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Inequality MattersComment Now

There are two familiar responses to the problem of human need.Conservatives say that the problem is poverty, and the answer is to createwealth. Liberals say that the problem is inequality, and that the answer is toconfiscate wealth. Conservatives say that by confiscating wealth, socialistand communist systems of government throughout the 20th century raisedno one out of poverty, but lowered quite a lot of people into it. Liberals retortthat wealth­creation always benefits the owners of capital more than itbenefits those who live from wages, and therefore the long­term effect of thefree economy is to transfer property from the poor to the rich. How, theyask, can this be a benefit to the poor, and in any case how are we to persuadethe poor to accept it?

The liberal position has received an enormous boost from the publication ofCapital in the Twenty­First Century, by the French left­wing economist,Thomas Piketty, an academic who is also an advisor to French socialistpoliticians, notably to Ségolène Royale. The book has been ecstaticallyreceived by American liberals such as Paul Krugman of the New York Times,since it argues that the free economy and the pursuit of wealth are just asdangerous as liberals say they are. Roughly put, Piketty argues thatcapitalism is advancing inexorably towards the kind of crisis foretold byMarx, as wealth is drained from the economy and piled up in a useless hoardof gold.

Of course, you might wonder why this hasn’t already happened, and Pikettygives various roundabout explanations of this. He also gives many statisticsand graphs purporting to show that it is in fact happening. The rich, he tellsus, are getting richer at the expense of the poor, and if nothing is done aboutit we shall enter a time of violent revolution, as the blatant inequalitiesbecome too much for the impoverished to bear.

Piketty bases his argument on two premises, one a priori, the otherempirical. The first is the well­known law that the rate of return on capitaltends to exceed the rate of growth of the economy: for if it did not, therewould be no motive for investment. This law, that r > g, is, with certainqualifications, widely accepted, not as the whole truth about a moderneconomy but as a principle governing the rational disposition of capital. Thesecond of Piketty’s arguments is empirical, and based on a detailed analysisof tax returns and other evidence, to show that the growth in income among

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wage earners has in recent times been significantly less than the growth ofthe returns to investors. In other words, r > g is not just an a priorispeculation, but an empirical truth.

Of course there are wars and revolutions, which lead to massiveredistributions of resources, usually to those who did nothing to earn them.But by and large, and given sufficient global stability, wealth will go onpassing in a one­way traffic from poor to rich. Joseph Stiglitz has argued thesame point, on slightly different grounds (The Price of Inequality, 2012).And these speculations feed into the left’s zero­sum way of thinking,according to which every benefit achieved by one person must be a costinflicted on another. If the rich are rich, it is because the poor are poor; andbelieving this, you can nurture all those old resentments against the peoplewho are better off than you are, on the grounds that they have stolen whatwas rightfully yours.

Piketty’s arguments have been pretty well exploded, and by no one moreeffectively than Jonah Goldberg, writing in Commentary Magazine. Mosttelling, perhaps, is Piketty’s examination of the Forbes list of the world’swealthiest people, in order to establish that the largest fortunes grew muchmore rapidly than average wealth during the period 1987 to 2010. The dataseem to show that the wealth of the Forbes list grew during that period by aninflation­adjusted 7% – even higher than the 4­5% return implied by the r >g argument. So the rich really are getting richer at our expense, and by quitea lot! However, Piketty neglects to mention that the people on the Forbes listtoday are almost all completely different from those on the list in 1987. Inother words, the data show that capital is not accumulating in the hands ofthose who already possess it, but moving around in just the way that socialmobility and growing wealth require.

Two questions are raised by Piketty’s argument. First, why is inequality sobad? And secondly, if it is so, what is the remedy? Piketty suggests thatinequalities breed revolutions, and that – as the transfers from poor to richcontinue – the situation becomes ever more explosive. But, even if that is soin France, it is not so in America. Research suggests that Americans livehappily with inequality, provided they can see the way to bettering their lot.If it is really poverty that we object to, then we should tolerate whatever isneeded to lift people out of it, inequality included. A poll in Januaryconducted by McLaughlin & Associates (for the YG Network) found thatAmericans by a margin of 2:1 (64 percent to 33 percent) prefer expandingeconomic growth to narrowing the gap between rich and poor. In 1990,Gallup

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asked Americans whether the country benefits from having a class of richpeople. Sixty­two percent said yes. In 2012, 63 percent said yes.

It seems, therefore, that most Americans do not think in the zero­sum way ofFrench left­wing economists. They do not believe that the rich are richbecause the poor are poor. They don’t want to confiscate wealth from thewealthy, but to create wealth for themselves.

That is not Piketty’s solution. For him inequality is the prime evil, and it is tobe overcome by the constant confiscation of capital. He proposes achievingthis by a tax on wealth, and by a marginal tax­rate of 80% on the highestincomes – in other words, by the kind of policies that French socialistgovernments have been introducing into Europe’s unhappiest country.

Piketty does not ask what then happens to this confiscated wealth. Whoholds it, for what purpose, and with what effect? The answer is clear: wealthconfiscated from the wealthy is held for political purposes. Instead of beingtranslated into goods and services according to the desires of freelyassociating citizens it is retained in the form of political power – the powerof the socialist politicians and their advisors over the people whom they tax.In this society of massive confiscation there will be just as manyaccumulations as in the old market economy. But they will not beaccumulations of goods that are constantly dispersed and redistributed byour free agreements. They will be accumulations of power in the hands of the‘expert advisors’ – in other words in the hands of people like Piketty. And inthis case there really will be a one­way traffic in assets, since all power thataccumulates in the state is stolen from the rest of us.