Supplement for First Class of Progressive Capitalism

    Copyright © 2022 Bruce W. Hauptli

Overview:

Joseph Stiglitz (Nobel Prize in Economics, 2001) is concerned our divided society endangers our future.  His People, Power, and Profits: Progressive Capitalism For An Age of Discontent provides a possible model for reuniting us and restoring a broad commitment to our common good while rescuing capitalism from its current excesses.  He maintains markets are shaped by public policy, and that our markets are not truly competitive because of our current public policies.  We will read and discuss his recipe for restoring our society considering how his recommendations for new public policies might foster recommitment to our common good while limiting both exploitation and market power and thus restoring competition.  One reason I find his views interesting is his emphasis upon restoring our democracy. 

Text: Joseph Stiglitz, People, Power, and Profits: Progressive Capitalism For An Age of Discontent (NY: W.W. Norton, 2019).  Kindle, $9.17 Paperback: 978-0393358339 $9.65

A. His Core Policy Contentions:

On p. 242 of the Kindle version [in the print edition: 1^st paragraph of Chapter 11's section "Promoting the General Welfare”] Stiglitz says his book presents

…a vision of where we [the United States] are, where we can go, what we can be, and how to get there; and a new twenty-first-century social contract to bring it about and sustain it.  It is a vision based on a sense of history and a deep understanding of economics and the social forces that shape the economy and are shaped by it.  This vision speaks the language of technocrats but reflects our highest moral aspirations and is willing to use the language of morals and values.[1] 

Continuing on the next page he maintains that in his

[243-244, the 4^th-6^th paragraphs of Ch 11's section “Promoting the General Welfare”]… progressive agenda, government plays a central role, both in ensuring that markets work as they are supposed to[2], and in promoting the general welfare in ways that individuals on their own, or markets on their own, can’t.  If this program is to be accepted, though, we must disabuse ourselves of the idea that government is always and everywhere inefficient and obtrusive, and replace it with the notion that, like all human institutions, including markets, government is fallible and can be improved.  The view that government is the problem, not the solution, is simply wrong.  To the contrary, many if not most of our society’s problems, from excesses of pollution to financial instability and economic inequality, have been created by markets and the private sector.  In short, markets alone won’t solve our problems.  Only government can protect the environment, ensure social and economic justice, and promote a dynamic learning society through investments in basic research and technology that are the foundation of continued progress.  

  Libertarians on the Right see government as interfering with their freedom.  Corporations on the Right see government as imposing regulations and taxes that decrease their profits.  The 1 percent worry about the potential of a strong government using its powers to take money away from them and redistribute it to the needy.  All of these actors have an incentive to portray government as inefficient and contributing to the country’s ills.  But the underlying hypotheses of each are badly flawed….  

  The book has described how, moreover, they’ve succeeded at shaping the rules of the game to favor themselves at the expense of the vast majority.  It is not “natural” economic forces that have resulted in near stagnation in incomes of the majority while those of the 1 percent have soared.  It is not the laws of nature but the laws of man that have resulted in these unnatural outcomes. 

  The reality is that markets have to be structured, and over the last four decades we’ve restructured them in ways that have led to slower growth and more inequality.  There are many forms of market economies, but we have “chosen” one that ill-serves large portions of our population.  We now have to once again rewrite the rules, so that our economy serves our society better.  We must, for instance, make markets act, once again, like markets are supposed to, by ensuring that there is competition, and taming outsize market power. 

  In the Preface he says

[xiv, p. 2 of Preface on Course Webpage in the final full paragraph] the central argument is that following these reforms will lead to a faster-growing economy, with shared prosperity, in which the kind of life to which most Americans aspire is not a pipe dream but an attainable reality.  In short, if we truly understand the sources of the wealth of the nation, we can achieve a more dynamic economy with greater shared prosperity.  This will require government to take a different, probably larger, role than it does today: we cannot shy away from the need for collective action in our complex twenty-first-century world.  I show too that there is a set of eminently affordable policies that can make a middle-class life—the life which seemed within our grasp in the middle of the last century but now seems increasingly to be out of reach—once again the norm rather than the exception. 

In other words, the book aims to show that the “public policy guardrails” that have been placed on our economy over the past half century have not served to promote “the common good” but have instead served to enrich the lives of those at the highest income and wealth levels.  He proposes altering the public policy guardrails to promote the common good, strengthen the economy, and ensure prosperity is more equitably shared. 

  In this course we will study his book and consider whether his proposal; is desirable, whether it is “affordable,” and whether is it practicable or attainable. 

B. His Core Economic Contentions:

His underlying economic theory rejects the view that self-interest is our primary motivation:

[223-224, 2^nd paragraph of Ch 11’s section “The Disparity between Our Values and Social Reality”] we are, in short, far more complicated than, and far different from, the homo economicus so well studied by economists, those selfish individuals constantly striving for their own gratification.  Yet if we make no effort to acknowledge our more admirable impulses, and to incorporate them into our models and policies, the less noble motives—avarice and indifference to the well-being of others—will fill the vacuum.  The vessel of the country will veer into dark seas, where the most vulnerable are left to fend for themselves, rule-breakers are rewarded, regulators are effectively “captured” by those they are supposed to regulate, watchdogs are cowed, economic gains accrue mainly to those who are already rich, the result of exploitation rather than wealth creation, and ideas like truth, facts, liberty, empathy, and rights are mere rhetorical devices, employed when politically convenient. 

Here we see him appealing to “our” values and social reality!  Clearly if he identifies truly shared values and conceptions, he will be on somewhat solid ground, but if the social reality differs from is analysis, or the values are not shared, then his conception of the problem to be addressed (as well as his proposed solution) will be subject to valid critique.  We will that this up in the final class, and I ask that at this point you simply recognize that he takes it that our society is committed to achieving the common good, extending equality, and to the core political belief that we are (and should remain) a democracy.  Of course should he be correct on the question of “our” values and social reality, his analysis might not be acceptable in countries or societies which do not hare these with us (e.g., in an Afghani Caliphate, or in Communist Cuba or China). 

  As Stiglitz tells the story, the homo economicus view (broadly influential in Western economics and psychology for 400 years) encourages the theory that unfettered markets encourage the greatest growth of both the wealth of individuals and of nations.  In the Preface and in the First Part of the book [Losing the Way, Chapters 1-6] he argues that the historical evidence shows that this view has led to our current economic mess:

[xxii, p. 6 of Preface on Course Webpage in the final full paragraph] first, markets on their own will fail to achieve shared and sustainable prosperity.  Markets play an invaluable role in any well-functioning economy and yet they often fail to produce fair and efficient outcomes, producing too much of some things (pollution) and too little of others (basic research).  And as the 2008 financial crisis showed, markets on their own are not stable.  More than 80 years ago, John Maynard Keynes explained why market economies often have persistent unemployment and taught us how government could maintain the economy at or near full employment. 

Climate change presents a clear example of where unregulated markets can lead individuals and corporations to place profits without taking into account the social costs of their activities.  Here [xxiii] “…excessive emissions of greenhouse gases present an existential threat to the planet—and far exceed the costs borne by any firm, or even any country.” 

  According to Stiglitz, [xxiii, p. 7 of Preface on Course Webpage in the second full paragraph] “…the question is not markets or government, but how to combine the two to best advantage.”  Of course one has to ask “whose advantage!”  Stiglitz spends a good deal of time distinguishing the wealth of nations from the wealth of individuals.  The latter can rest on exploitation, and the use of “market power” to benefit wealthy individuals:

[xxiv-xxv, p. 7 of Preface on Course Webpage in the third full paragraph] [some people and companies] succeed by using their market power to exploit consumers or their workers.  This is nothing more than a redistribution of income; it does not increase the nation’s overall wealth.  The technical term in economics is “rent”—rent-seeking is associated with attempting to get a large share of the nation’s economic pie, in contrast with wealth creation, which strives to increase the size of the pie.” 

[xxiv, p. 7 of Preface on Course Webpage in the second full paragraph] “…the wealth of a nation rests on two pillars.  Nations grow wealthier—achieving higher standards of living—by becoming more productive, and the most important source of increases in productivity is the result of increases in knowledge.  Advances in technology rest on scientific foundations provided by government-funded basic research.  And nations grow wealthier as a result of good overall organization of society, which allows people to interact, to trade and to invest with security.”  According to Stiglitz, the wealth of nations involves efficient and stable economic growth which shares the fruits of this growth equably. 

[xxiv-xxv, p. 7 of Preface on Course Webpage in the second full paragraph] ‘…a less divided society, an economy with more equality, performs better.  Particularly invidious are inequalities based on race, gender, and ethnicity.  This is a marked shift from the view that was previously dominant in economics, which held that there was a trade-off, that one could only have more equality by sacrificing growth and efficiency. 

At this point I must pause and make it clear that while Stiglitz is clearly politically progressive, he is also a capitalist.  Thus the book’s title.  Unlike many of my progressive friends and colleagues, Stiglitz believes that capitalism provides for prosperity, true wealth for nations, and comports with human motivation.  The decided emphasis throughout the work on the “progressive” side is a result of our decided slide for an extended period away from concern with the common good, and the need to promote shared prosperity and equality.  More on this as we develop our understanding of, and critical discussion of his proposals. 

C. Why Government?

Stiglitz devotes Chapter 7 [140, final paragraph of initial section—right before the Section “The Need for Collective Action”] to “…articulating a set of principles that should guide us in thinking about the role of collective action.  After setting out the general principles, we’ll see that in our evolving economy, there is an increasing need for government—rather than the retrenchment that so many on the Right seek.”  It is important to note that he is focusing on one form of collective action in this chapter: government action:  There are, of course other forms of collective action:

informal associations” social groups, PTAs, book clubs, social clubs, etc. 

formal associations: business corporations, professional associations, Senior Colleges, religious groups, etc.  

These play an important part in our collective lives, and we need to recognize and discuss them, but Stiglitz focuses on the role of government because of the role he believes it must play in regulating our economic interactions.  He contends that for there to be the sort of interdependent and complex society we enjoy

[143, 2^nd paragraph of Ch 7’s section “Regulation and Writing the Rules of the Games”] “…there has to be regulation.”[3]  The reason is simple: what one person does affects others, and without regulations those effects won’t be taken into account.  A firm that pollutes is shortening the lifespan and increasing the risk of lung disease of everyone who breathes the air—admittedly often by a small amount, but when multiplied by millions of firms, the pollution adds up.  Obviously, a firm with no moral conscience that just focuses on making profits would rather not spend the money required to curb its pollution. 

Stiglitz recognizes, however, that many of us too easily believe the necessity of governmental regulation and action conflicts

[139, 3^rd and 4^th paragraphs of Chapter 7] …with American individualism, the notion that we (or at least the most successful among us) are self-made and we would be even more successful if only we weren’t restrained by government.  This notion is largely a myth.  In a literal sense, no one is self-made; the biological process just doesn’t allow it.  But even our greatest geniuses realize that what they do is built on the works of others.  A simple thought experiment should induce a note of humility: What would I have achieved if I had been born to parents in a remote village in Papua New Guinea or in the Congo?  Every American business benefits from the rule of law, the infrastructure, and the technology that has been created over centuries…. 

  A well-functioning society thus requires a balance between individual and collective action.  In the first decades after their revolutions, the Soviet Union and Communist China lost that balance.  The worry today is that we are losing that balance on the other side.”[4] 

As he sees it,

[142, the 9^th paragraph of Chapter 7’s “The Need For Collective Action”] a fundamental role of government is ensuring opportunity and social justice for all.  Deficiencies in capital markets mean that those unfortunate enough to be born in poor families won’t, on the basis of their own or their parents’ resources, ever be able to live up to their potential.  It’s unfair, and it’s inefficient.  Government involvement in all these activities is essential.  That should not be controversial.  How government organizes these activities is, however, more complicated.  In some areas, government has proven to be a far more efficient producer than the private sector—such as the provision of annuities through Social Security or the provision of health insurance through Medicare. 

Of course there are significant governmental failures to regulate so as to ensure opportunity and social justice.  Indeed, as he says

[151, the 2^nd paragraph of Chapter 7’s section “The Ongoing Debate Over The Role of Government”] …a major impediment to acceptance of the ideas I’ve put forward is the lack of trust in government.  Even if collective action were desirable, those on the Right have encouraged a widespread distrust in government.  There can only be trust if there is a belief that the political system is fair, and that our leaders are not just working for themselves. 

Of course, we need to address what made it possible to instill this lack of trust—why do we laugh at the line "Hi, I'm from the government and I'm here to help?"  And why don't people say this when federal firefighters FBI agents or Public Health doctors and nurses arrives in response to natural disasters? 

One reason is that the government has not done a good job of regulating to foster equality, justice, and the common good.  While Stiglitz isn't as direct as he should be here, this is clearly the case.  Indeed the case he makes for the need for change because of the policies of the past 50 years directly proves this is the case.  It is the deregulation approved by the government that leads to the many of the problems he points to.  Stiglitz seemingly lays the blame on the corporations and "one-percenters, and contends we need a new set of policies.  But he needs to clarify that the "self-interested" individuals who he says lack the "moral concerns" he believes are so important have been tremendously effective in gaining control of the levers of governmental power.  To effectuate the sort of change he recommends, a new group would need to gain this control.  The belief that "government bureaucrats" don't have the requisite skills, power, or ability to plan and implement the necessary policies may largely, I believe, be the result of the policies put in place which dis-empower these individuals from working to achieve equality, justice, and the common good.  

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File revised on 01/18/22