unusual. Typically, when the economy weakens, wages and employment adjust slowly, so as sales fall, profits fall more than proportionately. But in this recession the share of wages has actually fallen, and many firms are making good profits.
Addressing inequality is of necessity multifaceted—we have to rein in the excesses 5 at the top, strengthen the middle, and help those at the bottom. Each goal requires a program of its own. But to construct such programs, we have to have a better understanding of what has given rise to each facet of this unusual inequality.
Distinct as the inequality we face today is, inequality itself is not something new. The concentration of economic and political power was in many ways more extreme in the precapitalist societies of the West. At that time, religion both explained and justified the inequality: those at the top of society were there because of divine right. To question that was to question the social order, or even to question God's will.
However, for modern economists and political scientists, as also for the ancient Greeks, this inequality was not a matter of a preordained social order. Power— often military power—was at the origin of these inequities. Militarism was about economics: the conquerors had the right to extract as much as they could from the conquered. In antiquity, natural philosophy in general saw no wrong in treating other humans as means for the ends of others. As the ancient Greek historian Thucydides
famously said, "right, as the world goes, is only in question between equals in power, while the strong do what they can and the weak suffer what they must."
Those with power used that power to strengthen their economic and political positions, or at the very least to maintain them. They also attempted to shape thinking, to make acceptable differences in income that would otherwise be odious.
As the notion of divine right became rejected in the early nation-states, those with power sought other bases for defending their positions. With the Renaissance and the Enlightenment, which emphasized the dignity of the individual, and with the Industrial Revolution, which led to the emergence of a vast urban underclass, it became imperative to find new justifications for inequality, especially as critics of the system, like Marx, talked about exploitation.
The theory that came to dominate, beginning in the second half of the nine- 10 teenth century—and still does—was called "marginal productivity theory"; those with higher productivities earned higher incomes that reflected their greater contribution to society. Competitive markets, working through the laws of supply and demand, determine the value of each individual's contributions. If someone has a scarce and valuable skill, the market will reward him amply, because of his greater contribution to output. If he has no skills, his income will be low. Technology, of course, determines the productivity of different skills: in a primitive agriculture economy, physical strength and endurance is what mattered; in a modern hi-tech economy, brainpower is of more relevance.
Technology and scarcity, working through the ordinary laws of supply and demand, play a role in shaping today's inequality, but something else is at work, and that something else is government. . . . Inequality is the result of political forces as much as of economic ones. In a modern economy government sets and enforces the rules of the game—what is fair competition, and what actions are deemed anticompetitive and illegal, who gets what in the event of bankruptcy, when a debtor can't pay all that he owes, what are fraudulent practices and forbidden. Government also gives away resources (both openly and less transparently) and, through taxes and social expenditures, modifies the distribution of income that emerges from the market, shaped as it is by technology and politics.
Finally, government alters the dynamics of wealth by, for instance, taxing inheritances and providing free public education. Inequality is determined not just by how much the market pays a skilled worker relative to an unskilled worker, but also by the level of skills that an individual has acquired. In the absence of government support, many children of the poor would not be able to afford basic health care and nutrition, let alone the education required to acquire the skills necessary for enhanced productivity and high wages. Government can affect the extent to which an individual's education and inherited wealth depends on that of his parents. More formally, economists say that inequality depends on the distribution of "endowments," of financial and human capital.
The way the American government performs these functions determines the extent of inequality in our society. In each of these arenas there are subtle decisions that benefit some group at the expense of others. The effect of each decision may be small, but the cumulative effect of large numbers of decisions, made to benefit those at the top, can be very significant.