Home > ethics, teaching > Teaching inequality: Notes on Piketty, Stiglitz and Harvey

Teaching inequality: Notes on Piketty, Stiglitz and Harvey

from Maria Alejandra Madi and the WEA Pedagogy Blog

The relevance of wealth and income inequality has been acknowledged by unorthodox writers for some time. The recent success of Piketty’s book (2014) shows that the wider public is also interested in this issue.  Piketty’s  15-year program of empirical research conducted in conjunction with other scholars analyzed  the evolution of income and wealth (which he calls capital) over the past three centuries in leading high-income countries. Among the lessons, he highlighted; 

  • There is no general tendency towards greater economic equality.
  • The relatively high degree of equality seen after the second world war was partly a result of deliberate policy, especially progressive taxation, but even more a result of the destruction of inherited wealth, particularly within Europe, between 1914 and 1945.
  • In Europe, a “patrimonial capitalism” – the world dominated by inherited wealth – of the late 19th century is being slowly re-created.
  • Inequality within generations remains vastly greater than among them.
  • In the USA, perhaps the most extraordinary statistic is that “the richest 1 percent appropriated 60 percent of the increase in US national income between 1977 and 2007.” Indeed, one of the most striking conclusions is the rise of the “supermanager” in the USA.

Among other contributions to re-thinking inequality, Nobel laureate Joseph Stiglitz’s recent book, The Price of Inequality, argues that this division is holding the country back where rent-seeking increased.. He pointed out some relevant issues to address in any attempt the rethink the foundations of wealth and income inequality. Indeed, Stiglitz pointed out some relevant issues to address in any attempt the rethink the foundations of wealth and income inequality:

1) Distinction between wealth and capital

In Stiglitz’ opinion, 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.   There is, therefore,  a link between the growth of the economy — the accumulation of capital— on the one hand and inequality and wealth. Stiglitz’s recent paper, “New Theoretical Perspectives on the Distribution of Income and Wealth Among Individuals”, begins with the observation that a closer look at what has gone is necessary to apprehend the current trends.  Stiglitz suggests that a large fraction of the increase in wealth is an increase in the value of existing assets. Indeed, in addition to an increase in the wealth/income ratio, there is a capitalization of the increase in other kinds of rents, like monopoly rents supported by the market power of firms relative to workers and by government guarantees, for example. Therefore, wealth can increase, but it doesn’t increase capital.

2) The role of credit in wealth expansion

All  the recent changes are  very closely linked with the credit system.  The flow of credit didn’t go to more wealth accumulation as we normally use the term in economics, as capital goods. Through deregulation and lax standards, banks increased lending, but not for creating new business, not for capital goods. The effect of it has been actually to increase the value of land and other fixed resources (buildings, real estate, etc.). Therefore, the link is that credit affects land prices and fixed asset prices, and those go disproportionately to the rich.  While that is a major part of the increase in the wealth, the workers, who have no wealth, don’t benefit from that expansion.

3) Increased market power

The ratio of wages to productivity is going way down and  the ratio of CEO pay to worker pay has gone up suggest increased exploitation founded on increased market power.  In the current scenario, weakened worker bargaining power and weaker unions, asymmetric liberalization where  only capital moves, corporate governance laws that do not cope with abuses of corporate power by CEOs, there are certainly a number of factors that suggest an increase in market power with consequences in terms of income inequality.

Beyond inequality, the concept of capital has been a controversial issue at the heart of Economics Education since the conceptualization of capital enhances deep implications on the apprehension of the economic, social and political dimensions of reality.

Thomas Piketty’s book has been worldwide discussed on behalf of his data sets and explanation for increasing disparities in wealth and income in the context of neoliberalism. Among critical readers of Piketty’s analysis to explain growing inequality, David’s Harvey concern pointed out that his argument relies on a mistaken definition of capital. In short, although there is much that is valuable in Piketty’s data sets, his explanation seems to be founded on a neoclassical theoretical background where capital is mainly a factor of production.  Indeed,  Piketty defines capital as the stock of all assets held by private individuals, corporations and governments that can be traded in the market (no matter whether these assets are being used or not).

Under Harvey’s approach, the definition of capital as a stock of assets excludes the idea of capital as a social process where money is used to make more money often, but not exclusively, through the exploitation of labor power.

Following Harvey’s concern, we need to highlight that the nexus between the current global scenario and inequality encloses inner tensions between the hypertrophy of finance and the expectations of society about citizenship, labor and income. In the current historical context, labor markets have become a key variable in macroeconomic and business adjustments.  In truth, capital mobility has favored the regulation of social relations based on growing flexibility. In contemporary capitalism, the global institutional architecture has favored capital mobility and short term investment decisions – increasingly subordinated to the decision of the “supermanagers” and the rules of portfolio risk management. While recent changes in productive organization have been based on competitiveness and corporate governance criteria, job instability and fragile conditions of social protection have forced the reorganization of survival strategies. Thus, workers must redefine their skills or become informal entrepreneurs. Given the decreasing power of workers in recent decades, it is not surprising that both the globalization process and its outcomes have favored  the concentration of wealth and changes in social behavior.

Definitely, the field of economics needs to come to terms with  inequality. Concerns with inequality extend well beyond issues of justice and fairness, since the degree of economic inequality also affects social cohesion and political stability, and can also have negative implications for economic growth and sustainability.

References:

Harvey, D. Afterthoughts on Piketty’s Capital,2014,http://davidharvey.org/2014/05/afterthoughts-pikettys-capital/

Piketty, T. Capital in the 21st century, 2014,http://www.hup.harvard.edu/catalog.php?isbn=9780674430006

Stiglitz, J. The Price of Inequality: How Today’s Divided Society Endangers Our Future, 2013, http://www.amazon.com/The-Price-Inequality-Divided-Endangers-ebook/dp/B007MKCQ30

Wolf, M. ‘Capital in the Twenty-First Century’

  1. July 3, 2015 at 4:55 am

    Reblogged this on My Desiring-Machines.

  2. Rhonda Kovac
    July 3, 2015 at 11:31 am

    I am very grateful for articles such as these. However, it bothers me that the issue is being referred to as ‘wealth inequality’. That term was hand-picked by politicians to defuse the issue in the public mind. ‘Inequality’ is not the problem here. It’s theft. Wealth is being in effect stolen from ordinary people by the rich, resulting in massive poverty and deprivation. Wealth ‘inequality’ is only one indicator/correlate of that theft. This may seem like a small point, but I think it is important. When people hear ‘inequality’, they are not outraged. ‘Inequality’ is expected. But when they hear ‘theft’ – – which is more direct and accurate – – they will be outraged, as they should be, as is necessary to mobilize public action against this evil.

  3. July 3, 2015 at 4:17 pm

    I am very grateful for Rhonda’s comment, which illustrates the empirical emphasis on things (what one can see, if one includes words) to the neglect of process (including the process of using words to refer to things, processes and other words about things and processes).

    Because most of the public (including politicians and economists) have been taught to think in terms of what they can see, they think in terms of how much they are going to get and doing what they see everyone else doing. It rarely occurs to them to ask what money is (i.e. a token or type of word) or whether, when not given, taking more interest than they need (i.e. shares of rents on land and business investments) amounts to thieving.

    IMHO, therefore, we should be directing outrage not destructively at each other but at ourselves – whether as citizens or teachers, politicians or bankers – for still being taken in by the historic architects and developers of our current banking system and the fortune-seeking con man Hume, who so persuasively justified empiricism and rewrote morality as the law of banker’s agents. Adults as parents, and particularly those with wider directing and teaching responsibilities, should be ashamed of themselves for remaining like children, using language transparently: believing “what it says on the tin” and being so ignorant of how untrue that has been in political history. Only when we are ashamed of ourselves will we be moved constructively to learn how to do better

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