Review of the Book:

The Price of Inequality: How Today
Divided Society Endangers our Future

by Joseph E. Stiglitz

H. William Batt

[Review dated 9 July, 2012]

The Price of Inequality is another tour de force by Joe Stiglitz, the latest in what is coming to be a book about every two years—with at least another coauthored with others. This one takes up a theme that has often been argued, once famously by S.M. Lipset,[1] that the health of a democracy depends very much upon the strength of a middle class. American society’s middle class has now been in jeopardy for more than three decades. To this extent the book is about politics as much as it is economics. Professor Stiglitz argues (p 76) that “we have created an economic and social system, and a politics, in which, going forward, current inequalities are not only likely to be perpetuated but to be exacerbated; we can anticipate in the future more inequality both in human capital and in financial capital."

He says this is due in part to changes in our economy: a decline in manufacturing together with the rise in the information and financial services industry. But it is explained equally by government policies that have been captured by the machinations of powerful and opportunistically situated special interests, able to suck from society what economists call rents. With the connivance of political conspirators who have facilitated changes in our laws, these interests have been able to reorient our economy in ways that extract wealth from others yet do nothing themselves to earn it. Rent seeking has reached proportions in American society that make it a high art. “We have a political system,” he says (pp. 31-32), “that gives inordinate power to those at the top, and they have used that power not only to limit the extent of redistribution but also to shape the rules of the game in their favor, and to extract from the public what can only be called large 'gifts.'”

Of course lawmakers and economists are not alone in having accomplished this; it is due as much to what students of cognitive psychology call framing, “the manipulation of frames, and thus perceptions and behavior” by which the public makes judgments and decisions. In explaining how the economics profession has been captured by a particular faction, and how it in turn has influenced the economics of the entire public arena, Dr. Stiglitz points to the insidious influence of the thought today best identified with the “Chicago school,” and referred to as “market fundamentalism.” This is the idea that markets left to their own devices are optimally efficient, and therefore productive, and that government therefore has a minimal role in directing economic affairs. Yet he points out that these ideas fly in the face of empirical evidence in almost every instance. But he is hardly the first to have identified this history. He cites (p 44) one study done in 1993 by the Alliance for Justice,[2] tracing this influence, but he could as well have cited Mason Gaffney’s The Corruption of Economics,[3] which follows in even greater detail how it was that economic thought was torn from its traditional three-century-old moorings. As Gaffney shows, the concept of rent was a pivotal element of classical “political economy,” but is now trivialized in the teaching of neo-classical economics.

Professor Stiglitz recognizes (p 39), “as rent seeking many of the ways by which our current political process helps the rich at the expense of the rest of us. Rent seeking takes many forms: hidden and open transfers and subsidies from the government, laws that make the marketplace less competitive, lax enforcement of existing competition laws, and statutes that allow corporations to take advantage of others or to pass costs on to the rest of society. The term 'rent' was originally used to describe the returns to land, since the owner of the land receives these payments by virtue of his ownership and not because of anything he does. This stands in contrast to the situation of workers, for example, whose wages are compensation for the effort they provide. The term 'rent' then was extended to include monopoly profits, or monopoly rents, the income that one receives simply from the control of a monopoly. Eventually the term was expanded still further to include the returns on similar ownership claims.”

One sees him employing the concept and the word rent in his writing more and more. Of course he presented one of the original papers in 1977 to introduce what is now known as the “Henry George Theorem,”[4] but his public finance text,[5] even in the most recent edition, makes no mention of George or the word rent. So it is particularly heartening to see, for example, his 2010 monograph, written for The Roosevelt Institute[6] recognize that

"One of the general principles of taxation is that one should tax factors that are inelastic in supply, since there are no adverse supply side effects. Land does not disappear when it is taxed. Henry George, a great progressive of the late nineteenth century, argued, partly on this basis, for a land tax. It is ironic that rather than following this dictum, the United States has been doing just the opposite through its preferential treatment of capital gains."

"But it is not just land that faces a low elasticity of supply. It is the case for other depletable natural resources. Subsidies might encourage the early discovery of some resource, but it does not increase the supply of the resource; that is largely a matter of nature. That is why it also makes sense, from an efficiency point of view, to tax natural resource rents at as close to 100% as possible. The well-designed auctions described earlier enable government to capture most of the rents derived from government owned assets."

More recently still, in an interview with a European reporter,[7] he referred to certain elements of our modern economies as “parasites:”

A lot of American inequality is caused by rent-seeking: monopolies, military spending, procurement, extractive industries, drugs. We have some economic sectors that are very good, but we also have a lot of parasites. The hopeful view is that the economy can grow if we rid ourselves of the parasites and focus on the productive sectors. But in any disease there is always the risk that the parasites will devour the healthy body parts. The jury is still out on that.

Going even further in a just published interview,[8] Professor Stiglitz urged that some of the bankers most responsible for creating the current financial crisis should be jailed. His book is a bit more circumspect; he refers, politely always, to “bankers and banks,” never to banksters as many now do. But it is clear that he holds the financial industry primarily accountable for the problems we face. Our problem is that people see little moral difference today in how one makes one’s money, as long as it is not illegal. There are those who regard earning an income as more virtuous than speculation, but the latter is by no means shameful. The investment firm Smith Barney years ago ran a television ad featuring John Houseman, an actor perhaps most widely known as Professor Kingsfield in the long-running TV series, The Paper Chase. In that advertisement, the tag line was "We make money the old-fashioned way—we earn it." It appealed to a sentiment that is becoming rare. It is not clear that Stiglitz goes so far as to call earned income virtuous and rent-seeking theft, but he’s getting close.

The problem arises because rent-seeking, or rather capturing rent that is socially created wealth is, from an economical standpoint, essentially stealing. Henry George believed that private capture of that which was God-given was theft, pure and simple: “Thou Shalt Not Steal!” he told the Anti-Poverty Society of New York in 1887. It was as immoral to capture freehold ownership of nature as it was to own other human beings—slaves—as property.[9] There are contemporary economists that also seem to view rent-seeking in such a light. Arye Hillman, the author of one current public finance textbook, says, “Rent seeking is the “competition for privilege. The form of government affects the extent of rent seeking that takes place…. In general, whenever personal benefits depend on decisions made by other people, life can become a quest for personal favors, and people spend time and effort in rent-seeking activity.”[10] A contemporary economic historian has a still more pointed definition: “the use of resources to get a rent by reducing the welfare of others.”[11]

So if it isn’t theft, it is at best inefficient and anti-social. Legitimized rent- seeking, or capturing resource rents as capital gains (that are arguably most if not all rent) explains much economic inequality and injustice. "The bottom 90 percent of the population gets less than 10 percent of all capital gains. Under 7 percent of households earning less than $100,000 receive any capital gains income, and for these households capital gains and dividend income combined make up an average of 1.4 percent of their total income. Salaries and wages accounted for only 8.8 percent of the income of the top 400, capital gains for 57 percent, and interest and dividends for 16 percent—so 73 percent of their income was subject to low rates. Indeed, the top 400 taxpayers garner close to 5 percent of the country's entire dividends." (p 72) He concluded (p 266) that "We have created an economy and a society in which great wealth is amassed through rent seeking, sometimes through direct transfers from the public to the wealthy, more often through rules that allow the wealthy to collect 'rents' from the rest of society through monopoly power and other forms of exploitation."

There are places where a true Georgist might quibble. For example, he writes repeatedly of a “housing bubble” and a “real estate bubble,” when surely he knows that it is land values that are the cause of the rise. And his book gives essentially no attention to land rent itself, arguably the greatest single source of rent-seeking. It was Winston Churchill, after all, that reminded people,[12]

"It is quite true that land monopoly is not the only monopoly which exists, but it is by far the greatest of monopolies -it is a perpetual monopoly, and it is the mother of all other forms of monopoly. It is quite true that unearned increments in land are not the only form of unearned or undeserved profit which individuals are able to secure; but it is the principal form of unearned increment which is derived from processes which are not merely not beneficial, but which are positively detrimental to the general public."

Why then so little attention to land itself and all the rent it holds? Is it because this is where the middle class gets its dribble of rent when their homes are sold for a small gain? One might also ask whether some of what Professor Stiglitz calls rent-seeking arising from inordinate compensation of corporate CEOs is really rent or captured interest and dividends. There is more discussion of the high compensation for corporate executives than there is the palpable rent from natural resources. That’s not something that I can sort out. But he does identify in passing the numerous widely recognized instances of rent-seeking—in mineral and fossil fuel resources, in the electromagnetic spectrum, in the pharmaceutical industry, and in the insurance and finance industries among others. He is willing at least to regard the field of economics as a moral discourse, unlike so many of his colleagues who regard it as value free. But that judgment extends for the most part to his view of it as inefficient, and distributively unfair. It is not clear that he would go so far as to call others of its practices and judgments immoral. That is what separates him from those of us who are Georgists: most of us would prefer to think of economics as a continuation of moral philosophy.


  1. SeymourMartinLipset,PoliticalMan:TheSocialBasesofPoliticsNewYork:Doubleday, 1960.
  2. Justice for Sale: Shortchanging the Public Interest for Private Gain, a monograph published by the Alliance for Justice, 1993; accessible (July 10, 2012) at http://www.afj.org/assets/resources/resources2/Justice-for-Sale.pdf
  3. Mason Gaffney and Fred Harrison, The Corruption of Economics. London: Shepheard-Walwyn Publishers, 1994, accessible online at http://homepage.ntlworld.com/janusg/coe/!index.htm
  4. “Theory of Local Public Goods,” in The Economics of Public Services, M.S. Feldstein and R.P. Inman (eds.), MacMillan Publishing Company, 1977, pp. 274-333. (Paper presented to IEA Conference, Turin, 1974.)
  5. Economics of the Public Sector, Third Edition. New York: Norton. 2000
  6. “Principles and Guidelines for Deficit Reduction,” The Roosevelt Institute, December 2, 2010, Working Paper No. 6.
  7. Austerity and a New Recession, an interview with Martin Eiermann, “Politics Is at the Root of the Problem.” April 23, 2012.
  8. The Independent, the newest of British national morning papers, interview with Ben Chu, July 7, 2012; online at http://blogs.independent.co.uk/2012/07/02/stiglitz-the-full-transcript/
  9. Henry George, “Thou Shalt Not Steal,” an Address delivered on 8 May 1887 to the Anti-Poverty Society, New York City. Henry George argued that seizing private titles to land, and by extension any elements of nature, was essentially theft, and was the moral equivalent to owning slaves. See http://www.wealthandwant.com/HG/George_TSNS.html
  10. Arye Hillman, Public Finance and Public Policies. (New York: Cambridge University Press, 2003 p. 448.
  11. Karl Gunnar Persson, An Economic History of Europe: Knowledge, Institutions and Growth, 600 to the Present (Cambridge: Cambridge University Press, 2010): 248.
  12. Winston Churchill, “The People’s Land.” One of nine speeches given in 1909 and then published in a booklet titled The People’s Rights. See http://www.wealthandwant.com/docs/Churchill_TPL.html