41 pages • 1 hour read
Joseph E. StiglitzThe Price of Inequality
Nonfiction | Book | Adult | Published in 2012A modern alternative to SparkNotes and CliffsNotes, SuperSummary offers high-quality Study Guides with detailed chapter summaries and analysis of major themes, characters, and more.
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BetaChapters 2-3Chapter Summaries & Analyses
Chapter 2 Summary: “Rent Seeking and the Making of an Unequal Society”
Stiglitz explains that since America’s level and type of inequality is unique in the world—a “distinctly American achievement” (28)—the 1 percent must be pulled back, more assistance must be given to the poor, and the middle must be sent reinforcements. The 1 percent engage in rent seeking, defined as “getting income not as a reward to creating wealth but by grabbing a larger share of the wealth that would otherwise have been produced without their effort” (32). During market failures like the Great Recession, the 1 percent get richer because of externalities (defined as when an individual has positive or negative effects on others but neither gets the benefits nor must pay). To pull back the richest 1 percent in a practical sense means putting limits on rent seeking.
Historically, the Greeks were the first to reject the religious idea that the 1 percent ruled and led through divine right; instead, they argued that those with power were made stronger, and those without became the underclass. In the mid-19th century to the current day, this idea became the marginal productivity theory: those who have more in society give more, those with less skills make less, and the market determines worth. Stiglitz interjects that the government has a role to play, too, since it makes the rules, distributes resources, and can “alter the dynamics of wealth” (31) through taxes or granting/denying access to things like public education. As such, the government can “determine the extent of inequality” (31), so it should ensure the markets are competitive, but it does not.
English 19th-century political economist Adam Smith argued that the market works because individuals’ private earnings and their social benefits will be equal to their private rewards and social contributions. He assumed that people with more pay will also be more productive. The government’s role is to equalize social returns and private incentives—in other words, prevent market failure, which Stiglitz defines as when “markets fail to produce efficient [and desirable] outcomes” (33). With large externalities produced during market failure, however, private rewards and social contributions fail to line up. This occurs in part because the financial sector can shape the market with unfair practices, such as preventing transparency in stock market transactions by hiding information, or rent seeking, the worst of which is “taking advantage of the poor and uninformed” (37).
Rent seeking can take many forms, including granting government subsidies like zero interest rates to corporations, enacting laws that make the market less competitive, and failing to enforce regulations. For the 1 percent, rent seeking can take the form of buying public assets like natural resources at a discounted price, or selling services or goods to the government at an inflated price. Another example is creating and sustaining monopoly markets, which lack competition. For example, Microsoft was accused of maintaining a virtual monopoly through unfair trade practices, like spreading unfounded fears that competitors’ software was incompatible with Microsoft, which pushed competitors out of the market.
Rent seeking also occurs in politics and government “munificence” (48). The government engages in rent seeking by giving money, directly and indirectly, to the 1 percent. For example, the government was prevented from negotiating drug prices for Medicaid, and so drug companies received a windfall of $50 billion. And even though politicians and the 1 percent write the regulations and rules, the 1 percent do not win fair; rather, they achieve a “regulatory capture,” meaning the lawmakers and regulators agree with their point of view and do their bidding. Capture also means putting people in positions of power, like making a lobbyist from the banking sector a member of the Federal Reserve Bank, which regulates the banks. As for government, Stiglitz argues that “regressive” taxes that take money from the bottom while cutting taxes for the top are contributing to growing inequality.
Chapter 3 Summary: “Markets and Inequality”
This chapter discusses the key idea that “market forces are real, but shaped by political processes” (52). Against this backdrop, Stiglitz discusses four market forces that help explain inequality in the United States because markets are regulated to the advantage of the 1 percent.
First is supply and demand. In a perfect market, the demand for goods and services is equal to the supply of those same goods and services. Stiglitz’s interest is in how economic analysis explains wages, wage differences, and “supply curves to explain changing patterns of wages and income inequality” (53). When demand rises slowly, but more quickly than supply, wages are expected to drop. But when one looks from the perspective of inequality, two questions emerge: What caused the shift in supply and demand, and how did it contribute to inequality?
The Great Recession highlights two key changes in the economy due to structural change that affected wages (structure here means big changes in how the market or economy usually operate). The first was sectoral shift, meaning the structural change caused a shift in where the jobs were and what kinds of jobs were available. Technological change and competition from emerging markets (like China) decreased US manufacturing, wages, and the number higher-skilled jobs. This sectoral shift explains in part the 1 percent’s wealth and why “ordinary workers are doing so badly” (54). The second was a structural shift, a “skill-based technological change” (55). Historically, the middle class kept up with the supply of skilled workers because they could access education, which kept wages higher and meant fewer unskilled jobs. But when manufacturing jobs left the United States during the Great Recession, workers could not move to another sector and make the same income, and the government did not help.
Globalization, the increasing integration of international markets, also contributes to lower wages and inequality because of two outcomes: financial liberalization and trade globalization. Financial liberalization encourages the free movement of capital around the world, but abuses arise when capital has no controls, such as when corporations move their production while the 1 percent seek to control labor wages rather than allowing them to move. But with integrated markets, recession can quickly spread to other economies, so capital controls are necessary. Trade globalization substitutes the free movement of goods for workers, which has led corporations to move to countries offering the best tax breaks and the lowest wages. While globalization should increase world gross domestic product (GDP), not everyone will be better off; in fact, globalization expects winners and losers. In the United States, the workers who lost their jobs because of sectoral shifts and stayed unemployed were the losers. The expectation is that the 1 percent, the winners, would “compensate the losers” (63), but it rarely happens.
Changes to social norms also contribute to America’s inequality. One example is the growing opposition to unions, even though they “correct an imbalance in economic power” (65) by creating a more skilled and loyal labor force. A second norm is that corporate governance has limited the influence of shareholders, so laws favor management, who get more while asking workers to do with less. With stronger management and weaker worker power, companies no longer seek to keep workers and risk profits during economic slowdowns; instead, they now make profits by getting rid of workers. A third norm is discrimination that is not necessarily overt, like job market discrimination toward people who are ethnic minorities and have criminal records.
Finally, the government plays a significant role in perpetuating inequality before taxes, through transfers in wealth like Social Security benefits, and after taxes, with tax rates that encourage a concentration of wealth at the top. In essence, the 1 percent who can afford to pay more pay a smaller percentage of income tax than the poor. Even though the US economy generates more inequality than other advanced economies, the government “does less to temper this inequality through tax and expenditure programs” (74).
Those at the top seek to justify inequality using theories of how they contribute more, but the Great Recession shows this is not the case. In fact, big bank CEOs do well whether or not their banks do, so the justification that these CEOs deserve more incentive pay because they contribute to growth is false. Stiglitz writes that since inequality is partly the result of policy choices, America “can achieve a more efficient and egalitarian society” (82), although the “political processes” that shape these policies will be difficult to change.
Chapters 2-3 Analysis
Stiglitz lays out two frameworks through which the reader can understand inequality—rent seeking (Chapter 2) and market inequality (Chapter 3). Stiglitz does this in a way that allows readers to see how inequality works, but he also provides a roadmap for readers to do their own investigation, to prove for themselves that rent seeking is real and that the market inequalities that he discusses actually are forces at work in the economy today.
This approach to providing readers with an analytical framework allows Stiglitz to practice what he preaches so loudly in this book: One critical key to ending the 1 percent’s rent seeking and fixing market regulations is transparency. What the 1 percent does, they do in the dark; the 99 percent do not see the hidden transactions, the real workings of the stock market, or the intimate connections between the financial sector and congressional or state policymakers. They only see the results, like lost jobs, lower wages, and a widening income gap. With more transparency, the 1 percent would lose some of their power, which would lessen inequality in America.
