Piketty, Inequality, Envy, and Fairness

Unknown-1The rich-hating left went orgasmic over Thomas Piketty’s book Capital in the Twenty-First Century. I previously discussed the controversy. Now I’ve read the book.

Not the thunderbolt of lefty wet dreams, it’s mainly dry economic history and analysis. Much I found interesting and informative. But it’s one of the most poorly organized books I’ve ever read, meandering repetitively to and fro.

Piketty’s big “revealed truth” is r>g – that is, return on capital (r) exceeds economic growth (g), which leads to capital accumulation, and thus rising inequality. His data does show r>g through most of history. Well, not data exactly, but mostly assumptions and estimates. UnknownBut never mind. A bigger problem is that for the last century, 1913-2012, g>r! Piketty says this was due to the 1914-45 “shocks” (wiping out many fortunes) but that past norms are returning. So the future will more resemble the 19th century than the 20th? However, taxes were negligible before the 20th century. Thus in order to project future after-tax r>g, Piketty makes the heroic assumption that taxes on capital and its return will fall to zero! Even while he advocates greater taxation.*

imagesThat r exceeded g through most of history is hardly news because g (economic growth) was practically zero, while capital would nevertheless earn some return, typically farm produce or by lending money at interest. Now we have significant growth that, for the past century at least, has exceeded return on capital. But why let facts spoil a pretty theory?

Inequality may also rise from pay gaps. Piketty focuses on corporate “supermanagers,” whose pay he doubts is justified by merit or productivity. Unknown-2I agree – it’s due to incestuous boards of directors. But even if “supermanager” pay were drastically cut, would that money then flow toward the bottom of the income distribution? Surely not. It would go to shareholders; the rich would still get richer.

Much inequality talk casts the rich as squeezing the share of productivity begrudged to employees. That’s not how the economy works. By and large jobs pay what the market dictates, in order for businesses to attract and keep the needed workforce. They can’t just arbitrarily pay less; but nor can they pay more; if they want to stay competitive and employ anyone at all. Worker pay is not what’s left after the rich have “taken” their “share” (or more than their share).

Piketty’s constant use of the words “take” and “share” implies a zero sum game where one person’s larger share makes others smaller. Similarly, the language of “distribution” implies a pot of pre-existing wealth to be divided up, as though some god ladles out portions. But that’s not how an economy works either. In the main wealth is not “taken” but gained from other people handing it over willingly – in exchange for something (a product or service) they value even more. No zero sum game, that makes everyone richer. The pot grows.

Unknown-3In today’s world, not just “supermanagers” but top performers in any field earn much more than the nearly-as-good. Take LeBron James. It might seem absurd to earn so much for something so meaningless as getting a ball through a hoop. But millions enjoy watching it, and willingly pay, in various ways. So LeBron gets rich. Is that social injustice?

We can debate who deserves what income, and I’d agree with Piketty that much high pay is undeserved. But should it be forcibly confiscated (as Piketty urges) in conformance to those debatable opinions? By what right may I (or anyone) dictate what’s fair for others to earn? I eschew such arrogant presumption.

Meantime Piketty acknowledges that bare mathematical inequality tells us little. In the past a small minority lived well (to the extent technology allowed), while most lived wretchedly. Today the whole picture has shifted dramatically to a higher level of overall societal wealth: the rich are even richer (hence mathematically more unequal), but the rest are much richer too. Indeed, their living standard is actually comparable to that of the past’s wealthiest (if not better, considering health and longevity).** That today’s inequality might mathematically equal 1800’s says nothing.

Yet Piketty writes as though modern inequality exactly parallels that of centuries past. Relative living standards are no part of his analysis. images-2Piketty’s focus is entirely upon the wealthy, analyzing their situation in depth; the non-wealthy are present only as shadows, with no discussion of their situation and its changes. A Martian reading this book would have no idea how much ordinary lives have improved.***

The book indeed omits any analysis of economic inequality’s goodness or badness. The answer might seem self-evident. But clearly, perfect equality of wealth and income would not be just but unjust because different people earn/deserve differing outcomes; not to mention the matter of incentives for people to be productive (hardly theoretical in the experience of communist societies). The real question is what kind of inequality is acceptable. Some writers have attempted to grapple with this, but not Piketty. All he does is to project rising mathematical inequality – which he himself cautions tells us little.

Yet he’s terrified that the 1% will monopolize all wealth, with the 99% having nothing. The absurdity of such dystopian fantasies is simply this: who will buy all the goods and services whose sale undergirds the 1%’s wealth?

Unknown-4Their wealth is not a problem, nor is high inequality, so long as most people can live decent lives; and helping those who can’t does not require knocking down the rich. They don’t get their wealth at the expense of the rest. Steve Jobs impoverished no one but got rich through products that benefited millions. Had he not, all that wealth would not have been “distributed” to others. It would never have existed. Indeed, we would all have been poorer.

This book, obsessed with the rich and oblivious to the lives of others, would be better titled Envy. unknown1 Resentment at others’ success (especially when seemingly undeserved) is a powerful human emotion, often underlying egalitarian politics. Life is unfair, and we must work for fairness – but by building people up, not tearing others down. Envy and fairness don’t mix well.

* Rising inequality is often blamed on tax cuts, the top mid-century U.S. income tax rate having exceeded 90%. But never discussed is what rich people actually paid. Piketty himself notes they can legally avoid having taxable income, allowing returns to accumulate untaxed instead. So in practice nobody ever paid anything like 90%. Yet Piketty forgets this in claiming that lower taxes have raised inequality. (Rich people still pay far the lion’s share of income taxes.)

** This actually applies even to the poorest in advanced societies; especially taking into account government benefits. Today’s U.S. “poverty” line equates to a middle class living standard of just a few decades ago. Poverty ain’t what it used to be. And even in developing countries, the almost universal abject deprivation of the past is inexorably going away, afflicting now only a small minority of world population.

Photo by Walker Evans

Photo by Walker Evans

*** Nor would many Earthlings, romanticizing the “good old days.” But read, for example, Evans and Agee on the extreme poverty of rural 1930s Alabama. The work was grinding; the food disgusting; clothes made from used burlap sacks; copulation the only recreation. And those were white folks.

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8 Responses to “Piketty, Inequality, Envy, and Fairness”

  1. Dave Hitt Says:

    You read a the whole book? That makes you a rare individual.

    Amazon can tell how far people read a Kindle book by noting where they stop marking passages. For that book, they stopped at page *twenty-seven*, on average. That makes it one of the best selling/least read books ever.

  2. rationaloptimist Says:

    Yes, I read the whole book. I do not recommend doing so.

  3. Lee Says:

    Step 1 is to identify and quantify the inequality. Step 2 is to figure out whether anything needs to be done about it. If yes, Step 3 is to figure out what should be done.

    The book apparently addresses Step 1. Step 2 is open for debate. I say that we should try a little harder to raise those at the bottom. For Step 3, I recommend a negative income tax. (Really, I am not a zealot on that issue; it has been relevant for several of your recent posts!) Other possibilities are also viable.

    Also, I have a quibble; I disagree with “The absurdity of such dystopian fantasies is simply this: who will buy all the goods and services whose sale undergirds the 1%’s wealth?” Economic growth can be significantly curbed by too much poverty. When the consumers (“99%”) cannot afford to buy from the producers (“1%”) then there isn’t as much growth. We saw some of this with our great recession in the last few years. In the form of wealth creation (e.g., Android phones), it benefits the rich to keep the poor contributing to the economy. To the extent that the poor get too poor, this may have to be achieved via non-market forces, such as the negative income tax; and the rich should be excited to be a part of it, even if only for selfish reasons.

  4. rationaloptimist Says:

    Some on the left (like Thomas Frank, whose book I reviewed https://rationaloptimist.wordpress.com/2010/08/19/what’s-the-matter-with-kansas/) think plutocrats/conservatives actually DESIRE the impoverishment of the 99%. As you note, of course, it’s in everyone’s interest for everyone to be more prosperous. I surely agree more must be done toward that. Like, as I keep harping on, it should be simply unacceptable that 25+% of Americans don’t even finish high school.

  5. Paul Landsberg Says:

    I also would quibble with “The absurdity of such dystopian fantasies is simply this: who will buy all the goods and services whose sale undergirds the 1%’s wealth?” There is no CEO, no senior VP, no director in corporate America that is concerned with “the public good” or society. The total subservience to shareholder value relentlessly drives local optimization.

    Why is local optimization bad? Bear with me on a plausible scenario. If tech companies could take the number of H1B visas from the 2014 level of 85,000 and blow it open to say 850,000, it would drive huge corporate profits and drive massive salary deflation and/or layoffs at tech companies. Do not believe for one minute that H1B visas are used to find skills not available from American hires. Second, completely open the borders. No immigration control whatsoever. Third, drop the minimum wage to 1$ per hour.

    All three steps I outline would drive tremendous wealth for the proverbial 1%. All 3 actions in themselves would cause huge disruption to the USA, all 3 in concert…….wow!

    I hark back to The Black Swan where just because we cannot imagine it (‘the absurdity’) does not preclude the reality of events happening.

    Is there really that low of a high school graduation rate (25%+). That is disheartening.

  6. rationaloptimist Says:

    The scenarios you depict are indeed preposterous, and moreover fully open borders would actually increase the size of the global economic pie for everyone (by enabling workers to work where they can be most productive).

  7. Paul Landsberg Says:

    well, not truly preposterous. See Senator Ron Johnson on the minimum wage:

    Although there is convoluted statements later made about “it is here to stay” and “I support it in immigration reform.”

    On your 25% stat I had to peek at those damn socialists in Germany:
    86% graduation rate. Bah humbug!

  8. rationaloptimist Says:

    Germany is decidedly not a socialist nation.

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