Social Europe

politics, economy and employment & labour

  • Themes
    • European digital sphere
    • Recovery and resilience
  • Publications
    • Books
    • Dossiers
    • Occasional Papers
    • Research Essays
    • Brexit Paper Series
  • Podcast
  • Videos
  • Newsletter

Democracy In The Twenty-First Century

Joseph Stiglitz 1st September 2014 7 Comments

Joseph Stiglitz

Joseph Stiglitz (CC Raimond Spekking)

The reception in the United States, and in other advanced economies, of Thomas Piketty’s recent book Capital in the Twenty-First Century attests to growing concern about rising inequality. His book lends further weight to the already overwhelming body of evidence concerning the soaring share of income and wealth at the very top.

Piketty’s book, moreover, provides a different perspective on the 30 or so years that followed the Great Depression and World War II, viewing this period as a historical anomaly, perhaps caused by the unusual social cohesion that cataclysmic events can stimulate. In that era of rapid economic growth, prosperity was widely shared, with all groups advancing, but with those at the bottom seeing larger percentage gains.

Piketty also sheds new light on the “reforms” sold by Ronald Reagan and Margaret Thatcher in the 1980s as growth enhancers from which all would benefit. Their reforms were followed by slower growth and heightened global instability, and what growth did occur benefited mostly those at the top.

But Piketty’s work raises fundamental issues concerning both economic theory and the future of capitalism. He documents large increases in the wealth/output ratio. In standard theory, such increases would be associated with a fall in the return to capital and an increase in wages. But today the return to capital does not seem to have diminished, though wages have. (In the US, for example, average wages are down some 7% over the past four decades.)

The most obvious explanation is that the increase in measured wealth does not correspond to an increase in productive capital – and the data seem consistent with this interpretation. Much of the increase in wealth stemmed from an increase in the value of real estate. Before the 2008 financial crisis, a real-estate bubble was evident in many countries; even now, there may not have been a full “correction.” The rise in value also can represent competition among the rich for “positional” goods – a house on the beach or an apartment on New York City’s Fifth Avenue.

Sometimes an increase in measured financial wealth corresponds to little more than a shift from “unmeasured” wealth to measured wealth – shifts that can actually reflect deterioration in overall economic performance. If monopoly power increases, or firms (like banks) develop better methods of exploiting ordinary consumers, it will show up as higher profits and, when capitalized, as an increase in financial wealth.

Democracy

According to Joseph Stiglitz, the issue is not capitalism but democracy in the 21st century.

But when this happens, of course, societal wellbeing and economic efficiency fall, even as officially measured wealth rises. We simply do not take into account the corresponding diminution of the value of human capital – the wealth of workers.

Moreover, if banks succeed in using their political influence to socialize losses and retain more and more of their ill-gotten gains, the measured wealth in the financial sector increases. We do not measure the corresponding diminution of taxpayers’ wealth. Likewise, if corporations convince the government to overpay for their products (as the major drug companies have succeeded in doing), or are given access to public resources at below-market prices (as mining companies have succeeded in doing), reported financial wealth increases, though the wealth of ordinary citizens does not.

What we have been observing – wage stagnation and rising inequality, even as wealth increases – does not reflect the workings of a normal market economy, but of what I call “ersatz capitalism.” The problem may not be with how markets should or do work, but with our political system, which has failed to ensure that markets are competitive, and has designed rules that sustain distorted markets in which corporations and the rich can (and unfortunately do) exploit everyone else.

Markets, of course, do not exist in a vacuum. There have to be rules of the game, and these are established through political processes. High levels of economic inequality in countries like the US and, increasingly, those that have followed its economic model, lead to political inequality. In such a system, opportunities for economic advancement become unequal as well, reinforcing low levels of social mobility.

Thus, Piketty’s forecast of still higher levels of inequality does not reflect the inexorable laws of economics. Simple changes – including higher capital-gains and inheritance taxes, greater spending to broaden access to education, rigorous enforcement of anti-trust laws, corporate-governance reforms that circumscribe executive pay, and financial regulations that rein in banks’ ability to exploit the rest of society – would reduce inequality and increase equality of opportunity markedly.

If we get the rules of the game right, we might even be able to restore the rapid and shared economic growth that characterized the middle-class societies of the mid-twentieth century. The main question confronting us today is not really about capital in the twenty-first century. It is about democracy in the twenty-first century.

© Project Syndicate

Trump
Joseph Stiglitz

Joseph E Stiglitz, a Nobel laureate in economics and professor at Columbia University, is chief economist at the Roosevelt Institute and a former senior vice-president and chief economist of the World Bank. His most recent book is People, Power, and Profits: Progressive Capitalism for an Age of Discontent.

Home ・ Politics ・ Democracy In The Twenty-First Century

Most Popular Posts

schools,Sweden,Swedish,voucher,choice Sweden’s schools: Milton Friedman’s wet dreamLisa Pelling
world order,Russia,China,Europe,United States,US The coming world orderMarc Saxer
south working,remote work ‘South working’: the future of remote workAntonio Aloisi and Luisa Corazza
Russia,Putin,assets,oligarchs Seizing the assets of Russian oligarchsBranko Milanovic
Russians,support,war,Ukraine Why do Russians support the war against Ukraine?Svetlana Erpyleva

Most Recent Posts

transnational list,European constituency,European elections,European public sphere A European constituency for a European public sphereDomènec Ruiz Devesa
hydrogen,gas,LNG,REPowerEU EU hydrogen targets—a neo-colonial resource grabPascoe Sabido and Chloé Mikolajczak
Big Tech,Big Oil,Big Pharma,agribusiness,wealth,capital,Oxfam,report,inequality,companies Control the vampire companiesJayati Ghosh
Labour,Australia,election,climate,Greens,teal Australian Labor’s climate policyAnna Skarbek and Anna Malos
trade,values,Russia,Ukraine,globalisation Peace and trade—a new perspectiveGustav Horn

Other Social Europe Publications

The transatlantic relationship
Women and the coronavirus crisis
RE No. 12: Why No Economic Democracy in Sweden?
US election 2020
Corporate taxation in a globalised era

Hans Böckler Stiftung Advertisement

Towards a new Minimum Wage Policy in Germany and Europe: WSI minimum wage report 2022

The past year has seen a much higher political profile for the issue of minimum wages, not only in Germany, which has seen fresh initiatives to tackle low pay, but also in those many other countries in Europe that have embarked on substantial and sustained increases in statutory minimum wages. One key benchmark in determining what should count as an adequate minimum wage is the threshold of 60 per cent of the median wage, a ratio that has also played a role in the European Commission's proposals for an EU-level policy on minimum wages. This year's WSI Minimum Wage Report highlights the feasibility of achieving minimum wages that meet this criterion, given the political will. And with an increase to 12 euro per hour planned for autumn 2022, Germany might now find itself promoted from laggard to minimum-wage trailblazer.


FREE DOWNLOAD

ETUI advertisement

Bilan social / Social policy in the EU: state of play 2021 and perspectives

The new edition of the Bilan social 2021, co-produced by the European Social Observatory (OSE) and the European Trade Union Institute (ETUI), reveals that while EU social policy-making took a blow in 2020, 2021 was guided by the re-emerging social aspirations of the European Commission and the launch of several important initiatives. Against the background of Covid-19, climate change and the debate on the future of Europe, the French presidency of the Council of the EU and the von der Leyen commission must now be closely scrutinised by EU citizens and social stakeholders.


AVAILABLE HERE

Eurofound advertisement

Living and working in Europe 2021

The Covid-19 pandemic continued to be a defining force in 2021, and Eurofound continued its work of examining and recording the many and diverse impacts across the EU. Living and working in Europe 2021 provides a snapshot of the changes to employment, work and living conditions in Europe. It also summarises the agency’s findings on issues such as gender equality in employment, wealth inequality and labour shortages. These will have a significant bearing on recovery from the pandemic, resilience in the face of the war in Ukraine and a successful transition to a green and digital future.


AVAILABLE HERE

Foundation for European Progressive Studies Advertisement

EU Care Atlas: a new interactive data map showing how care deficits affect the gender earnings gap in the EU

Browse through the EU Care Atlas, a new interactive data map to help uncover what the statistics are often hiding: how care deficits directly feed into the gender earnings gap.

While attention is often focused on the gender pay gap (13%), the EU Care Atlas brings to light the more worrisome and complex picture of women’s economic inequalities. The pay gap is just one of three main elements that explain the overall earnings gap, which is estimated at 36.7%. The EU Care Atlas illustrates the urgent need to look beyond the pay gap and understand the interplay between the overall earnings gap and care imbalances.


BROWSE THROUGH THE MAP

About Social Europe

Our Mission

Article Submission

Membership

Advertisements

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641

Social Europe Archives

Search Social Europe

Themes Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

Follow us on social media

Follow us on Facebook

Follow us on Twitter

Follow us on LinkedIn

Follow us on YouTube