Das Kapital for the digital age

The central problem in 1930, as now, was not government borrowing but the lack of effective demand in the economy, an absence of purchasing power. And this, according to Stiglitz, is itself a consequence of inequality. Rich people, contrary to popular belief, don't spend money – they save it, invest it, speculate with it, buy property and paintings. Stiglitz argues that this effectively neutralises a substantial proportion of effective demand and slows the economy down. As workers get laid off, they stop paying taxes and require benefits. This plunges the state into the kind of fiscal crisis we have seen replicated through Europe.

Stiglitz argues that the 2000s were essentially a repeat of the 1920s, in that a small proportion of the population, the top 1%, managed to command an ever greater share of national wealth. During that decade they seized more than 65% of the gain in national income in America. The policy response to the collapse of Lehman Brothers in 2008 has made matters much worse, according to Stiglitz, by cutting demand further though government spending constraints. Cutting the deficit during a recession can only make the recession worse, as John Maynard Keynes observed, and the crash duly became another economic depression.

We are seeing this in Britain where, after two years of the Coalition's austerity programme, public spending is actually going up. In Europe, this self-lacerating economic orthodoxy may destroy the euro. Under the dogma of deficit reduction, the European central bankers have been forcing countries like Ireland and Spain to introduce ever greater deficit reduction programmes, even though both countries were in surplus before the crash.

For Stiglitz the solution is simple. If the private sector cannot generate more jobs, then the government has to step in and do it for them. The state should be creating jobs by investing in education and new technologies to harness the economic challenges posed by the internet and by global warming. This should be paid for by increasing taxes. It has to be said that Stiglitz is a little vague on precisely what needs to be done. But he is almost certainly right when he says that "deficit fetishism" is making the recession worse. He is also right that increasing taxes, rather than decreasing them, is a way to provide resources for state investment and also for cutting the deficit. "With the top 1% getting more than 20% of the nation's income," he argues, "an incremental 10% tax on their income (without loopholes) would generate revenue equivalent to 2% of the nation's GDP". Budget crisis solved.

It sounds easy, put like that – but isn't in practice, largely because the wealthy are so adept at avoiding taxes, as the comedian Jimmy Carr demonstrated. There are also very formidable lobbies that block any attempt to increase taxes on the rich. Banks and wealthy corporations buy up the political system through campaign contributions and block policies that would damage the interests of the wealthy. They do this under the guise of a free market economics that holds, despite all evidence to the contrary, that cutting taxes on the rich makes the economy more dynamic and productive. As Stiglitz demonstrates, it does nothing of the kind. Indeed it does the reverse: by reducing the spending power of the middle and lower classes, it reduces GDP and plunges the economy into recession. This is the price of inequality

This is a remarkable work of political economy – a Das Kapital for the digital age, but shorn of communist utopianism. Stiglitz is no revolutionary, though he does pay tribute to the Occupy movement, which he inspired with a Vanity Fair article last year entitled: "Of the 1%; by the 1%; for the 1%". Critics will say that Stiglitz's prescription is too simplistic. That if the government increased borrowing dramatically in Britain, it would almost certainly cause a sovereign debt crisis, because the private markets would refuse to lend at an acceptable rate of interest. He also underplays the danger of inflation. The kind of spending stimulus required by Stiglitz would be vast – equivalent to fighting a war. He hints at this by observing that it was rearmament after 1938 that finally ended the Great Depression. We can only hope that is one mistake of the past that our politicians will not repeat.