In a recent column for The Guardian, Joseph Stiglitz offers some peculiar comparisons between Wall Street Bankers and Norman Borlaug, father of the green revolution. In the midst of his all-too-familiar castigation of bankers, Stiglitz offers these insights on society.
"...our societies tolerate inequalities because they are viewed to be socially useful; they are the price we pay for having incentives that motivate people to act in ways that promote societal wellbeing. Neoclassical economic theory, which has dominated in the west for a century, holds that each individual's compensation reflects his marginal social contribution – what he adds to society. By doing well, it is argued, people do good."
The problem with these insights is that they simply aren't true. Yet again, Stiglitz is attempting to advance his agenda by redefining the debate. Consider his two propositions in turn.
In the US, inequality is not tolerated because it's viewed as being socially useful. Inequality is tolerated because property rights are guaranteed by the US Constitution, particularly Articles IV and V of the Bill of Rights. I realize it's terribly unfashionable these days to refer to the Constitution as a document with any relevance to passe issues such as freedom and property rights. But as a matter of history, Stiglitz is simply wrong.
Of course, we could ask whether the authors of the Constitution might not have been motivated to protect property rights in order to promote "incentives that motivate people to act in ways that promote societal wellbeing." But as a matter of history, inequalities of income and wealth were not issues that were of great concern to these men generally. We might argue that they should have been issues of concern. But the fact is that they weren't.
We might also ask whether the Constitution should be amended, perhaps subjecting property rights to consideration of inequality of wealth or income. But the fact is that it hasn't been subject to such amendments.
At least in the US then, Stiglitz is simply wrong when stating the reasons that inequality is tolerated.
How about the claim that neoclassical economic theory holds that the compensation of an individual reflects his marginal contribution to society? In reality, neoclassical economic theory holds nothing of the sort. Rather, it holds that the compensation of an individual reflects the supply and demand for the skills and experience of that individual. Under certain conditions, the supply and demand for these skills may result in an equilibrium in which the marginal cost of the employee (his compensation) is equal to the marginal revenue generated by the employee.
And under certain conditions, an equilibrium may result in which the marginal compensation of the employee is such that the employee can expect to earn a return on the investment he's made in his own human capital that in some sense is commensurate with the expected returns of other investments, with appropriate adjustments for risk. But neoclassical economic theory does not suggest that this compensation reflects the employee's marginal contribution to society.
In fact, neoclassical economic theory makes no claim even to be able to measure the marginal contribution of an individual to society. And even if we could measure the marginal contribution of an individual to society, we would need to make a whole set of heroic assumptions about labor markets in order to obtain a result linking compensation to marginal social contribution, such as the absence of externalities and free rider problems in the labor market.
Of course, the goal of Stiglitz isn't simply to use the occasion of Borlaug's death as an opportunity to heap further abuse on bankers. He's also attempting to re-frame the debate about the redistribution of income and wealth. Throughout most of our history, the debate about redistribution primarily has been framed around the issues of property rights vs social stability (riots, strikes, protests, acts of civil disobedience). In recent decades, advocates of redistribution have tried to re-frame the debate as one involving individual liberties vs social justice. As these efforts have experienced relatively modest success, Stliglitz would like to re-frame the debate yet again -- this time as an issue of social incentives.
If Stliglitz and his sympathizers are successful in re-framing the debate in this way, they can point to the recent financial crisis as evidence that bankers haven't responded appropriately to their financial incentives and that these incentives therefore can and should be dictated by regulatory fiat rather than determined in a free market for labor.
Of course, we live in a democracy, and Stliglitz is free to attempt to influence the outcomes of the current regulatory reform process. But Stliglitz misleads those whom he would persuade when he mischaracterizes such basic notions as the protection of property rights and the tenets of neoclassical economic theory. We would all be better served if Stiglitz would rely less on rhetorical artifice and more on a straightforward enunciation of the values he believes should be promoted in our society.