The True Source of Inequality: Values

The article, “Corporatism, not capitalism is to blame for inequality,” by Edmund Phelps, the 2006 Nobel in Economics, appeared in the July 24, 2014 Financial Times. For Phelps, the term corporatism refers to the values of an egalitarian, progressive society that at the same time encumbers innovation. He discussed his views on corporatism in an FT interview published just a few weeks prior to the article.

Edmund S. Phelps. Author: Jürgen Frank. Source: Egon Zhender
Edmund S. Phelps. Author: Jürgen Frank. Source: Egon Zhender

His point of departure in is that Europe is suffering from a malady: the loss of a capacity for growth. This loss in turn is directly linked to the loss of innovation. The latter is in fact at the heart of the problem; it is the result, says Phelps, of perverse incentives.

He goes on to explain that real interest rates – pushed down as far as they have been – have kept people from becoming better off the traditional way , i.e., through savings. Wall Street and the City of London therefore became beacons for investors. Arbitrage and speculation are now the source of success. However these don’t create new value, but rather distribute what others create, a major disincentive for those who are the potential source of new value. 

Values in disarray lead to tangled incentives

Phelps seems to distinguish between the spreading of corporatist values – solidarity, security and stability – and the disorderly development of these. I believe he is not opposed to the values in and of themselves, for we all need certain security. Where he does have a bone to pick is with the assumption that society, regardless of the circumstance, should be blanketed in this security. The consequence is that so much security deprives us of the incentive to resolve our problems ourselves. Instead, we transfer the risk to others – normally to taxpayers – and discourage value creation to their detriment.

We can apply the same idea to solidarity. It is one thing to keep people from stumbling into poverty. But giving them everything for free without requiring any effort on their part is another story altogether.

Unity in diversity. Author: Fady Habib
Unity in diversity. Author: Fady Habib

“With so many people rolling the dice,” in financial markets and not in production of real wealth, “there are bound to be some winners – and their rich rewards raise wealth inequality even further,” he writes. In addition, those that are participating in this game try to gain political favor, reducing competition amongst would-be innovators. “With less competition to fear, companies are emboldened to raise their mark-ups and profits. That lifts share prices and thus the wealth of already wealthy shareholders.”

Phelps adds another corporatist value: materialism. According to him, “this has brought just such a fixation on becoming rich.” In addition, it is accompanied by short-termism which, “tempts chief executives to pump up their share prices and fund managers to demand that managers hit their quarterly earnings targets. This stifles innovation and buoys wealth inequality.”

My suggestion to the reader is to take this diagnosis seriously; perhaps it isn’t comprehensive, but it certainly does hit the nail on the head with many of our afflictions today.


 

Antonio Argandona | Business EthicsAntonio Argandoña is Emeritus Professor in the Economics and Business Ethics departments and holder of the “la Caixa” Chair of Corporate Social Responsibility and Corporate Governance at IESE.

He teaches mainly in the areas of macroeconomics, monetary economics and international economics, and publishes research on business ethics, corporate social responsibility and organizational governance. Prof. Argandoña is the autor of the blog Economía, Ética y RSE  (in Spanish).

 

About Antonio Argandoña

Antonio Argandoña is Emeritus Professor of Economics and holder of the "la Caixa" Chair of Corporate Social Responsibility and Corporate Governance at IESE. He teaches mainly in the areas of macroeconomics, monetary economics and international economics, and publishes research on business ethics, corporate social responsibility and organizational governance.

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