I have to admire Thomas Piketty. Has there been a more effective book promotion than that for his book “Capital in the Twenty-First Century”? The promotion has been years in the making, with the Occupy Movement, the war on Mitt Romney and the ongoing efforts of Obama to stir up resentment of the wealthy. As they say, you can’t buy publicity like that.
I have not read Piketty’s book and I am unlikely to (although I would not definitely rule it out). I have read reviews and commentary, pro and con, enough so that I believe I understand the main features of the book:
- Empirical data measuring inequality in various countries over several hundred years
- Such data shows increasing inequality since WWII
- Observation that if the rate of return on capital r exceeds the rate of growth g, those with capital will own an increasing share of the wealth
- Increasing inequality is bad, so it must be combatted
- One way of curtailing a tendency to inequality is the imposition of a global wealth tax, progressive, of course.
Critics have questioned his data and methodology in the last week or so. That is an interesting controversy, but my questions are independent of his calculation methods. What puzzles me is why some consider inequality to be harmful? I can think of several explanations why:
- It creates resentment and jealousy in those who have less
- It is unfair that some have so much more (e.g., current CEO’s earn 257 times the average employee)
- The concentration of income/wealth in few hands will result in the impoverishment of the rest (i.e., there is a fixed pie)
- The wealthy use their money to influence the government which will then oppress the rest of the population or steal their wealth
- Related to the previous explanation, the wealthy have already rigged the rules of the game to favor themselves (e.g. property rights, contract rules, rules of incorporation)
First, isn’t it clear that individuals are unequal in key respects? We are not born equal in intelligence, in athletic ability, attractiveness. We differ in our willingness to work hard, our reaction to adversity, and our general optimism or pessimism in outlook. We don’t choose the circumstances of our birth including the intelligence or wealth of our parents. We may be lucky – in the right place at the right time or know the right people. Is it any wonder that outcomes can be widely divergent and unequal? Proposition 1 – individuals are naturally unequal which inequality leads to large differences in income and wealth.
Critics of inequality often use language which begs the question by describing income as something that is distributed. Thus income is viewed as a common store which is doled out by some agency. This creates an impression that those with more income have somehow jumped to the head of the line and took more than their “fair” shares. There is no pot of income that is just sitting there for the taking aside from that which is created by the efforts of individuals – income has first to be created. Under our legal system, the income that is produced goes to the those who produce it. Income produced by groups of individuals is divided based on the agreed upon arrangement (e.g., employer/employee/investor/stockholder).
A second line of argument is that since the rules under which income is produced and allocated are enforced by a government, any such allocation is arbitrary and thus redistribution of the results is fine. There are several problems with this argument. First, when you leave people alone, trade and exchange naturally occur; it does not have to be imposed. Consider the millions of businesses in the US economy. The vast majority were started by individuals not in response to a government mandate but in service to individual desires. The allocation of revenue is also determined by individual agreements; for example, employees receive certain periodic payments (wages), salesmen earn commissions based on sales and owners receive the residuals which represent profits. The common law rules that govern such organizations have largely evolved without legislative action – humans are capable of working cooperatively and arrive at rules to govern their collaborations without top-down mandates. Of course some will object that a key rule such as the limited liability corporation did not evolve but was created by a legislature but I don’t think that is a crucial objection – businesses existed before the rule and would exist without it. Proposition 2 – the rules governing the creation and ownership of income are not arbitrary and are based largely on standards evolved over time to govern cooperation between individuals.
Second, there is a key difference between establishing the rules of commerce and judging the results fair if the rules are followed on the one hand and altering the results afterward because you don’t like them. The first approach allows for a system of individual freedom and non-interference while the second one requires a heavy state presence. If the rules are stable and well-known, people can make plans based on them. It may be objected that a system of redistribution can be set up in advance through income and wealth taxes that will run on automatic pilot. For argument’s sake, I would concede the possibility, but believe that creates secondary problems connected with increased government power, which are discussed in more detail below. Proposition 3 – efforts to reduce inequality are inconsistent with a free society and would require/result in a much larger central government.
Another claim is that the increasing concentration of wealth allows the wealthy to commandeer the government and somehow oppress everyone else. My understanding is that this is one of the key arguments in Thomas Piketty’s Capital in the Twenty-First Century. I find this argument puzzling. I recognize that individuals and organizations can manipulate the government to gain advantages through grants of monopoly, elimination of competitors, and contracts with the government. I am in favor of reducing the powers of government to grant favors to the politically connected (while recognizing the difficulty of eliminating such favoritism). Aside from these areas, I do not see how government control is advantageous to those who have earned their wealth through free exchange. At worst, I believe the successful have much less to gain from the government and a lot to lose, through taxation and the depredations of the political class.
The solutions that Piketty advocates, a wealth tax and punitive income tax, will increase the power of government and the attractiveness of government manipulation. This seems to go in the wrong direction – a smaller government that spends less is a less attractive takeover target. Finally, a larger government with more favors to dispense makes citizens less secure – for those receiving benefits, and for those funding the benefits. If you are a recipient, your benefit can be withheld. For an example, remember the success of the Democrats in preventing any modifications to Medicare by accusing the Republicans of killing grandma back in the 1990′s. If you are a taxpayer, more of your income (and wealth) can be taken away, especially if you are identified as one of the undeserving rich.