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Joseph Stiglitz Responds to Thomas Picketty

Thomas Picketty’s Capitalism in the 21st century has recently drawn the attention of economists to the situation of growing inequality. There has been considerable debate on the issue and careful inspection of the data show a number of anomalies, Recently Joseph Stiglitz has published a series of four research papers in which he responds to Picketty with a careful analysis. Stiglitz shows that many of the anomalies of the data can be resolved by introducing a number of new assumptions onto the economic models. Of high significance is his re-introduction of land as a third factor into the models in an addition to labour and capital and the recognition of the rent of land as a significant source of unearned income.


Some of his conclusions:

“We have, for instance, considered land as a positional good—the value of beach front property in the Riviera or in Southampton increases with wealth and wealth inequality. Indeed, the effects are reinforcing.

We have explained too why land bubbles are a natural part of market economies (in the absence of futures markets extending infinity far into the future); and even when there are “corrections,” there is no assurance that the market will not once again go off on a bubble path. On such bubble paths, wealth, as conventionally measured, may increase, even as the real wealth of the economy diminishes.

But, most importantly, we have explored the connections between land, collateral, and the financial system. There is increasing recognition that the increase in the wealth income ratio and inequality is related to the increase in rents, and in particular the value of land, and to our financial system. Indeed, as Galbraith (2012)44 has suggested, our financial system is at the heart of the creation of inequality in our modern economy. This paper has suggested that these two phenomena are in fact linked with each other; that the increase in the value of land and the distribution of ownership claims may be related to the provision of credit by our financial system—and that changes in the rules governing that sector and the conduct of monetary policy may have played an important role in the increase in inequality.”

“…a tax on land, reducing the value of land, it reduces wealth inequality, for the workers’ savings is given by their wage plus transfers, and with wages unchanged, transfers increased, and interest rate unchanged, their savings increases, and their wealth-holdings crowd out those of the capitalists. Thus, as Henry George (1879) argued long ago, land taxes can be an important instrument for increasing equality. He explained how such a tax was non-distortionary. But in many of the models presented here, we obtain a stronger result: a land tax actually leads to higher wages and a higher level of national output.”

The four papers can be found here.


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