Thursday, April 30, 2015

Piketty's Strategic Victory

By Mark Hendrickson

French economist Thomas Piketty’s book Capital in the Twenty-First Century reportedly has sold more than 1.5 million copies in its combined French and English translations. In his book, Piketty decries the unequal distribution of wealth that exists both within and between the world’s countries, and he calls for national governments to work together to reduce this inequality via increased taxation of income and accumulated wealth.

As attested by the gaudy sales figures, Piketty’s book struck a responsive chord among egalitarians, progressives, social justice advocates, etc. They believe that Capital proves that there is a maldistribution of wealth that government must correct. Piketty’s “proof,” though, is full of holes. First, the mounds of data in Capital were thoroughly debunked by multiple American economists. (Piketty publicly retracted them last year, supplying new data sets that also have been debunked). Second, his book is littered with flaws and fallacies, catalogued in my short book, Problems with Piketty. 

To give just one example of Piketty’s esoteric economic ideas, consider his views on capital: With his now famous formula, r > g (the rate of return on capital is greater than the rate of economic growth), he treats capital as a monolith endowed with mysterious powers to “reproduce” (p. 395) and “reconstitute itself” (pp. 41-2)—which would be news to the many owners of capital who have suffered losses.

He laments the prospect of capital becoming increasingly concentrated, even as evidence abounds that capital ownership is being democratized (more and more people have been able to accumulate savings and have capital to invest, and Piketty himself writes about the growing number of people receiving large inheritances on p. 420). Most mystifyingly of all, he alleges that capital “devours the future” (p. 571) as if capital causes economic ruin. If this were so, then the United States would have the world’s poorest people, because more capital has been deployed here than anywhere else.

In reality, capital multiplies the productivity of labor, thereby boosting wealth production, uplifting standards of living (albeit not for everyone equally and simultaneously) and enabling more people to accumulate savings. Capital is the driver of economic growth, not growth’s enemy, so Piketty’s proposal for government to increase taxes on capital is an anti-growth formula.

Despite the multiple economic errors in Capital, Piketty has achieved a strategic victory. He has succeeded in focusing the conversation on the question, “How equal or unequal is the distribution of wealth?” This quest for an empirical quantification of inequality is a red herring—a distraction from the policy debate that should be happening. The redistributionist, egalitarian left does not worry about how many holes are in Piketty’s arguments—to them, the redistribution of wealth is an article of faith. They will zealously pursue that goal in the name of “justice.” However, their premises and ethical presuppositions are in need of a challenge. It is important to discuss questions of justice such as, “When is an unequal distribution of wealth unjust?” and, “Is it just to favor policies that hurt the poor?”

All can agree with a desire to improve economic conditions for the poor and middle class rather than the rich minority. If the rich get richer while the non-rich prosper, so what?

Read the rest here.

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