Joseph Stiglitz: In Defense of Capitalism

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An Occupy Los Angeles protester holds a sign as he walks down the steps during a rally in Los Angeles, Thursday, Nov. 17, 2011. About 100 protesters, chiefly a coalition of labor unions, gathered Thursday morning outside the Bank of America tower on Hope and 3rd streets and marched in a circle chanting "Banks got bailed out, we got sold out." (AP Photo/Jae C. Hong)
A Los Angeles protester holds a sign as he walks down the steps during a rally, Nov. 17, 2011. (AP Photo/Jae C. Hong)

In the September issue of Harper’s Magazine, Noble Prize-winning economist Joseph E. Stiglitz argues that Thomas Piketty’s much-lauded Capital in the Twenty-First Century lands at an incorrect conclusion. Capital, Stiglitz writes, holds that growing inequality is an inevitable outcome of capitalism. But this, Stiglitz says, is not in fact the case. Our system produces such yawning gaps because it isn’t truly competitive the way a capitalist system should be — it has, in fact, been engineered by the wealthy to prevent competition and to protect their economic and political power.

Photo: Dale Robbins

Joseph Stigltiz on the Moyers & Company set in May. (Photo: Dale Robbins)

But much of the damage done, Stiglitz writes, can be remedied by rethinking the tax code.

A well-designed tax system can do more than just raise money—it can be used to improve economic efficiency and reduce inequality. Our current system does just the opposite. Piketty’s proposal for addressing inequality through taxation—a global wealth tax—is a political nonstarter, whatever one thinks of its merits. But there are steps the United States—home to the worst inequality among the advanced countries—can take on its own. With a sensible reform of our domestic tax code, we can simultaneously raise money, improve the performance of the economy, and address some of our biggest social problems—not just inequality, but joblessness and looming environmental catastrophe.

Stiglitz goes on to outline his plan; you can read the essay in full at Harper’s (you will need a subscription to log in).

This week’s Moyers & Company features an encore broadcast of a conversation Bill Moyers had with Stiglitz soon after his latest research for the Roosevelt Institute — on which the Harper’s essay is based — was released. He told Bill:

We have this vicious cycle where economic inequality gets translated into political inequality. It gets translated into rules of the game that lead to more economic inequality, and which allow that economic inequality to get translated into evermore political inequality.

The only way we’re going to break this viscous cycle is if people come to understand that there is an alternative system out here. That there is an alternative way of raising taxes, that we are not really faced with a budget crisis. It’s a manmade crisis. You know, when we had the government shutdown, we realized that that was a political crisis. That wasn’t an economic crisis. And the same thing about our budget crisis, you know. It’s not that we couldn’t raise the revenues in a way which actually could make our economy stronger. We can.

If we just had a fair tax system, to tax capital at the same rate that we tax ordinary individuals, if we just made those people in that upper one percent pay their fair share of the taxes.

You can watch the full conversation here:

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  • Fresnel

    Capitalism has existed for scarcely 300 years. In all that time there have NOT been free markets, and the system has had to be propped up, guaranteed, and tweaked by the State at all times. The powerful in government, commerce, and status have always controlled these anything-but-free markets. There are many histories of Capitalism out there for anyone who cares to actually see how it came about. Mr. Stiglitz has crept to the edge of his criticisms of this oligarchic system and blinked.

  • daeder

    Yeah… the problem however is the rising model, based on Singapore, where Deng Xiaoping got his ideas from, is Authoritarian Capitalism. The political domination of The Party now imposes ‘market freedom’ which ends up being liberty to buy more junk for some and new forms of penury and slavery for most. Liberal theorists like Stiglitz think eventually the new middle-class in China will assert political will, but there is no necessity to that happening. People for the most part are happy with the social contract where so long as the middle-class is doing well, they won’t meddle in politics. This is why Stiglitz is especially naive in insisting upon this artificial divide between “Economics” and “Politics,” which serves as the lynchpin of his claims against Piketty. They didn’t used to call it Political Economy for nothing, it is because, as Aristotle knew before Marx, it’s the IDEAS of the powerful that trickle down to the masses, and THAT is how they ultimately stay in power. Look at us in the US, where people vote against their own self-interest all the time. Does Stiglitz really think people are going to suddenly wake up if people like himself keep flapping about this stuff? Perfection? Of course not. Why is demanding something ELSE always denounced as demanding perfection? Freedom isn’t perfection, but THAT is what we should be demanding. Real freedom, which demands EQUALITY. Real equality, which ENSURES freedom.

  • Tsyr

    Mr. Stiglitz understands THE political issue facing our generation as well as anyone out there. Has he ever considered directly taking his message to the voters?

  • Anonymous

    “and communism has failed everywhere it has been tried. The rulers live in fabulous wealth and the masses eat, sleep, and work, in the broken sewer of the public infrastructure.”

    You describe the United States very accurately. Just one question: why do you call what we have “communism”?

  • Anonymous

    In that case 75% of the Fortune 100 companies lied. They would not build their manufacturing facilities in the United States because most of that manufacturing is contracted out to companies that would not make it if they had to pay even the minimum wage, meet standards to minimize pollution, and have worker safety rules implemented.

    The cash brought back from overseas would be used for stock buybacks and other financial moves that would boost stock prices and executive income.

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  • Anonymous

    “The only way we’re going to break this viscous cycle is if people come to understand that there is an alternative system out here.”

    So, the cycle is sticky? Or is it a vicious cycle?

  • Derek R

    Noble prizewinners revel in viscous cycles. Not like those deadbeat Nobel prizewinners.

  • Erik Reppen

    The problem of course is Americans not really understanding what it is that gives it value as a system. The profit motive can be excellent at reducing costs and improving quality as long as companies aren’t allowed to engage in anti-competitive practices. That requires regulations which the GOP has convinced Republican voters runs counter to capitalism rather than helping guarantee its effectiveness.

    And of course when the profit motive serves to promote abuse in sectors like insurance where the most duh way to increase your profits is by finding ways to avoid paying the most expensive bills of a minority of customers by burying the details in over-complicated plans or just simply screwing people over and hoping nobody comes to their rescue; you really gotta ask whether it’s even worth trying to make capitalism work in that scenario.

    Our allies in the Western world aren’t idiots. They sprinkled a little socialism on the problem for a reason. I think people need to stop seeing the slightest mixing of economies as putting us on a road to Stalinist russia. Swinging to the other extreme just gets us to the same place via WW2-vintage fascism. When profit inevitably encourages more abuse than competition due to the very nature of the service or product, maybe we need to take that particular one off the market. Sometimes gov bureaucracy/inefficiency is the lesser of two evils.

  • daeder

    “Communism” just means no private ownership of the means of production – industry, land, etc. The root is “common” as in to hold ‘in common.’ So I guess you are saying the 1% hold the reigns of power ‘in common’? Ok… does that make “communism” as such something bad? Sounds to me like the problem you are describing is not nearly enough communism – like 99% more is needed.

  • daeder

    I think you hit the nail on the head with “Defending this trend is insane, unless you look forward to the creation of violent revolutions, instead of creating just social orders that are stable.” Problem is the alternative being peddled is ‘capitalism with a human face.’ No such thing – it’s a sham. Capitalism is inherently violent, unstable, and unjust. Naomi Klein only documents how neoliberalism took up as natural and good the theorization (largely Marx-Schumpeter) of capitalism as tragically feeding off of and ever reinvigorating upheaval. Was it really new, however, for policy-makers to actually consciously provoke such upheaval, rather than just letting it happen according to so-called natural law? I don’t think so, I think the only difference is the propaganda making this kind of capitalism appear commensurate with ideals of ‘freedom’ and therefore somehow ‘democratic.’ Klein does great but come on – it’s not that hard to peel back that onion. So you advocate ‘more democracy’ and so on… well, the way our system works… do you really think that is going to happen before constant economic turmoil and ecological catastrophe become the norm (moreso than already, that is)?

  • daeder

    Harry Shutt isn’t bad in writing about doing away with the profit motive, though he wants to do it entirely…

  • http://axon.tel axon

    Capitalism is the greatest engine of wealth creation ever devised. But it sucks at allocating a sufficient portion of the wealth created to the demand curve for optimum growth and sustainability. It allocates far too much to the investor and managerial classes and far too little to the working classes, and hardly any at all to market support. It is possible to compensate the investor for his risk and reward the executive for his acumen beyond the dreams of avarice and still have enough left over to pay good wages and fair taxes.

    A free market is not one without regulations or tariffs, but one without compulsion. It is right for the state to establish the conditions of commerce, to provide rule of law and resorts to courts, and invest in market making activities. From direct subsidies (particularly to the ag and extraction industries) to favorable trade policy to exclusionary regulations to a whole barrel full of tax tricks, we the people invest in industry and markets, because they are strategic to our continued well-being as a nation. The notion that this results in anything like a level playing field is, charitably, fanciful. We’re rigging the game to our mutual advantage.

    So why don’t we invest in demand? Why don’t we figure out what the optimum portion of new wealth creation diverted to demand is to create sustainable growth? Why don’t we just skim the NN% of GDP that is ideal for economic expansion and distribute it to the demand curve, not just with wages, but with direct transfers?

    Because even though it would benefit them greatly, conservatives are opposed to it because poor people might be relieved and their suffering mitigated in the process. They actually think like this. They think it’s wrong.

  • Anonymous

    He must be referring to “sticky wages”. ;-) It was his specialty (see: Carl Shapiro and Joseph E. Stiglitz (1984) “Equilibrium Unemployment as a Worker Discipline Device.” The American Economic Review, 74:3, pp. 433-444.). “It is widely recognized that the assumption that wages are rigid is central to Keynes’ explanation of the persistence of unemployment.” Joseph E. Stiglitz 1984.

  • Anonymous

    Actually, if you look at the paragraph above the quoted line, he does mean vicious. “We have this vicious cycle where economic inequality gets translated into political inequality.” and then “The only way we’re going to break this viscous cycle is if people come
    to understand that there is an alternative system out here.” I was just pointing out a funny typo :-), though I do know of Stiglitz’s work in market failure, which got him his Nobel Prize.

  • Anonymous

    And Stiglitz knows what really is causing inequality, but the pioneer of the “Henry George Theorem” rarely speaks the remedy out loud. http://pastebin.com/818dWbFa

    “Stiglitz draws decades of leather against inequality,
    but nobody got the issue so high on the agenda as Thomas Piketty.
    Stiglitz appreciates the French economist for his data work, but it is
    thoroughly disagree with his theoretical insights.

    “Piketty confuses capital and wealth,” he says in his
    lecture. “The increase in wealth does not come from capital, but by the
    increase in land prices. The importance of capital relatively even took
    off.”

  • Anonymous

    Yep. I knew you were kidding and was just playing along.

  • rocky fatcat

    So why do millions of illegals try to get here vs. some real communist nation?

  • rocky fatcat

    It’s called freedom. Because they can do whatever the f**k they want to with their own F**king business. And those that think they have the right to tell them what they should or shouldn’t do should be given a copy of OUR CONSTITUTION as we deport their asses to real communist countries.

  • Anonymous

    “So why do millions of illegals try to get here vs. some real communist nation?”

    Mr. Fatcat, I hear this lame argument a lot. And yes, it is lame. It’s offered by people like you who don’t think, don’t reason, and don’t make the slightest effort to find out what is the real reason why people try to escape from the crushing poverty and violence in their home countries.
    Mr. Fatcat, has it occurred to you that these people are trying to escape from countries that have even higher inequality than the United States?