They caused the crash, then got away with it

Saturday, July 21, 2012

A Nobel prize-winning economist’s clear-eyed analysis of the inequality at the heart of the great recession leaves one eager for more, writes Jack O’Connor

The Price of Inequality
Joseph Stiglitz
Allen Lane, €33.00;
Kindle, £14.99

STIGLITZ synopsises his case in one compelling sentence — “this book is about the politics of efficiency and fairness”. Over 290 easily-accessible pages, he provides an understanding of what has happened to the global economic system, interprets what is happening to it and offers a vision of what he believes must happen, if there is to be a sustainable future.

No-one can question his competence. This Nobel Prize winner (in Economic Sciences 2001) who is University Professor of the Columbia Business School served as Chairman of the US Council of Economic Advisors under President Bill Clinton and went on to fill the role of senior Vice President and Chief Economist of the World Bank. He has already published a string of best sellers critiquing the fundamental defects of “Globalisation as it has been managed” and current orthodox economic thinking — (“Globalisation and its Discontents, The Roaring Nineties, Making Globalisation Work and Freefall”).

This book follows the by now familiar pattern. As always it is pacey, devastatingly insightful and presented in popular style. However, the analysis is rigorously thorough. The arguments are marshalled with military precision and reinforced by 651 detailed, densely typed notes and references to foil detractors and to facilitate further academic pursuit.

It focuses initially on the devastating consequences of the “Great Recession” for middle and low income citizens, the young and civil society generally. Then it proceeds to dissect the labyrinthine relationship between economics and politics that led to the crash. It goes on to describe the way in which “those who created the crisis walked away with millions” at the expense of society in general and the most vulnerable in particular. Then and most chillingly it outlines how they are still determining the response so that it reflects and protects their interests even at the expense of jeopardising the prospects for sustainability. However, the most compelling aspect is the critique of the consequences of inequality. Most insightful here is the elucidation of the economic implications in terms of unaffordable inefficiency and waste. The work concludes with a chapter outlining the author’s road map to stability, recovery and a sustainable future.

This book is no repudiation of capitalism, much less an endorsement of socialism. Adam Smith can rest easily in his grave. Indeed if anything, it amounts to an appeal that Smith’s theories should be tried out for a while. According to Stiglitz, the “invisible hand” didn’t have much to do with the collapse at all. Indeed it didn’t really get a look in as the get-rich-quick brigade monopolised the landscape. Moreover, it has had even less to do with the response. That being said, the author is by no means mesmerised by the myth of the markets. While clearly no supporter of the dictatorship of the proletariat, he is not an adherent of dictatorship of the market either. It is not the “invisible hand” he is concerned about but the very visible hegemony of corporate vested interests, especially at the top of the financial services sector, singularly motivated by unbridled greed.

The USA provides the central location for the work. Indeed this book is primarily about that country but because it is the citadel of the Anglo-American, neo-liberal model of capitalism, which reigned unchallenged in the world until the fall of Lehmans in September 2008, it is about civilisation as well.

Stiglitz questions how an economic philosophy which has failed the empirical test of history nonetheless continues to determine the outlook of policy makers, academics and politicians alike. How is it that it continues to exercise its pernicious dominance over human endeavour after taking us all to the precipice of catastrophe? The author clearly understands why. He takes us to the top of the mountain so that we can see it for ourselves. The only reason why failed economic orthodoxy still reigns supreme, for another while at least, is because it coincides exactly with the interests of the better off. They are identified as the one-per-cent which has managed to exercise hegemony over the rest of humanity — the 99%.

The reader is taken on an educational tour through the maze of avenues, routes, devices and passageways by which those at the top of the corporate pyramid shape government to draft the rules in favour of themselves, thus exacerbating inequality and the inefficient use of resources. Apart from blatant bribery, we are introduced to the much more pervasive phenomenon of “cognitive capture” and how it contaminates regulatory authorities.

We receive a vivid demonstration of the linkages between corporate colonisation of academe, economic dominance in the financing of the cultivation of ideas and of their dissemination through parallel hegemony in media ownership to supremacy in the political arena, via political funding. All of this, (including the training of economists), combines to cultivate the “deliberative space in which ‘conventional wisdom’ emerges”.

All of it contributes to condition society to interpret the constraints, initiatives, ideas and policies which serve only to reinforce the wealth and power of the dominant minority as “common sense”. The work deplores “the degradation of values to the point where everything is acceptable and no-one is accountable”.

This is a graphic portrayal of the bias in perceptions and beliefs — through which the “top has persuaded those in the middle to see the world in a distorted way, leading them to perceive policies that advance the interests of those at the top as consonant with their own interests”. Thus the grossly inflated and growing disparity between a handful of oligarchs and the rest is justified in terms of the “marginal productivity theory”. In other words reward allegedly reflects their contribution to society through risk taking, business acumen, innovation etc. Stiglitz strips it bare.

“They have learned how to suck out money from the rest in ways that the rest are hardly aware of — that is their true innovation”. He rails against success that is based “not on contribution to society — but ability and willingness to take advantage of others”.

The bank bailout is encapsulated in Churchillian terms — “never in the history of the planet had so many given so much to so few who are so rich without asking anything in return”.

Bubble era financial services industry activity is characterised as “extortion camouflaged by credit”. The bogus concern about potential inflation is understood for what it is — a preoccupation with the interests of bondholders. This author who predicted the double dip recession dismisses the austerity agenda that feeds the downward spiral, calling instead for increasing aggregate demand –— through re-distribution of wealth. Indeed it is precisely in its insightful elucidation of the price of inequality that this work triumphs. Here malnourishment, stress and anxiety along with impairment of living are linked with loss of productivity and, in the long run, performance of the economy. The higher the inequality — the lower the growth.

However, those of a Leninist bent will come away disappointed. The writer comes not to slay the market, but to rescue it. The concluding chapter outlines a recipe for sustainability, which envisages a “balanced role between markets, the state and civil society — naturally evolved”. The elements extend from effective regulation, through progressive taxation to high levels of intelligent public investment, all underpinned by a healthy, well-functioning democracy.

The only basis for criticism of the book relates to the limited discourse on how to bring it all about. The 1% has signalled no intention of allowing the meek to inherit the earth. However, there is surely more to come. This work is essential reading for all involved in the human race at this critical juncture. It leaves one eager for more.

* Jack O’Connor is general president of SIPTU Home