About a decade ago, Joseph Stiglitz’s book The Price of Inequality laid bare the actual and potential consequences of a dramatically imbalanced distribution of wealth across America.
A mere 1 percent of Americans, he wrote, control about 40 percent of all wealth in this country, and his central argument at the time was that it doesn’t necessarily have to be this way. A relatively tiny minority of super-rich individuals had distorted policy to their own advantage, he explained, rendering the United States the most unequal advanced industrial country in the world and imperiling not only the economy, but also democracy and the entire system of justice.
Whatever way you look at it, much has changed in the years since then. The Donald Trump presidency redefined the United States’ role on the world stage; an opioid epidemic ravaged America; the effects of climate change became more evident; and over the past three years, a global pandemic forced almost everyone into a period of great experimentation. Indeed, as COVID-19 claimed millions upon millions of lives and livelihoods, many of the great divides that Stiglitz wrote about back in 2013 became even harder to ignore.
In a recent conversation with Glenn Hubbard, dean emeritus and the Russell L. Carson Professor of Finance and Economics at Columbia Business School, Stiglitz reflected on all of this and, more broadly, where we might be heading next.
Hosted in Columbia Business School’s Geffen Hall, the discussion was the first in a speaker series on the future of capitalism. It tackled capitalism’s role as a mechanism for prosperity, the economic importance of innovation, and whether business leaders and politicians are doing what needs to be done to advance dynamism. On the latter point, Stiglitz’s views were unequivocal: They certainly could be doing more.
At the heart of Stiglitz’s argument on capitalism’s shortcomings is that too many economists and business leaders still blindly subscribe to an idea popularized more than half a century ago by the economist Milton Friedman, who, like Stiglitz, won a Nobel Prize. Friedman postulated that the social responsibility of business is to increase profits, but because today’s world is complex and filled with externalities like climate change, this sort of thinking is extremely harmful, Stiglitz argued. And then there’s the other thesis, rooted in Adam Smith’s theory of the invisible hand, which is similarly flawed in the context of today’s world, he said — namely, that free markets will necessarily create what is socially needed.
Many contemporary business leaders and economists with influence have “propagated the idea that markets solve all problems,” Stiglitz said. “There is a core idea that we should just let the market rip, and that is simply not true.” In fact, he added, Friedman and economist Friedrich Hayek, another free market advocate, have done “enormous harm by propagating this idea and by linking the words freedom and capitalism through their work.”
A Hippocratic Oath for Economists
So, what can be done to make capitalism better? To make it fairer? To ensure that inequality is not a core tenet of our economic system?
“Doctors, when they get their medical degree, have to take a Hippocratic Oath,” Stiglitz said, “and similarly, the first point of the economics profession should be to do no harm.” For both economists and business leaders, doing no harm can mean many things, he added. One example is not exploiting the fact that there’s little regulation in place around creating pollution in order to make money. It also means understanding that there’s frequently a trade-off between a short-term investment and a long-term one, and that while raising wages and investing in the workforce might be less advantageous to shareholders in the short term, the long-term benefits will certainly materialize.
Of course, the onus also has to be on policy makers to make changes that help halt today’s growing inequality. Events like the global financial crisis of 2008 and the opioid epidemic illustrate the importance of better regulation, Stiglitz argued. If you look across a lot of the corporate sector, he said, there are examples of things that are “not what you might think of as ideal behavior or welfare-maximizing behavior.”
So, does Stiglitz think there are ways in which regulation and policy can be used to protect the welfare of society and increase its general well-being? “Unambiguously, yes,” he said.
One of those ways, Stiglitz said, is better education. Ideally funded by a more progressive tax code, he would like to see a bolstering of the public school system and better infrastructure to ensure that members of the current and future labor market possess the types of skills and qualities that enable them to be agile as industries evolve. Technological innovation is changing the nature of work — in some cases, swiftly and radically — and as it stands, the United States is largely failing to equip individuals to deal with that change.
Stiglitz, who hails from Gary, Indiana, commented that he had grown up in an industrial city that was profoundly affected by the changing nature of the economy as a result of trade agreements and globalization. Displacement and lost jobs can have an “enormous effect on communities,” he said, and for a long time, there was a dominant assumption among economists and politicians that if wages fall and companies prosper as a result, everyone will be better off in the long run. But decades on, we’ve still not succeeded in supporting workers who are being squeezed out of a job, and that’s something we must address in order for capitalism to work for all, Stiglitz added.
For all the warnings and anguish, though, he said there is cause for optimism — at least over the next three decades.
“I am optimistic for the next 30 years, if we get our policies right,” Stiglitz said. We need stronger regulation and a better education system, and we need to steer technological change in the right direction, he urged: “There’s a real reconstruction of the economy that is needed. [But] if we get it right over the next 30 years, then we should be good for the next 30 years after that.”
February’s event, “The Future of Capitalism,” was the first installment of a new speaker series from The Hub, Columbia Business School’s new think tank, which aims to tackle the most pressing challenges facing society.