The Price of Inequality

Price of InequalityJoseph Stiglitz’s new book The Price of Inequality is a great book. Unlike the books of Paul Krugman, which are also very good, Stiglitz goes into much depth. In fact, the book is kind of like taking a short course on what has been going on in our economy. It is as good as Winner-Take-All Politics, but from an economic standpoint.

One of the high points of the book is Chapter 2: Rent Seeking and the Making of an Unequal Society. In it, he goes after one of the most aggravating aspects of the free market religion. Companies may get big by innovating, but they don’t stay big that way. Stiglitz notes that Microsoft, “Did not develop the first widely used word processor, the first spreadsheet, the first browser, the first media player, or the first dominant search engine.” Microsoft has used its lucky original contract with IBM to establish a monopoly, which it then used to stifle competition and steal others’ innovations.

Another example of this is the ethanol industry:

So successful has Brazil’s research on sugar-based ethanol been that in order for America to compete, for years it had to tax Brazilian sugar-based ethanol 54 cents a gallon. Forty years after the introduction of the subsidy, it was still in place to support an infant technology that seemingly would not grow up.

There are so many things to discuss in the book, let me just mention two other things. First, he tackles sociological aspects of market behavior that tend to get ignored in economic models. In particular, he talks about how many economists claimed that racial discrimination couldn’t exist in a free market. Wrong again, Bob! He also shows how people actually do care about each other beyond their simple economic interests. One striking case had to do with an after school program. In order to stop parents from picking their kids up late, the program started charging them extra. It did not work. The parents we’re already doing their best to get their kids on time (these were not rich parents). When the program turned it into a simple economic transaction, many parents just made the calculation that rushing to pick the kids up was not worth the extra money they would have to pay. When it was just caring about others’ time, the parents did better.

Stiglitz’s academic work looks at the effects of imperfect information in a market. Traditionally, economic models assume that everyone knows the value of a product or service. In a sense, this is why people claim that markets are perfect: they assume them to be perfect. Stiglitz showed that the effects of information asymmetries were large. Late in the book, he relates the story of conversations he had with free market fundamentalist Milton Friedman:

I remember long discussions with him on the consequences of imperfect information or incomplete risk markets; my own work and that of numerous colleagues had shown that in these conditions, markets typically didn’t work well. Friedman simply couldn’t or wouldn’t grasp these results. He couldn’t refute them. He simply knew that they had to be wrong.

Stiglitz ends the book with a series of recommendations for what we can do to fix our economy. They are solid and I don’t see how any reasonable person can question them. However, because of our corrupt political system, there is little hope that more than a little around the edges will be done. So I fear we must first fix our politics before moving on to our economic problems.

This entry was posted in Uncategorized by Frank Moraes. Bookmark the permalink.
Avatar

About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

Leave a Reply

Your email address will not be published. Required fields are marked *