Joseph Stiglitz. The Price of Inequality. Cultural Evolution. The Evolution Institute

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I am about two-thirds of my way through the latest book by Joseph Stiglitz, The Price of Inequality. Stiglitz is a recipient of the Nobel prize in Economics and a former chief economist of the World Bank. But he is not a traditional economist.

First, unlike most academic economists Stiglitz is sympathetic to Leftist ideas. Actually, he is way out on the Left end of the political spectrum. In the beginning of the book Stiglitz talks approvingly of the Occupy movement and Los Indignados. Later there are favorable mentions of such left-wing South American leaders as Inácio Lula and Hugo Chávez, who came to power in some of the most economically unequal countries and managed to reduce the inequality. And Stiglitz inveighs against the ‘Right’ on numerous occasions throughout the book.

This is unusual for an economist, especially such an accomplished one who is (or, at least, has been) part of the ruling elite. Most economists know very well which side of their bread is buttered. It is curious how economic theories that yield answers pleasing to the powerful and wealthy tend to be part of the mainstream, while those yielding uncomfortable answers are relegated to the fringe…

The second way in which Stiglitz differs from traditional economists is related to the first – his willingness to engage with ideas from evolutionary science, which often go against the old-fashioned economic dogma. Today this is not as unusual as it was two or three decades ago. We now have the Santa Fe Institute, the Institute for New Economic Thinking in Oxford headed by Eric Beinhocker (the author of The Origin of Wealth), and our own Evolution Institute (the parent organization for the SEF), whose president David Wilson has led several initiatives in evonomics.

So Joseph Stiglitz is not a pioneer in this field, but his book engages with a number of central themes in it and in socio-cultural evolution (there is no sharp boundary between evonomics and socio-cultural evolution).

While Stiglitz is known as the advocate for government policy theory as the main explanation for the recent growth of economic inequality in America, his book presents a more nuanced message. Government policy remains a central theme, but in addition Stiglitz pays a lot of attention to economic and power issues (he uses the not very helpful economic jargon, ‘rent-seeking’ when referring to power differentials). He also devotes a lot of thought to issues that are of central interest to social evolution: norms and institutions, cooperation and social cohesion.

For example, on p. 65 he says, “Inequality may be at once cause and consequence of a breakdown in social cohesion over the past four decades.” And later: “The more divided a society becomes in terms of wealth, the more reluctant the wealthy are to spend money on common needs” (p. 93) – because they can simply purchase such things as security, clean environment, etc. I would add that the poor are also less likely to cooperate with the wealthy in highly unequal societies. Which is how inequality contributes to the breakdown of the fragile cooperative equilibrium.

It is interesting to note that when the wealthy ‘defect,’ they actually not only make the  overall situation worse, but it is actually a suboptimal outcome for them, too. At least that is the message of The Spirit Level: Why More Equal Societies Almost Always Do Better by Richard Wilkinson and Kate Pickett. Among other things, Wilkinson and Pickett make a striking observation that the expectation of life among the wealthier segment of Americans is less than the median for many European societies that are much more egalitarian – and spend much less per capita on health.

One thing, though, is that Stiglitz tends to treat ‘the wealthy’ as a monolithic class that acts for its own benefit in a Marxian fashion (“class for itself”). Yet the ‘1%’ consists of quite heterogeneous groupings. Most importantly for the issue at hand, economic inequality, there is a small minority among the very rich – to give a recent example, the Patriotic Millionaires – who have been very worried about the present trends towards greater inequality and are advocating increased taxes on top incomes, among other measures.

Since I started talking about shortcomings of this, in most ways excellent, book, let me mention another. Stiglitz is apparently unaware of the great progress that cultural evolution and cultural multilevel selection theory made in the last decade or so. In at least one place he cites Richard Dawkins, but so far I have not seen any mentions of David Wilson, Pete Richerson, Rob Boyd, Sam Bowles and other luminaries of our field. I point this out not to criticize Stiglitz; rather it is we who failed to get our message out as effectively as Dawkins or Steven Pinker do.

I had a similar experience in the conference the Evolution Institute organized last December in Stanford on Nation-Building and Failed States. One of the participants was Francis Fukuyama, who had recently published a book, The Origins of Political Order, in which he was clearly interested in engaging with evolutionary thinking. Yet he had to resort to appeals to the two tired (and badly wrong) models of human sociality – reciprocal altruism and kin selection. I had a long conversation with him at the conference, and so did David – it will be interesting to see whether we were able to make our case effectively.

This brings me to the last issue – so what is to be done? This question can be asked at two different levels: (1) how can the current trend to greater inequality be reversed, and (2) how can the Evolution Institute help in bringing this trend reversal about?

Stiglitz argues for a change in government policy, but clearly it must be preceded by the change in the collective mood and the social attitudes held by Americans, both the elites and the common people. Right now Ayn Randism has a much greater sway than evolutionary thinking. As Stiglitz puts it, “the Right underestimates the need for public (collective) action,” counting on the ‘invisible hand’ of pure, untrammeled markets to bring about the desired outcomes. Such an ideology that celebrates individualism and dismisses cooperation/collective action may serve the American elites in the short term, but it actually hurts everybody, poor and rich alike, in the long term.

I don’t have any ready answers to the questions I raised above. We’ll see if Stiglitz does in the last third of his book. But these are precisely the issues that the Evolution Institute – whose mission is to use evolutionary science to solve such problems as reversing the growth of inequality – should be engaged with.

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Fredr

I think some serious criticisms of the Spirit Level’s methodology have been raised.

@EdGibney

Fredr – The Spirit Level is a massive meta analysis of dozens of studies performed over decades across many, many countries. Unless you plan on taking down all of science, I don’t think your unexplained criticism is likely to hold any weight.

Jack

The Spirit Level is not based on any solid science. Many of the correlations they report depend on outliers, without which there is no relation between inequality and the outcomes they report. Whether or not you get the sorts of results they get is highly contingent on the choice of data and measures (e.g., the 20/20 ratio vs. the Gini coefficient, inclusion and exclusion of certain countries, data from different years, etc.). Their results are very fragile. And even if there’s a correlation between equality and positive outcomes, that of course does not establish that there’s a causal relation. See here for a quick demonstration of how The Spirit Level fails basic reality checks.

@EdGibney

I read that and found it wholly unpersuasive. Some blogger misrepresents the claims of The Spirit Level and posts one graph of his choosing and believes he can undermine the dozens of reports Wilkinson used? C’mon. Read the book. And others like it. Inequality is a harmful thing for a social species with a strong internal sense of justice. It makes sense and more importantly it is backed up by lots of research across many different social ills. Wilkinson is very careful about the causation correlation minefield he is walking in, but it is just not a controversial thing to say we do not want more inequality. Wilkinsons motives would actually seem to be against his own financial well being as a presumably well off epidemiologist. What are your motives exactly?

FredR

Books like the the Spirit Level Delusion (http://spiritleveldelusion.blogspot.com/), and blogposts and articles like the one Jack links have reduced my confidence in the reliability of The Spirit Level’s conclusions. That said, I’m only a student when it comes to econometrics and statistical analysis, so certainly I’m not qualified to even really discuss the issue. My comment was in the hopes of inspiring (as it has) better informed people to debate the book for my own edification.

@EdGibney

I applaud you! I’ve recently launched a website about Evolutionary Philosophy and published my first novel as an anti-Randian fable of a heroine’s journey through the bowels of government (I was an internal change management consultant for 5 years in DC). If there’s anything we can do to make these messages more public, I’m all for it.

As for your pointed two-pronged question: 1) how do we reverse inequality, and 2) what can Evolution Institute do to help this? I’ll offer my own brief replies.

1) It’s pretty clear that capitalism leads to inequality because those at the top of corporations have more bargaining power to obtain initial profits, and as profits accumulate, it becomes harder and harder for anyone but those at the top to invest in more profit-making ventures. It’s a system built to become more unequal – not necessarily on purpose, but it quite obviously is. The way to stop this inequality therefore is to either reduce the bargaining power of those at the top (by way of cooperatively owned businesses, i.e. separation of power in the economic sphere) or reduce the ability to accumulate profits by those that receive them (through more aggressively progressive taxation, which is easily argued for since wealth comes from effort, but extreme wealth comes from the economic structure that society has built).

2) I don’t know the exact capabilities of The Evolution Institute, but I think you are rather like a Think Tank. The strings you pull within the competing forces of government are ones that involve public education (which turn into votes) and the intellectual backing for legislative agendas (which turn into laws). Get your facts and your story and your experts aligned with this important message, and you could be a very powerful force for this. Good luck!

Peter Turchin

Interesting idea, to take the message to the public by means of a novel. It certainly worked for Ayn Rand.

On your point (1), empirically, capitalism does not have to lead to greater economic inequality. In America inequality grew throughout the nineteenth century, but declined, and very substantially, between c. 1910 and 1980. Now it is growing again. It’s a cyclic process (otherwise, inequality would continue growing and all wealth would end up in the hands of a single person). So the question becomes what explains trend reversals, and how one can be brought about. I’ll be returning to these issues in future blogs.

@EdGibney

Thanks for pointing that out Peter. I should have said “free-market, Ayn Randian capitalism” leads to greater inequality. The government can, and absolutely should, intervene to correct this long-term market inefficiency. I believe that time period you mention was predominantly marked by the high tax rates on the top income level that I recommended – evidence that it does work for addressing inequality.

Ayn Rand was wrong on several things, but she is regularly hailed as one of the most influential writers / thinkers – this isn’t by accident. Humans tell themselves stories to make sense of the world so novels can be very powerful pieces of persuasion. I’m just trying to fight fire with fire.

Peter Turchin

That’s right. I am far from dumping on free markets. The best system is the one that judiciously combines free markets with societal regulation (government). It delivers both better and more equitably distributed long-term economic growth.

There was more than just taxes going on during that period of the “Great Compression” when inequality in America shrank (although tax rates were an important part of the story), but that’s a long story and I will need to address it elsewhere.

neuroecology

“so far I have not seen any mentions of David Wilson, Pete Richerson, Rob Boyd, Sam Bowles and other luminaries of our field. I point this out not to criticize Stiglitz; rather it is we who failed to get our message out as effectively as Dawkins or Steven Pinker do.”

Do you think you could point me to their most important papers, or perhaps (I’m being greedy!) give a brief synopsis of their ideas?

Peter Turchin

I am actually working on a popular book on this topics, which I hope will be out next Spring. Meanwhile, look through the articles and commentaries posted on this blog. Good books to read are David Wilson’s “Darwin’s Cathedral”, Sam Bowles and Herb Gintis “A Cooperative Species”, and Richerson and Boyd’s “Not By Genes Alone”.

cardiffkook

I’m a big fan of this blog, but found this piece to be way below the standards of excellence I have come to expect from the level of discussion. Obviously it is easy to criticize right wing, Randian or anarchist caricatures, or to pretend that they mesh together in some cohesive whole.

I will just add that equality in the world has never been better, and living standards have never risen as much as they have in the past decade. Economists seem to agree (per the IGM consensus website) that the cause of inequality in the US is due to the effects of global technology and changes in supply and demand as they relate to skilled as opposed to unskilled labor. Another way to put it is that unskilled labor is now less “privileged” in competition with labor around the world. I’d argue that for humanity we are seeing a great trend, not a problem. Indeed the rate of gain is improving across the globe.

Finally, belief in free markets does not necessarily equate with anarchy or an absence of regulation, as free markets require rules. But they are based not upon individualism, but upon specialization, liberty and integration. In other words, based upon voluntary cooperative problem solving. Free markets are not the enemy of social evolution, but one of the greatest breakthroughs in institutional arrangements of all time — right up there with the scientific method. Indeed, both of them are constructive, competitive-cooperative problem solving systems.

Peter Turchin

Stiglitz’ book mixes science with ideology. I do not share some of his ideological positions (for example, as I pointed out, his characterization of the ‘Rich’ as a monolithic “class for itself” is not correct), but his science is solid.

By all measures economic inequality has been growing in the US since ~1980. Income inequality, wealth inequality, the Gini index, the top 10%, 1%, 0.01% in relation to the median. All indices show a long term trend over the last three decades (although there are yearly fluctuations). The work by economists such as Saez and Picketty on the growth of income inequality in the US has been solid and is now accepted almost universally by the economic profession.

Why this is happenning is not understood. I disagree that it can be explained by trends in technology and demand for skilled labor, but that’s another story (which I will address in a future blog).

However, I would be very interested to see a reference to the IGM consensus on the causes of inequality growth.

Finally, voluntary cooperation is one of the most important ingredients for effective collective action, but it is not enough. There also needs to be means to control free-riders.

cardiffkook

Thanks for the response.

The IGM data base on this question, which includes Saez, is here. This web site is loaded with questions which reveal how economists often do arrive at consensus opinions.

http://www.igmchicago.org/igm-economic-experts-panel/poll-results?SurveyID=SV_0IAlhdDH2FoRDrm

I of course agree that income inequality has risen in the US even as it has improved world wide. The important thing, of course is consumption equality, and what I have read on this is that we are becoming more equal even in the US due to transfers, different rates of inflation and so on. I look forward to your thoughts on inequality, but hope you take a wider perspective than just the US.

Your points on the dangers of free riding are spot on, but I will add that free riding is less of a problem in markets than in political activity and government redistribution. In open markets we can choose who to deal with, and who not to interact with. Furthermore, we can agree to fund (via government or non government agencies) specialists who concentrate on documenting and revealing the reputation of the various participants, and/or enforce punishment of cheaters. Most importantly, because markets are based upon constant consumer choice, they are dynamic systems that constantly evolve and constantly seek to solve more problems better in a dynamic world.

Peter Turchin

Thanks for the link – very interesting.

OneShot

When I first encountered Turchin’s work (in NewScientist)I was thrilled. Finally someone was following up on Mancur Olson’s classic, The Rise and Decline of Nations. Olson left a wonder body of work, complementary if I may say to that of Douglass C. North and the Public Choice School, but it has not yet received, in my opinion, the recognition is deserves. And RIse and Decline of Nations is his masterpiece (The Logic of Collective Action: Public Goods and the Theory of Groups, is also very good). Note: I would say he was a complete free-marketer but he was heading in that direction.

Nevertheless, reading this post I felt unhappy. I have to protest. If people are really interested in government propomoted equality (I presume monetary is what is meant but who knows), they need to know how government actually works. Equality could be considered a public good and so one really needs to familiarize oneself with the work of the Public Choice people, Tulloch and Buchanan (Nobel Prize), but others as well. It is a tremendous intellectual achievement and one we can honor by simply reading some of their books. Think of it: for the first time since Aristotle someone was studying constitutions again. Public Choice started out with The Calculs of Consent but there are many others, e.g. The Limits of Liberty: Between Anarchy and Leviathan, Democracy in Deficit. All of Tulloch’s works are strongly recommended though as an economist his approach is different. He is difficult. And yes he has a lot to say about rent-seeking (the work goes back to Ricardo though it was Tulloch who updated it) and government failure tying in well with Olson’s Rise and Decline of Nations. Can’t stop plugging that book

So if you are interested in how government really works these are good places to start. There is also economist Thomas Sowell’s autobiography A Personal Odyssey, which details his conversion from Marxist to free-market type when he became a government employee. He finally got to see how the government truly worked and did not like it. Sowell has written a lot about income inequality and the problems with various measures of it. I would go to far say that his revised and expended Economics is a must read.

Rand does a good job as well. For those interested in the thought of Ayn Rand labeled here as “AynRandism” (as distinguised, I suppose from GeorgeRandism and PeteRandism) you can start by just reading her novels (which become increasingly didactic) or anything about her life (Goddess of the Market: Ayn Rand and the American Right is the latest and a very good place to start). It’s that simple.

Personally, I would dispute utterly that “Stiglitz’ book mixes science with ideology . . but his science is solid.” Unpersuaded, unconvinced, unyielding I am. And I base that on years of reading bogus statistics and lame arguments about income inequality. Moreover, the whole premise is faulty. Frankly I just don’t care about income inequality. In a free market this is the one of the factors generating wealth (i.e. capital). The state with it’s monopoly on force is anti-free market so it serves as a capital destroyer. I don’t think that is a good thing.

Look, I know there are plenty who think we should all go down together (so much more fair) then survive and prosper unequally, but a lot of this stuff about the rich is just emotionalism. Please, I don’t like rich people either. I never get invited to their parties (at least never get invited back) and many of them, outside of their specific abilities, are fools or worse. But so what? What does that have to do with anything? And why do all social problems, to the extent they are such (a lot of the reasoning behind equality movements is what Sowell terms “Arguments without arguments”) at the end of the road insist as the ultimate remedy we vote for the democrat party? That’s not science.

Is there a role for the State? Yes, but a very limited one. Is there a purpose for regulation? Yes, but wise men know to be very cautious in their application — watch out for those unintended consequences! That is what history tells us, particularly the history of the Soviet Union.

John Lilburne

Carlota perez http://www.carlotaperez.org/ has some interesting comments on the growth of inequality due to financial bubbles. The ethnicity of the financial elite is substantial different to the manufacturing elite which adds to competition.

Simon Jonstone formely of the IMF
http://thebrowser.com/interviews/simon-johnson-on-why-economic-history-matters?page=2
http://seekingalpha.com/article/560981-do-the-banks-have-a-stranglehold-on-policy
comments on the growth of the financial extractive elite that has led to the increase in equaity

Also see http://www.itulip.com

vdinets

Just for the record, the Somalian economy is booming despite all the fighting and chaos. So if growth rate is your only criteria, it really is better in Somalia 🙂

Peter Turchin

If it’s true about the Somalian economy growing very fast, than it’s yet another reason why GDP is such a poor indicator of human well-being.

Fiona Mackenzie

Stiglitz and Krugman are not “traditional economists” in the sense that they are not bought, paid for, and trotted out by corporations seeking to increase inequality. Is there anyone here who has not yet heard of the recent discredit and shame of Rogoff and Reinhart, two Harvard professors who sold their integrity to big money, and published the lies that caused us to allow “austerity” to take away our future? Busting them was as simple as reviewing and replicating their figures, to find out that they were completely wrong and austerity would (as, in fact, it has) bring down the United States economy and end the Middle Class.

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