“When people feel economically insecure, they grow more defensive, less open and generous, and more suspicious of ‘the Other.’ When life seems like a zero-sum struggle, gains by other groups are interpreted as losses by one’s own group.”
Why has income inequality increased so prolifically over the past four decades? The typical response to this question put forward by economists attributes novel trends involving globalisation, technology, trade and education. Another long-taught explanation for inequality cites a trade-off between equity and efficiency – that is, between making a bigger pie and dividing it more fairly. If this explanation is taken to be true, we would expect growing inequality to be an unfortunate, yet unavoidable, symptom of improved innovation and productivity. However, recent decades of simultaneously stagnant economic growth and rising wealth inequality presents us with a paradox. According to the traditional model found within the pages of economics textbooks, we simply shouldn’t see the situation we currently live through.
In their insightful, albeit brief book, co-authors Brink Lindsey and Steven M. Teles provide a compelling account for how the twin ills of inequality and stagnation have synchronized in recent years. As suggested by their long-drawn-out title, ‘The Captured Economy: How the Powerful Become Richer, Slow Down Growth, and Increase Inequality’, the authors chronicle how the already wealthy are able to influence policymaking to their advantage. Rather than considering today’s rampant inequality as the unfortunate result of a fair free-market process, Lindsey and Teles attribute the source of inequality to little-known government policies that regressively redistribute wealth and income up the economic scale, while stifling competition and entrepreneurship.
I must admit that I am often weary of reading books put out by economists, since they can commonly indulge themselves with technical jargon only understood by fellow academics who boast godlike knowledge and pompous vocabularies. However, Lindsey and Teles quite impressively subvert this trend, as they provide user-friendly explanations of the more complicated economic concepts contained in the book, while managing to do so without tarnishing the quality of their analysis. For example, central to the book’s discussion of preferential government policy is how it drives up rents for favoured market participants. Rent, as the authors modestly explain, not only refers to the periodic check that you send to your landlord, but the excess payment made for any factor of production (e.g. land, labour, or capital) due to scarcity. Though the every-day and technical use of the word do intersect, as some portion of the rent paid to your landlord is attributable to the fixed supply of land in your area. Of course, they explain that some degree of rent is healthy and arises naturally; think of the temporary above-normal profits received by a firm who makes a technological breakthrough before competitors can innovate to the same level. Unlike such ‘natural’ rents, Lindsey and Teles explain that those with substantial resources are able to influence policy settings, reducing competition and driving up profits at the expense of consumers.
The authors describe four case-studies of regressive regulations that create artificial rent: financial regulation, land-use regulation, occupational licensing and intellectual property. Although their discussion of the financial sector may be a little dense for those who don’t share the psychopathic fanaticism for all things finance-related that has become customary among commerce students, the insights drawn on this subject are nonetheless thought-provoking. The authors describe how the increasing size of the financial sector – a process known as ‘financialisaton’ – has been fuelled by government subsidies and regulations. Specifically, existing policies have provided explicit and implicit safety-nets to financial firms promoting excessive leveraging (i.e. risk-taking), with an end result in the form of a highly unstable business-model across the entire financial sector. As Frank Borman brilliantly put it, “capitalism without bankruptcy is like Catholicism without hell”. The book further provides an excellent description of the causes and consequences of the global financial crisis and ensuing ‘bailout’, while also canvassing the missed opportunity for policy reform in the wake of the crisis.
A characteristic of this book that I am quite fond of is its discussion of lesser-known policy issues. Particularly, the authors’ explanation of the role occupational licensing plays in reducing competition and driving up rents is quite startling. On face value, occupational licensing, such as the requirement for doctors to gain admission to practise from a central authority, seems quite essential to preserve product quality and protect the interests of consumers. Yet, as the authors highlight, in recent years this protection has mostly served as a barrier to entry for workers, reducing competition and boosting the wages of licence-holders, evident as 25% of jobs in the US now require a professional license – up from 10% in 1970. Lindsay and Teles still manage to keep this discussion enjoyable for the reader as they include several bizarre instances of occupational licensing taken to comical lengths. For example, we are introduced to the absurd situation in Alabama where you need a license to work as a florist. Florists earn more when they are insulated from competition, but consumers pay the price and would-be florists are stuck in worse jobs. Alabama’s florists have a massive incentive to campaign for stricter restrictions, but consumers will only gain marginally from cheaper flower arrangements. As a result, such laws remain unreformed. Thankfully, peculiar examples such as this are deployed frequently by the authors which certainly keeps their analysis engaging, while also describing the broader implications of regressive policies in microcosmic form.
After reading the first seven chapters convinced of their diagnosis of interesting causes behind income inequality, I couldn’t help but find their final, solitary chapter outlining policy suggestions that could ‘rent-proof’ our economy relatively straight forward and underwhelming. Ultimately, they find that the main driver of inequality is not our technical inability to create economic policy, but rather that we lack the political means to do so. They write, “There is no route to a competitive economy except through finding a way to a more deliberative politics…Only when both sides to an economic question are represented in the political sphere, and when the side of those who pay the costs of regressive regulation can force a dispute to the political surface, is true deliberation on the merits possible.”
Overall, ‘The Captured Economy’ provides an unconventional insight into some lesser-focussed-on structural problems facing modern economies. Though you may not leave it with a laundry-list of policy ideas, if you are looking for an approachable book to learn more about income inequality, this will be sure to do the trick. For this reason, I rate it 4/5.