It is hard to tell whether “Pikettymania” (including the little dust up over data) has peaked now that he has been on the Colbert Report (see my earlier post on the best reviews of his work). But the real debate over what to do about inequality is just heating up. Most believe that Piketty’s proposal for a global wealth tax is a non-starter. There is little agreement as to what, if anything, should be done.
In part, the “if anything” view still remains strong. Inequality is still seen by many as the price of growth. Earlier I noted this argument that inequality is necessary for economic growth falls by the wayside when considered from an intangible capital perspective. If you believe, as I do, that intangibles are the drivers of economic growth, then anything that undercuts and destroys the value of those assets undermines economic growth. Inequality undermines human capital development by reducing access to education for all. Inequality undercuts strategic capital by reducing entrepreneurship and risk taking. It destroys relationship capital by undermining the trust necessary for a market economy to work. Finally, inequality undercuts social capital by increasing political instability and uncertainly.
If this is true, then can growth and equality be pursued simultaneously? The growth side of this topic is explored in more depth in a new book by Joe Stiglitz and Bruce Greenwald called Creating a Learning Society: A New Approach to Growth, Development, and Social Progress (Amazon or Columbia University Press). The book is an extension of the Kenneth J. Arrow Lecture Series at Columbia University and builds upon the growth theory of Kenneth Arrow and Robert Solow. Note that the subtitle of the book includes both “growth” and “social progress.” In an earlier book (The Price of Inequality: How Today’s Divided Society Endangers Our Future), Stiglitz clearly states his belief that inequality hurts economic growth.
Creating a Learning Society lays out the case that economic growth is no longer a question of efficient allocation of resources, specifically labor and capital (aka static efficiency) but the creation, dissemination and utilization of knowledge (aka innovation).
In the first few chapter of this book, we lay out our basic theses: that most of the increases in standards of living are, as Solow suggests, a result of increases in productivity–learning how to do things better. And if it is true that productivity is the result of learning and that productivity increases (learning) are endogenous, then a focal point of policy ought to be increasing learning within the economy; that is, increasing the ability and the incentives to learn, and learning how to learn, and then closing the knowledge gaps that separate the most productive firms in the economy from the rest. Therefore, creating a learning society should be one of the major objectives of economic policy. If a learning society is created , a more productive economy will emerge and standards of living will increase. By contrast, we show that many of the policies focusing on static (allocative) efficiency may in fact impede learning and that alternative policies may lead to higher long-term living standards. Thus, the theory we develop provides one of the most compelling and fully articulated critiques of the Washington consensus policies that dominated development thinking in the quarter century before the Great Recession.
As Stiglitz and Greenwald stress:
All of this highlights that one of the objectives of economic policy should be to create economic policies and structures that enhance both learning and learning spillovers; creating a learning society is more likely to increase standards of living than is making small one time improvements in economic efficiency or sacrificing consumption today to deepen capital.
The generic policy prescriptions that flow from their conclusions concern the role of government.
If learning, and R&D more generally, is at the center of the success of an economy, and if there is no presumption that markets are efficient in making decision which affect the pace of learning (or R&D), then the longstanding presumptions against government intervention are simply wrong.
. . .
our concern is that some of these classical policy prescriptions, thought well-intentioned, may actually lead to a reduction in the rate of progress of societies and a deterioration in ling-run societal well-being. In the attempt to improve the static efficiency of the economy, learning may be impeded.
Using a twist on the market failure argument, they argue that the case for government intervention rests on the need to promote positive outcome rather than simply prevent negative ones.
The production of knowledge entails positive externalities . . .
the private sector typically produces too little goods that give rise to positive externalities. To correct this market distortion requires some form of government intervention.
But the government interventions to create positive externalities are more complex.
If there are market failures in learning, then the market failures are pervasive in the economy. They are diffuse. More pervasive governmental interventions are required to correct them.
Much of the book subjects a variety of areas (trade policy, intellectual property, competition policy/anti-trust, financial policy and investment) to this lens of “does this policy promote learning? As an example, the authors reconfigure the infant industry case for limited trade protection. The traditional argument states that an industry need limited projection in order to grow strong enough, with economics of scale, to compete on the world market. The new argument calls for policies that protect where there are knowledge spillovers to the entire economy.
While I’m not convinced about all the policy prescription in this book, I heartily agree with the notion of subjecting economic policies to the test of whether they promote broad economic learning (and not just narrow knowledge creation). Such a test would greatly improve the changes of a positive outcome of our policy proposals.