Joseph E. Stiglitz: Rewriting the Rules

Dirk Löhr

A recent report, written by Nobel laureate economist Joseph Stiglitz along with Roosevelt Institute fellows Nell Abernathy, Adam Hersh, Susan Holmberg, and Mike Konczal — sheds another light on the contemporary economic problems.

It is not just one of distribution, the report argues. In fact, the economy is fundamentally broken, shot through with opportunities for the rich to get richer not by building wealth but through exploitation and taking.

The problem, Stiglitz and his co-authors write, is that the rise in wealth isn’t coming from productive investments. It’s coming from what economists call rents. Stiglitz and his co-authors apply the rent concept, which was originally connected with land, on a wide and more modern array of rents (such as patents or copyrights).

“Rent-seeking”, as economists call it, is generally viewed as economically counterproductive. It’s especially counterproductive when it becomes so lucrative as to provide a more attractive outlet for people’s money than real investments. The report’s authors argue that’s exactly what’s happening with Wall Street. Its growth has fueled a big rise in credit — credit that tends to go to those who already have wealth, often in the form of rents, exacerbating existing rent-based problems. Financiers have also identified novel ways to rent-seek.

Also the “too big to fail” status, for example, can count as a rent. It increases the value of firms like Goldman Sachs or JPMorgan Chase not by making them more productive, but by providing an implicit government subsidy. Trading mortgage-backed securities for profit, similarly, does little to actually increase wealth but a lot to redirect it. That makes it attractive as a business activity for banks and hedge funds, redirecting their energies from profitable activities that create wealth.

The report, originally published on May 12 by the Roosevelt Institute, can be downloaded here:

“Rewriting the Rules of the American Economy: An Agenda for Shared Prosperity” (please click)

The analysis is comprehensible, sometimes excellent. Although, the role of land taxation in the concert of expedient instruments proposed should have been stressed more.

 

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