Self-interest vs. self-interest properly understood (Stiglitz)

Joseph Stiglitz has a terrific essay in Vanity Fair on the implications of the fact that the top 1% of Americans now make 25% of the income and control 40% of the wealth (25 years ago it was 12% and 33%). In 25 years will the top 1% make 50% of the income? If so, it will make the worst banana republic look like an egalitarian paradise in comparison. That's the direction we're heading. In the second half of the piece Stiglitz unpacks what's driving this trend, but here's an excerpt on why it even matters:

Some people look at income inequality and shrug their shoulders. So what if this person gains and that person loses? What matters, they argue, is not how the pie is divided but the size of the pie. That argument is fundamentally wrong. An economy in which most citizens are doing worse year after year — an economy like America’s — is not likely to do well over the long haul. There are several reasons for this.

First, growing inequality is the flip side of something else: shrinking opportunity. Whenever we diminish equality of opportunity, it means that we are not using some of our most valuable assets—our people—in the most productive way possible. Second, many of the distortions that lead to inequality—such as those associated with monopoly power and preferential tax treatment for special interests—undermine the efficiency of the economy. This new inequality goes on to create new distortions, undermining efficiency even further. To give just one example, far too many of our most talented young people, seeing the astronomical rewards, have gone into finance rather than into fields that would lead to a more productive and healthy economy.

Third, and perhaps most important, a modern economy requires “collective action”—it needs government to invest in infrastructure, education, and technology. The United States and the world have benefited greatly from government-sponsored research that led to the Internet, to advances in public health, and so on. But America has long suffered from an under-investment in infrastructure (look at the condition of our highways and bridges, our railroads and airports), in basic research, and in education at all levels. Further cutbacks in these areas lie ahead.

None of this should come as a surprise—it is simply what happens when a society’s wealth distribution becomes lopsided. The more divided a society becomes in terms of wealth, the more reluctant the wealthy become to spend money on common needs. The rich don’t need to rely on government for parks or education or medical care or personal security—they can buy all these things for themselves. In the process, they become more distant from ordinary people, losing whatever empathy they may once have had. They also worry about strong government—one that could use its powers to adjust the balance, take some of their wealth, and invest it for the common good. The top 1 percent may complain about the kind of government we have in America, but in truth they like it just fine: too gridlocked to re-distribute, too divided to do anything but lower taxes.

Ultimately, Stiglitz argues, this naked self-interest will backfire because it's not the "self-interest properly understood" that Tocqueville identified as one of the strengths of American society. I know this will be dismissed as simply more class warfare rhetoric from a liberal economist, but it comports with the reality I see on the ground here in Palm Beach County, Florida, USA.