Supplement for Second Class of P

In passing in the first class I noted that we musty distinguish between subjective, intersubjective, and objective facts. It is a subjective fact that I enjoy teaching—if my enjoyment changed, this may cease to be factual. It is an intersubjective fact (for those Zooming in here) that we value Midcoast Senior College—were we, or it, to change, this might cease to be factual (though others might continue to do so, so, for them, it would be continue to be the case). It is an objective fact that water freezes at 32° Fahrenheit at sea level—though this could cease to be the case if there were requisite changes in the natural environment.

Amongst the intersubjective sort of facts there are a whole category of social facts, and the “economic facts” Stiglitz appeals to are in this category. Some social facts are legal in character (the fact that we drive on the right side of the road, that Maine has an income tax, that corporations have property rights, etc.). Some social facts arise because organizations (whether formal or informal) adopt rules: that shots from beyond the arc in basketball earn three points, that chess pieces may only move in determinate manners, that one should keep one’s promises. Note that some of these depend on one’s country (driving rule facts), while others apply across borders (soccer and chess facts). Some are of short duration (legal facts) and some remain unchanged for millennia (chess rules). In the social sciences there is an effort to identify very broad and pervasive facts: psychologists endeavor to uncover broad truths about human (individual and social) motivations, political theorists endeavor to find broad and pervasive facts about political organizations, and economists try to do the same with regard to economic systems.

We will need to discuss, in a future class, how differences amongst rival theorists (and their “schools”) might best be addressed, but at this point we need to first under and Stiglitz’ economic theory. An important beginning point is highlighted in the discussion of his core economic contentions. For the final class I want to encourage you to look at a piece on my website titled “Relativism, Objectivism, and Judging” and two readings I ask those reading the piece to do: Readings: Ambrose Beirce's "A Horseman In The Sky" and Jonathan Bennett's "The Conscience of Huckleberry Finn)".

Stiglitz’ Core Economic Contentions [see First Class Supplement which has been revised]

Stiglitz contends that the divisiveness we now face is evidenced by the fact that [p. xiii, p. 2 of Preface on Course Webpage in the first full paragraph] “not since before the Great Depression have the country’s richest citizens captured such a large proportion of the nation’s income.” He believes that we face this divisiveness in large part because of our

[xiii, p. 2 of Preface on Course Webpage in the second full paragraph] …failure to handle well the transition from a manufacturing economy to a service-sector economy, to tame the financial sector, to properly manage globalization and its consequences, and most importantly, to respond to the growing inequality, as we seemed to be evolving into an economy and democracy of the 1 percent, for the 1 percent and by the 1 percent.”

While I can appreciate his rhetorical flourish here, I don’t believe one can call an economy of the 1 percent, for the 1 percent and by the 1 percent a democracy! Nor do I believe we have such an economy—though, clearly, Stiglitz believes we have headed too far in this direction!

[p. 24, the second paragraph of Chapter 1’s section “Alternative Theories to the Sources of the Wealth of Nations”] for markets to work well on their own, a host of conditions have to be satisfied—there has to be robust competition, information has to be perfect, and actions of one individual or firm can’t impose harm on others (there cannot, for example, be pollution). In practice, these conditions are never satisfied—often by a large measure—which means that in these instances markets fail to deliver. Before environmental regulations, our air was unbreathable and our water undrinkable and unswimmable—and the same is true today in China, India, and other countries where environmental regulations are too weak or too weakly enforced.

[45-46, the second paragraph of Chapter 1’s section “Conclusions”] The slogan “leave it to the market” never made sense: one has to structure markets, and that entails politics. Those on the Right grasped this, and beginning with Reagan, they restructured markets to serve those at the top. But they made four key mistakes: they didn’t understand the eviscerating effects of ever larger inequality; they didn’t understand the importance of long-term thinking; they didn’t understand the necessity of collective action—the important role that government has to play in achieving equitable and sustainable growth; and most importantly, they failed to understand the importance of knowledge—even as we were championing ourselves as an innovation economy—and that of basic research, the foundations on which our technology rests. They thus downplayed key factors that were essential to the success of capitalism over the past two hundred and some years. The result is largely what one should have expected: lower growth and more inequality.’

[9, second paragraph chapter’s “The Wealth of Nations” section] the true wealth of a nation is measured by its capacity to deliver, in a sustainable way, high standards of living for all of its citizens.

[10-11, fourth paragraph of the chapter’s “The Enlightenment and its aftermath” section] the absence of royal or ecclesiastical authority to dictate how society should be organized meant that society itself had to figure it out. One couldn’t rely on authority—either on Earth or above—to ensure that things worked out well, or as well as they could. One had to create systems of governance. Discovering the social institutions that would ensure the well-being of society was a more complicated matter than discovering the truths of nature. In general, one couldn’t do controlled experiments. A close study of past experiences could be informative, however. One had to rely on reasoning and discourse—recognizing that no individual had a monopoly on our understandings of social organization. Out of this reasoning came an appreciation of the importance of the rule of law, due process, and systems of checks and balances, supported by foundational values like justice for all and individual liberty. Our system of government, with its commitment to fair treatment of all, required ascertaining the truth. With systems of good governance in place, it is more likely that good and fair decisions are made. They may not be perfect, but it is more likely that they will be corrected when they are flawed. Over time, a rich set of truth-telling, truth-discovering, and truth-verification institutions evolved, and we owe to them much of the success of our economy and our democracy. Central among them is an active media. Like all institutions, it is fallible; but its investigations are part of our society’s overall system of checks and balances, providing an important public good.

[25, the second to last paragraph of the chapter’s “Alternative Theories to the Sources of the Wealth of Nations” section] deregulation, especially of the financial market, brought us the downturns of 1991, 2001, and most grievously, the Great Recession of 2008. And lower taxes did not have the energizing effect that supply-siders claimed.

[36, third paragraph of chapter’s “International comparisons in standards of living section] using the Human Development Index, a broad-gauge measure of standard of living, the US ranks thirteenth, just above the United Kingdom. Once America’s inequality is taken into account, it slips to twenty-fourth.

Discussion of “Growing Inequality” in race, ethnicity, gender, health, wealth, and opportunity.

We covered pp. 45-46 [Chapter 2, second and final paragraphs of “Conclusions” section] above.

[49, first paragraph of chapter’s “The Big Picture section] market power allows firms to exploit consumers by charging higher prices than they otherwise would and by taking advantage of consumers in a variety of other ways. Higher prices hurt workers just as much as lower wages. In the absence of market power, the forces of competition would drive excess profits to zero, but as we shall see, it is these excess profits that are at the root of America’s growing inequality. Market power also allows firms to exploit workers directly, by paying lower wages than they would otherwise, and by taking advantage of labor in other ways. Market power gets translated into political power. The huge profits generated by market power allow corporations—in our money-driven politics—to buy influence that further enhances their power and profits, for instance by weakening unions and the enforcement of competition policy, giving free rein to banks to exploit ordinary citizens, and structuring globalization in ways that further weakens workers’ bargaining power.

[51, first paragraph of chapter’s “Market power and the division of the national pie” section] the laws of economics are different from those of physics: markets are shaped by public policy, and most markets are far from competitive. Public policy shapes, in particular, who has how much market power.

[70, second to last paragraph of chapter’s “Curbing Market Power…” section] what is needed now is a change in these presumptions, with their associated burdens of proof, based on the hypothesis that markets are fundamentally competitive. Anticompetitive practices—actions that reduce competition in the market—should be presumed to be illegal, unless there is strong evidence that (a) there are significant efficiency gains and that a significant proportion of the benefits of these efficiency gains accrue to others than the firm and (b) these efficiency gains could not be achieved in a less anticompetitive manner. We discuss a number of other changes in presumptions below. Government will also have to be more active in resorting to a broader range of tools, not just limiting mergers and enjoining certain anticompetitive practices….Mergers that lead to major conflicts of interest should be prohibited (as when an internet provider acquires a firm creating entertainment content), and if they’ve already been allowed, there should again be divestiture. Similarly, firms with market power should be proscribed from entering business activities where there is a conflict of interest with their existing customers.

[81, end of sixth paragraph of introductory passages in the chapter] ... we mismanaged the consequences both of globalization and of technological progress. If we had managed these well, both could have generated the blessing that their advocates claimed.

[97 final paragraph in chapter’s “Globalization in a world with multiple value systems” section] we are now confronting the reality that different countries will organize their economies in fundamentally different ways, reflecting their values and beliefs. Not everyone wants American-style capitalism, with its corporate power and inequality. And certainly, not everyone wants China’s level of intrusion in the economy or its lack of concern for privacy. A values-free system of unfettered globalization can’t work; but neither will a system in which the rules of the game are dictated by one country or another. We will have to find a new form of globalization, based on some version of peaceful coexistence, recognizing that even if we have markedly different economic systems, there are still large areas where we can fruitfully engage in commerce. We will need a minimal set of rules—some version of a rule of law, what might be thought of as a basic set of rules of the road. We can’t force others to adopt our regulatory system, nor should we be forced to adopt theirs. And it will be a lot better for all of us if these rules are global, multilateral, and can be agreed upon by all countries.

[113, first paragraph of chapter’s “Conclusions” section] the financial sector exemplifies in so many ways all that is wrong with our economy. The sector has been the example par excellence of rent-seeking—the bankers increased their wealth at the expense of the rest of society, in what clearly turned out to be a negative sum game, where what the rest of society lost was far larger than what the bankers gained. They exploited the financially unsophisticated, but there is no honor among thieves: they also exploited each other. The economy was hurt in so many ways: resources that could have gone into wealth creation were devoted to exploitation, as the financial sector grew and grew in size, attracting some of the country’s most talented individuals. But all the country had to show for it was slower growth, more volatility, and greater inequality. The financial sector illustrates too what’s wrong with unfettered markets: bankers’ unbridled pursuit of their self-interest didn’t lead to the well-being of society, but to the largest financial crisis in 75 years.

Chapter 6 The Challenge of New Technologies: whereas Chapters 2-5 provide Stiglitz’ account of where our economy has gone wrong, this chapter raises the claim that mismanagement of globalization is an additional cause of our malaise. He devotes so much space to what might be done to better regulate new technologies that this chapter could itself take a course to cover. I am going to opt to skip discussion of it as there just isn‘t enough time in this four week course to take it up.

On p. 144, the sixth paragraph of Chapter 7’s “Regulation and Writing the Rules of the Game” section Stiglitz contends

every society has learned the painful way that there are those who seek to get rich not by inventing a better product or making some other contribution to society, but by exploitation—exploitation of market power, exploitation of imperfections of information, exploitation especially of those who are vulnerable, poor, or less educated. To take one classic example: meatpackers tried to take advantage of consumers, selling them rotten meat, until Upton Sinclair exposed this in his 1906 book, The Jungle. The book caused such furor that the industry then asked to be regulated so confidence in meat could be restored.

I have not highlighted portions of Stiglitz’ discussion of the “Gilded Age” and the "Roaring 20s," but the reference to Sinclair’s novel is illustrative. As Wikipedia notes,

The Jungle is a 1906 novel by the American journalist and novelist Upton Sinclair (1878–1968).The novel portrays the harsh conditions and exploited lives of immigrants in the United States in Chicago and similar industrialized cities. Sinclair's primary purpose in describing the meat industry and its working conditions was to advance socialism in the United States. However, most readers were more concerned with several passages exposing health violations and unsanitary practices in the American meat packing industry during the early 20^th century, which greatly contributed to a public outcry which led to reforms including the Meat Inspection Act.

The book depicts working-class poverty, lack of social supports, harsh and unpleasant living and working conditions, and hopelessness among many workers. These elements are contrasted with the deeply rooted corruption of people in power. A review by the writer Jack London called it the “Uncle Tom's Cabin of wage slavery.”

Sinclair was considered a muckraker, a journalist who exposed corruption in government and business. In 1904, Sinclair had spent seven weeks gathering information while working incognito in the meatpacking plants of the Chicago stockyards for the socialist newspaper Appeal to Reason. He first published the novel in serial form in 1905 in the newspaper, and it was published as a book by Doubleday in 1906.[1]

…Sinclair intended to expose “the inferno of exploitation [of the typical American factory worker at the turn of the 20^th Century]’ but the reading public fixed on food safety as the novel’s most pressing issue. Sinclair admitted his celebrity arose “not because the public cared anything about the workers, but simply because the public did not want to eat tubercular beef”

Sinclair's account of workers falling into rendering tanks and being ground along with animal parts into "Durham's Pure Leaf Lard" gripped the public. The poor working conditions, and exploitation of children and women along with men, were taken to expose the corruption in meat packing factories.

Public pressure led to the passage of the Meat Inspection Act and the Pure Food and Drug Act; the latter established the Bureau of Chemistry (in 1930 renamed as the Food and Drug Administration).[2]

In many ways, Stiglitz’ is calling for the sort of change which Sinclair’s work helped bring about, though, I believe, he doesn’t have Sinclair’s socialist motivations. Unlike Sinclair, Stiglitz would be happy with public policies which make capitalism stronger. Ultimately he hopes for public policy and economic transformation akin to those which led to the New Deal and the rise of the American Middle Class.

Next Time: Class III. A Decent Life For All: Reclaiming America, Restoring Democracy, and Restoring Our Economy

Note: (click on the note number below to return to text for the note--emphasis has been added to several of the citations)

[1] Wikipedia, The Jungle - Wikipedia, accessed on 01/19/22.

[2] Ibid.