Although better known in academic circles for his work on market imperfections, Stiglitz’s doctoral dissertation was on how too much income inequality reduces economic growth. He updates that theme in “The Price of Inequality,” showing how inequality undermines productivity, leads to wasteful competition for status goods and allows the rich to convert their wealth into political power, which they use to further tilt the playing field in their favor.
The threat of plutocracy — a democracy taken over by the wealthy and run for their benefit — is a theme running through not only Zingales’s and Stiglitz’s analyses but a number of the other books as well. They raise the specter of the country being sucked into a dangerous spiral in which inequality, class rigidity and economic instability breed more of the same.
“The basic premise of the ‘mixed economy’ is that market dynamism can be combined with democratic equality,” Columbia University economist Jeffrey Sachs writes in “The Occupy Handbook,” a collection of essays prompted by the Occupy Wall Street protests and written by authors from across the ideological spectrum. “The overriding political and financial power of corporate capitalism has nearly obliterated the functioning of the mixed economy, with the state in retreat or mainly serving corporate interests.”
“In the absence of a properly functioning set of protections, the bazaar (the sphere of the market) consumes the forum (the sphere of politics),” adds the Financial Times’ Wolf in the same volume. “The outcome is rule by affluent vested interests or, quite simply, plutocracy.”
Were he alive today, no less a free-marketeer than Adam Smith would readily acknowledge that a capitalist system forfeits not only its economic rationale but its moral justification if all its benefits are captured by a tiny slice at the top of society.
What’s been lost from American capitalism is any sense of a larger purpose, of how it fits into and serves society, broadly speaking — or as the Skidelskys would put it, how it contributes to a “good life” that is both individual and collective.
In the current, cramped model of American capitalism, with its focus on output growth and shareholder value, there are requirements for financial capital, human capital and physical capital, but no consideration of what Stiglitz calls “social capital,” Zingales calls “civic capital” and Martin calls the “civil foundation.” It is this trust in one another that gives us the comfort to conduct business, to lend and borrow, to make long-term investments and to accept the inevitable dislocations of the economy’s creative destruction.
Whatever you call it, societies do not thrive, and economies do not prosper, without it.
This erosion is most visible in the weakening of the restraints that once moderated the most selfish impulses of economic actors and provided an ethical basis for modern capitalism. A capitalism in which Wall Street bankers and traders think it is just “part of the game” to peddle dangerous loans or worthless securities to unsuspecting customers, a capitalism in which top executives have convinced themselves that it is economically necessary that they earn 350 times what their front-line workers do, a capitalism that puts the right to pass on unlimited amounts of money to undeserving heirs above the right to basic, life-saving health care — that is a capitalism whose trust deficit is every bit as corrosive and dangerous as its budget and trade deficits.
As Zingales notes, American capitalism has become a victim of its own success. In the years after the demise of communism, “the intellectual hegemony of capitalism led to complacency and extremism: complacency through the degeneration of the system, extremism in the application of its ideological premises,” he writes. “Money — regardless of the way it was obtained — ensured not only financial success but social prestige as well. ‘Greed is good’ became the norm rather than the frowned-upon exception. Capitalism lost its moral higher ground.”
So where is a blueprint for a new American capitalism likely to come from? Probably not from economists or journalists, or even from politicians in Washington or on the campaign trail. As Meltzer would say, the genius of democratic capitalism, and democracy, is that the new norms of economic behavior are likely to emerge from executives and entrepreneurs, workers and consumers, money managers and bankers who find the courage to demand something better of themselves and others.
Steven Pearlstein is a business and economics columnist at The Washington Post and the Robinson professor of public and international affairs at George Mason University.