Inequality — A Key Issue Of Economic Research

Lindau Meeting of Nobel Laureates

Nobel laureates and aspiring young economists from all over the world to discuss models and concepts in Lindau later this month

In the aftermath of the global financial crisis and the ensuing economic and political disruptions, inequality has re-emerged as a central focus of public debate. The drivers of rising inequality of income and wealth and the various scientific models for counteractive measures will be among the central topics debated among 17 Nobel Laureates in Economic Sciences and approximately 450 aspiring young economists from more than 80 countries in Lindau, Germany, next week. The 5th Lindau Meeting on Economic Sciences will bring them together for a unique dialogue across generations, cultures and scientific backgrounds. The meeting will open on 20 August with a keynote address by German Chancellor Angela Merkel, and will also feature “a panoramic view on the situation and prospects in Latin America” by Mario Vargas Llosa, the 2010 Nobel Laureate in Literature.

From 20 to 23 August, the participating laureates and the young economists will have plenty of opportunity for an intensive exchange of ideas. The numerous lectures, discussions, master classes and panel discussions of the program will address central fields of the discipline, ranging from econometrics, game theory, and neo-classical growth theory to mechanism design and systemic risk measurement. The overarching question “How useful is economics – how is economics useful?” will also be subject of the meeting’s closing panel debate on Mainau Island on Saturday, 23 August. As a special guest of honor, Queen Silvia of Sweden will attend the concluding events that day.

Among the sessions addressing the challenge of high and rising inequality will be plenary lectures by Joseph Stiglitz, Eric Maskin and James Mirrlees.

Joseph Stiglitz: “Inequality, wealth and growth: why capitalism is failing”

Recent data note large increases in both wealth and the wealth/income ratio. But there has not been the associated decline in interest rates or increases in wages that might have been expected. Indeed, in some countries, such as the United States, there has been wage stagnation.

If “wealth” is taken to be capital, this leads to a seeming paradox, a strong contradiction to the neoclassical model, because high levels of inequality are considered to be a natural aspect of capitalism – with the short period of the few decades before 1980 representing an exception.

In his lecture, Joseph Stiglitz will resolve the seeming paradox. He will describe the centrifugal and centripetal forces that lead to increased and diminished inequality. And he will show how the balance between these forces has been disturbed since 1980 to lead to a higher ‘equilibrium’ level of inequality.

Professor Stiglitz will explain that today’s higher level of inequality is not just the result of market forces, but of policies and politics, some of which have impeded the way that a well-functioning competitive market would behave. The final piece of his analysis will link growing inequality to the financial system and the process of credit creation.

Eric Maskin: “Why haven’t global markets reduced inequality in developing economies?”

The theory of comparative advantage predicts that globalization should cause income inequality in emerging economies to fall. But this has not happened in the current era of increasing international trade (although the prediction held up well for previous globalization).

In his lecture, Eric Maskin will sketch an alternative theory – developed in collaboration with his Harvard colleague Michael Kremer – that seems to fit recent history well. The model conceives of globalization as an increase in international production. Computers are a good example: they may be designed in the United States, programmed in Europe and assembled in China.

Professor Maskin will show that when the barriers to international production come down, moderately skilled workers in emerging economies get new employment opportunities and unskilled workers don’t. It is this disparity, he will argue, that accounts for rising inequality in many developing countries.

Sir James Mirrlees: “Some Interesting Taxes and Subsidies”

There are situations where marginal tax rates of 100% or nearly 100% may be justified, according to analysis by Sir James Mirrlees. In his lecture, he will sketch three models: one, which makes unusual assumptions about preferences for labor, can justify income subsidies of low incomes with implicit marginal tax rates of 100%.

The second, assuming high substitutability between consumption and work, might justify marginal tax rates approaching 100% on the highest incomes. The last, with competition between skilled workers (such as sportsmen or inventors) for market share, might justify marginal rates of 100% on high incomes of a particular type.

Professor Mirrlees will conclude that the assumptions under which these conclusions follow may not hold in actual economies – but they might sometimes. In any case, extreme results, and the reasons for them, can help us understand how incentives work and their implications for taxation.