The Problem of Inequality: Stiglitz > Acemoglu > Piketty
Stiglitz, Acemoglu and Piketty have written prestigious books on inequality. Although Stiglitz’ book is better than the other two, all three authors offer an analysis, which are very flawed. Their policy conclusions come out of the blue – not as implications of their analysis. Not any of their policy instruments are effective according to their own analysis. The author of the tekst – Piet Keizer – shows how we should improve our analysis so as to be able to really improve equality and growth.
- Introduction
Not only Acemoglu and Piketty published a book on inequality in 2012 – so did Stiglitz. The books became widely known and were subject of academic and public debate. In this text I want to make a comparison in terms of theoretical and practical importance. The text will be published on my website – www.pietkeizer.nl – where the reader also find comments on the books by Acemoglu and Piketty already. Here we stick to a short characterization of their approaches. Stiglitz, however, will be discussed more thoroughly. Then we will compare and contrast the three books, especially from a methodological point. We will see that there are differences in the language, which are used by the three authors. Examples of important concepts are structure, institution and system. We first summarize shortly the books by Acemoglu and Piketty. Then we will discuss Stiglitz, also from a methodological point of view. In section 4 we will show that the three books are analytically flawed, with significant consequences for the policies that are advocated. Section 5 shows in which way their analyses can be significantly improved. In section 6 we draw some conclusions.
- Acemoglu and Piketty on Inequality
Acemoglu focusses on the differences between the wealth of nations – why some nations become rich, while others stay poor. His answer to the question: extractive institutions have a negative effect on equality and growth. Institutions are extractive if they make it easy for economically powerful organizations to extract more resources from the economy than is the case in a competitive economy. These powers are able to put so much pressure upon powerful political agencies, that the legal framework becomes very extractive. Politically created monopolistic markets make it impossibe for smaller firms or for newcomers to compete with the vested interests. More generally, if economic and political powers have found each other in lucrative deals and positions, it is almost impossible for the mass of the people to develop countervailing powers, so as to participate more equally in the distribution of resources and positions. Acemoglu’s view might stimulate the formation of combinatons of liberal and socialist powers. They should liberate protected markets, and tax the rich people and use these receipts for the financing of educational and health care services, accessible for all.
Piketty focusses on the intrinsic dynamics of a capitalist system. According to him capitalist structure unavoidably leads to growing inequality of scarce resources. This development is self-reinforcing. Rich people have a higher savings rate, and the profitability of capital is structurally higher than the profitability of labour, which is the wage rate. The growth of inequality can be described by an exponential function; in other words, the inequality explodes. According to Piketty the government should sharply increase the tax tariffs on income and wealth, especially on heritage.
Neither Acemoglu nor Piketty offers an analysis of the phenomenon of power, which is the key concept in both analyses. It makes their work difficult to interpret and apply to practical situations. If everything is the outcome of a power struggle and social and mental variables do not play a role, then our reality is just like a machine, which cannot be controlled by people, who belong to the 99%. In the next section we will see how Stiglitz approaches matters of growth and equality.
- Stiglitz on Inequality
For Stiglitz the main phenomenon, which produces inequality is the rent-seeking behaviour of big business. They have the economic power to prevent smaller businesses from competing them, and they have the resources to change government policies to their advantage. The created markets offer them large rents[1]. Once big, these powerful businesses have the tendency to grow explosively. The last few decades we see especially explosions in the rewards received by the very top. They reap the fruits of their rent seeking, and keep them for themselves. Stiglitz expresses himself in terms of systems, not structures or institutions. For him the economy is influenced by two systems, namely market and government. If market powers have a strong influence on the government system, inequality will rise, which is at the cost of economic growth. Then the economy is threatened by a vicious circle: inequality has a negative effect on growth, which aggravates inequality. Stiglitz formulates a list of regulations and tax tariff increases, which could break through this vicious circle. These proposals are especially about curbing the financial sector, and improving the access to health care and education, also for the lower classes. Many people, who do not participate are ‘high potentials”, and society should invest in them and in their children. Now the free market system is not the realm of opportunity for all anymore, the government must save the USA as the land of hope and glory for all[2]. In the next section we will compare and criticize the three authors.
- Comparison between Stiglitz, Acemoglu and Piketty
When comparing the three authors we face a language problem. The authors use different vocabularies without carefully defining their main concepts. So, only by close reading and knowledge of many different approaches is a valuable comparison possible. We saw already that Stiglitz talks about systems, while Acemoglu centers his analysis around the concept of institutions. Piketty is used to talk in terms of structures, especially the capitalist structure of the economy. The meaning of ‘structure’ is the most narrow one. It refers to legal property rights, and the capitalists are the owners of the productive resources. The meaning of ‘institutions’ is broader. But Acemoglu does not pay attention to its meaning; he just gives a number of examples, among them particularly constructed machines. In the literature on institutional economics, we can find two different meanings. The new institutional economics (NIE) defines institutions as efficiency-enhancing rules of behaviour, while the original institutional economics (OIE) defines the concept of institution as a framework of rules of a social character, which channels human behaviour. It seems that Acemoglu uses the NIE-definition. The concept ‘system’ is the broadest term. It refers to a set of elements, which are highly interconnected to each other. The elements of a system depend in their well-being significantly on the well-being of the system as a whole. Systems analysis is constructed to make interdependencies visible. In his book Stiglitz only uses the distinction between whole system and subsystem. He ignores the phenomenon ‘aspect-system’ completely, which has far-reaching consequences, as we will see later.
The three authors have important characteristics in common. They all like to talk about power, without carefully defining and analysing the concept. They implicitly link the concept to sectors of society: economic power and political power, for instance. They do not link the concept to aspects of behaviour, such as the distinction between economic power, symbolic power, and psychic power (self control). A more scientific approach needs careful distinctions; otherwise texts are meaningless, and nobody knows what to do with it. Now it is all a matter of power, and we must change power relations. Without a scientific analysis, however, we simply don’t know how to change them. Then, suddenly, out of the blue, there are a series of policy proposals by Piketty and Stiglitz, all focussed on what the government should do: increase in the tax rates, for instance. But this sounds not very convincing after a long text explaining that and why the government is a puppet on a string, led by big business.
As we saw Acemoglu makes a difference between extractive and inclusive institutions. He interprets the USA as a country having inclusive institutions. The book by Stiglitz, however, offers arguments of why the American government is so terribly extractive. Acemoglu’s statements about inclusive versus extractive institutions are almost true by definition: we should look at the distributional performance to see whether the institutions of a particular country are extractive or inclusive. The figures about income and wealth over the last decades confirm Stiglitz’ statement In section 5 I will give my own view on the matter.
- Keizer on Inequality Analysis
The analyses are expressed in terms of structures and institutions, which are determined by economic and political power relations. In Keizer (1982, 2015) an analysis of the concept of relative power is given. It makes a distinction between objective and subjective determinants of relative power. Objective elements are the property of scarce resources such as machines, buildings, knowledge and financial resources. Subjective elements are the ideologies and mentalities of the people involved. Different ideologies and mentalities mean different views on what are the costs and what are the benefits of a particular activity. An example will clarify the importance of subjective factors. American unions fight for better labour conditions of workers, who are member of the union. Dutch unions fight also for full employment and social protection on the national level. Some unions are more militant than others. It means that they have a longer horizon and a lower time preference. They show more perseverance than less militant unions.
This power analysis means that sociological and psychological variables do play a role in the determination of relative power. Neither Acemoglu nor Piketty pays any attention to these factors. Stiglitz does not incorporate these kind of factors into his analysis and therapy. Only now and then he talks about values and norms, and about cognitive captures[3].
What really is missing in the approaches discussed so far is the personal system, which is the system of the human mind (Parsons 1937). Economy and society are approached in a modern way: they consists of a whole series of interrelated systems, which are treated as machines. Humans are engineers, who are constantly trying to improve the functioning their systems: economic systems, political systems, and sometimes even social and cultural systems. On organizational level managers try to improve corporate identity and culture. On political level politicians are constantly discussing about a little more or a little less intervention. It seems as if there is a taboo in Western culture to analyse the mind of an individual and his drive to maintain self-respect (Keizer, 2015). It goes without saying that dictatorial regimes can abuse their power to change the mentality of people to the benefit of the regime. But Western civilization is based on the belief that individuals are able to use their freedom in a way that benefits not only the individual, but also society at large. But then individuals must also have the opportunity to work on themselves and society must offer the individuals the tools to improve their personality. It means that Western analyses of economy and society should offer social-cultural and psychic factors a place – thereby considering these factors as variables. A virtuous mentality and a culture of fairness do not drop from the sky – they must be produced by working hard and applying effective social and psychic technologies.
A last point to be made is the problem of subsytem versus aspect-system. Orthodox economics is about the economic aspect of life, while heterodox economics is about the economy as a real life subsystem, part of the whole system of society. The problem with the heterodox analyses is the fact that they miss a foundation. Scientifically this is something to worry about. An analysis needs a foundation (paradigm), which determines the definitions of the elements, that participate in the analysis. All three authors suffer from this lack of definition. Orthodox economics, however, must be integrated with orthodox sociology and orthodox psychology (Keizer, 2015). Then we can develop multidisciplinary economic analyses and formulate theories, which can be tested empirically.
When looking at the current situation with respect to inequality we see the following problems:
- The three authors (implicitly) assume in their analyses that people are economic, non-social and rational actors. Only Stiglitz refers irregularly to non-economic factors, but they do not participate in his analysis and in the formulation of his policy proposals. As a result they assume just two mechanisms of coordinaton and distribution, namely market and government[4]. There is no civil society, no culture and there are no virtuous persons, necessary for reliable relations of cooperation. This makes it impossible to analyse developments in the variables, such as the degree of virtue and solidarity, and the eventual changes in culture or in its strength.
- The lack of social and psychic variables makes it impossible to develop a sophisticated analysis of the phenomenon of power and institution. Piketty analyses structures: capitalist and legal structures; Acemoglu talks about institutions but actually his analysis is strongly focussed on the same variables as Piketty. Stiglitz attaches value to values and norms, and to something like cognitive capture, but these variables do not influence his policy proposals. This makes their analysis of markets and market economies flawed. Moreover, their policy proposals are limited to legal reform; together with their narrow-minded analysis these proposals are ineffective in a way as described by neoclassical analysis.
- By refusing a priori the possibility of different degrees of sociality and mentality, they cannot effectively analyse situations as described extensively in their books. In terms of Keizer (2015): In the course of the last decades a growing number of top managers, also of banks, hedgefunds and private equity, have used the neoclassical theory as an ideological justification for their actions: if every person is just an economic and rational person, the well-being of society at large is served best. So, people close to the cashes of rich firms and government, took incredibly large amounts of money for themselves. Mr. Johnson did it, because Mr. Peterson did it, and vice versa. Powerful people form powerful networks, and meet each other on a regular basis. In this way groups in the sociological sense are formed. Their subcultures make it possible for the members to sleep well, although their behaviour is very anti-social (Rothkopf (2008). Some appear to be crooks, but others are just irresponsible by abusing their discretionary room.
- These powerful people created the crisis by abusing their power to prevent governments from preventing and reducing the crisis. The overrated people, who caused the crisis continues to profit from the crisis through the decline in wage rates. So, inequality and low rates of growth are positively related to each other. There appear no trickle down effects. Neoclassical ideology just advises the 99% to wait: in the long run this development will appear to be good for all[5].
- Conclusion
The academic debate must be about the question whether strong inequalities are natural and good for economic growth or not. Neoliberalism has tried to sell the idea of the positive relationship between growth of the income of the top and growth of the income of the middle and lower class. The three authors discussed in this essay are in one way or the other opponents to this particular statement.
Acemoglu: if inequality results from rent seekers who extract resources at the cost of others, inequality is bad for growth.
Piketty: in a capitalist economy explosively growing inequality cannot be prevented. Only if the government has the power to develop countervailing regulation, inequality can be reduced and growth will be benefical also for the middle and lower class.
Stiglitz: Governments should become more independent from business powers. Only then our economy can return to economic growth and more equality.
My conclusion is that the analytical apparatus of the anti-neoclassical authors is flawed, making government policies as advocated by the opponents less effective than necessary for a major change in terms of equality and growth. Mental and moral variables must show how to break through the private-public power networks, which rule the ‘bad’ world. Strong and virtuous personalities should take the lead in the formation of civil society, also in the work place. It is not necessary to say that every person has the potential to become a virtuous personality.
References:
Acemoglu, D., J. A. Robertson (2013), Why Nations Fail, The Origin of Poer, Prosperity and Poverty, London: Profile Books Ltd.
Keizer, P. K. (2015), Multidisciplinary Economics, A Methodological Account, Oxford University Press.
Rothkopf, D. (2008), Superclass. The Global Power Elite and the World They are Making, Dutch edition edited by Balans.
Piketty, T. (2014), Capital in the Twenty First Century, Kindle version.
Stiglitz, J. E. (2013), The Price of Inequality, London: Penguin Books.
Dr. Piet Keizer
Utrecht University School of Economics
22-01-2015
Word account:2842.
[1] In short rents refer to the superprofits of monopolist.
[2] The terms high potentials and land of hope and glory are mine, not Stiglitz’s. Stiglitz uses the term opportunity all the time.
[3] Cognitive capture refers to the success of powerful groups to let other groups adopt the frame of interpretation of the powerful. So, governments, unions, the general public become neoliberal, although this is not in their interest.
[4] How could economic, non-social and rational actors ever form a government? Nobody disposes of properties necessary to trust this body, and delegate important powers to it.
[5] In the neoclassical analysis this statement is true by definition, but it affects opinions of so many people, rich as well as poor.
Piet Keizer 