THE PRICE OF INEQUALITY

2.5 LAW AND ECONOMICS

SUBMITTED BY: SMRITI SHARMA

UID: UGJ21-51

B.A.LL.B. (Adjudication and Justicing)

Semester- II

Academic Session: 2021-22

SUBMITTED TO: PROF. SUMIT KUMAR MALVIYA

(ASSISTANT PROFESSOR OF ECONOMICS)

MAY, 2022

MAHARASHTRA NATIONAL LAW UNIVERSITY, NAGPUR

CHAPTER -1
 AMERICA’S 1 PERCENT PROBLEM

“This chapter illustrates the depth and breadth of economic inequality in the United States.
The gap between the rich (the 1 percent) and everyone else is growing, with 20% of national
income going to the top 1%. This means that America isn’t as much a land of opportunity
anymore for those at the bottom. However, this trend toward increasing inequality isn’t
inevitable; it’s caused by market forces but also can be changed by policy changes.”

“In the past, there was less inequality in America. However, it is increasing rapidly. The top 1
percent of Americans earn a much larger percentage of income than they used to 30 years ago
(12% versus 30%). Defenders of today’s growing inequality argue that rich people deserve
what they get because capitalism rewards hard work and talent; if the system isn’t fair, it
would be too costly to fix; when the top 1 percent have more money, everyone benefits from
their spending. Stiglitz disagrees with these arguments for several reasons:”

“The US economy has grown faster when there is more equality because inequality
negatively affects the economy. A lack of social safety nets and opportunity for poor people,
along with a significant drop in standard of living, have led to a higher poverty rate. The top
1% are taking wealth from the 99% rather than creating it because of market distortions.
Wages for wealthy Americans have steadily increased while barely rising for bottom 90%. At
the same time, jobs that offer decent wages moved overseas and middle-class workers were
pushed into low-skill jobs even as CEOs made 200 times what their employees made.”

“Since the Great Recession, America’s 99 percent have not benefited as much as they should.
In The Price of Inequality, Stiglitz argues against positions that are held by America’s
political right (or right). These include the idea that inequality is measured over a lifetime
(some people are always at the bottom), poverty in America is relative depravation because
poor people have access to things like televisions and indoor plumbing, and statistics are
wrong because inflation is estimated at too high a rate so growth in income has been
underestimated. Stiglitz counters this with the argument that we need to understand why there
is inequality and how it came about.”

CHAPTER 2
 RENT SEEKING AND THE MAKING OF UNEQUAL SOCIETY

Stiglitz explains that since America’s level and type of inequality is unique in the world—a
“distinctly American achievement” -the 1 percent must be pulled back, more assistance
must be given to the poor, and the middle must be sent reinforcements. The 1 percent
engage in rent seeking, defined as “getting income not as a reward to creating wealth but
by grabbing a larger share of the wealth that would otherwise have been produced without
their effort”. During market failures like the Great Recession, the 1 percent get richer
because of externalities (defined as when an individual has positive or negative effects on
others but neither gets the benefits nor must pay). To pull back the richest 1 percent in a
practical sense means putting limits on rent seeking.
“Historically, the Greeks were the first to reject the religious idea that the 1 percent ruled
and led through divine right; instead, they argued that those with power were made
stronger, and those without became the underclass. In the mid-19th century to the current
day, this idea became the marginal productivity theory: those who have more in society
give more, those with less skills make less, and the market determines worth. ”
“There is a two-way relationship between inequality and the environment, and the complex
relationships between inequality and the environment play out both at the local (national) and
global levels. The poor are often more dependent on the natural environment than the rich,
and thus environmental degradation, including climate change, has particularly adverse
effects on them. Many in developing countries are dependent on common resources, such as
local forests and ground water. Their very survival may be at stake when there is degradation
of these resources. In both developing and developed countries, the poor are more likely to
live in areas where they are exposed to higher levels of pollution and toxicity. Indeed, not
only does environmental degradation affect the poor, it creates poverty. Farmers who might
otherwise have eked out a living above the poverty threshold can no longer do so. Those who
live surrounded by pollution and toxicity and likely to be less healthy. They will perform
more poorly at school, and their lifetime productivity will be lower.”
Rent Seeking by an American Economist In the American Economist Joseph Eugene Stiglitz’
essay, ‘Rent Seeking and the making of an Unequal Society,’ he argues, with the help of
examples, that most of today’s economic and political problems are caused by the government.
He goes in depth to explain why the government policies are a major factor in creating these
problems, as well as the market forces itself. In addition to this, he discusses the relationship
between income inequality and societal growth, and how rent seeking contributes to it. The
following is main ideas from his essay that help to further prove his point of how rent seeking
provides for income inequality, as well as how the government policies help in the making of
an unequal society. Firstly, because the government policies shape the market forces, they are
able to shape the degree of inequality. The root of the inequality issue lies in the government
policies, as they hold the power to determine where the money lies on the spectrum of the rich,
middle class and the poor. Normally, when an economy is suffering, employment as well as
wages adjust accordingly and sales as well as profits suffer as well.

CHAPTER 3

MARKETS AND INEQUALITY

“In The Price of Inequality, Joseph E Stiglitz passionately describes how unrestrained power
and rampant greed are writing an epitaph for the American dream. The promise of the US as
the land of opportunity has been shattered by the modern pleonetic tyrants, who make up the
1%, while sections of the 99% across the globe are beginning to vent their rage. That often-
inchoate anger, seen in Occupy Wall Street and Spain's los indignados, is given shape,
fluency, substance and authority by Stiglitz. He does so not in the name of revolution –
although he tells the 1% that their bloody time may yet come – but in order that capitalism be
snatched back from free market fundamentalism and put to the service of the many, not the
few.”

“In the 1970s and 80s, "the Chicago boys", from the Chicago school of economics, led by
Milton Friedman, developed their anti-regulation, small state, pro-privatisation thesis – and
were handed whole countries, aided by the International Monetary Fund (IMF), on which to
experiment, among them Thatcher's Britain, Reagan's America, Mexico and Chile. David
Harvey's A Brief History of Neoliberalism describes how the democratically elected Salvador
Allende was overthrown in Chile and the Chicago boys brought in. Under their influence,
nationalisation was reversed, public assets privatised, natural resources opened up to
unregulated exploitation (anyone like to buy one of our forests?), the unions and social
organisations were torn apart and foreign direct investment and "freer" trade were facilitated.
Rather than wealth trickling down, it rapidly found its way to the pinnacle of the pyramid. As
Stiglitz explains, these policies were – and are – protected by myths, not least that the highest
paid "deserve" their excess of riches.”
“In 2001, Stiglitz, a former chief economist at the World Bank, and arch critic of the IMF,
won the Nobel prize for economics for his theory of "asymmetric information". When some
individuals have access to privileged knowledge that others don't, free markets yield bad
outcomes for wider society. Stiglitz conducted his work in the 1970s and 80s but asymmetric
information perfectly describes the Libor scandal, rigging the interest rate at a cost to the
ordinary man and woman in the street. Stiglitz details the profound consequences not just of
the current financial meltdown but of the previous decades of neoliberal interventions on the
incomes, health and prospects of the 99% and the damage done to the values of fairness, trust
and civic responsibility.”

“The Price of Inequality is a powerful plea for the implementation of what Alexis de
Tocqueville termed "self-interest properly understood". Stiglitz writes: "Paying attention to
everyone else's self-interest – in other words to the common welfare – is in fact a
precondition for one's own ultimate wellbeing… it isn't just good for the soul; it's good for
business." Unfortunately, that's what those with hubris and pleonexia have never understood
– and we are all paying the price.”