Everything That Counts

Thomas Piketty’s Capitalism in the 21st Century has been subjected to considerable commentary, critical and supportive, and is packed with historical data about the history of inequality.  One may wonder if the considerable data in such a project is selected to support a preordained conclusion, especially when the conclusions and prescriptions fall so clearly in line with a distinct ideology.  But it is also worth wondering how relevant the subject is to most of us.

Inequality and wealth are not easily defined and are often described more from what is measurable than how people may perceive them.  It is like the man who is crawling on the ground looking for his keys under a street lamp.  He says he saw the keys last over two blocks away, but he is looking here because the light is better. 

Is inequality important?  Is it more important than social mobility?  Is it more important than the standard of living for all classes?

Some of the most equal societies are the poorest. Some of the wealthiest societies are the most unequal.  The poorest in America may enjoy a better lifestyle than the average citizen in more equal countries.

Vast inequalities may harbor the potential for social unrest, but that is muted by social mobility.  Oprah and Andre Young (Dr. Dre) may have been born in poverty, but that has not kept them from rising to the top one tenth of one percent.  Here is a defining question: did the dramatic rise in the fortunes of Dr. Dre and Oprah increase or decrease inequality as a whole? 

Here is the central problem with Piketty’s task: the data on inequality measures categories, not individuals. 

Individuals rise and fall among categories, often taking leaps as luck and talent unfold.  Oprah’s success increases inequality, but her success also demonstrates an increase in mobility.  Individuals may buy a lottery ticket knowing that the odds are against them if they know that their opportunity is equal to other lottery ticket buyers.  They will be less likely to buy a ticket if they think the game is rigged (i.e., crony capitalism).  For many, the mobility and the equality of opportunity are most important.  We hold no grudge against the winner, because we understand that the winner could be we.

Andrew Gibson notes in "The benefits of wealth inequality" in The Commentator:

If the Beckhams left the UK, and took their taxable income and all their spending with them, the country would lose out. Support staff would be laid off, New Bond Street would lose sales, and so on. But we would be a more equal society, which the Left says is a good thing.

Similarly, if more successful people chose to live and work in Britain – like, say, Kevin Spacey – bringing with them their talent, spending power and jobs, this would make us a less equal society and so the Left would be upset.

These absurd positions derive from placing equality before absolute living standards.

If less inequality is such a worthy objective for society, are we better off because Bernie Madoff made so many rich people poorer?

Piketty’s prescriptions, such as a high wealth tax, encourage behavior we find repulsive and immoral.  If you know your wealth is likely to be confiscated, you are more prone to conspicuous consumption and less prone to sacrifice for elusive returns that will be taxed.

While Piketty reviews a history of inequality, we should realize that the inequality of the feudal society of the middle ages, where force kept the poor in a lifetime of poverty, is vastly different from the inequality from a system where innovations spur spectacular success, while benefiting large proportions of other people.  Does anybody with an iPhone hold a grudge against Steve Jobs and his billions of dollars of wealth, or the wealth of Sergi Brin of Google?

All inequality is not equal.

Capital is also not so obvious to define.  Apple’s capital is much more than the sum of its cash, patents, real estate, and factories.  The most productive capital is the human mind, and its value is obscure until we see the results.  The entrepreneurial mind is always seeking to increase value and lower costs.  It is unmeasurable.

Just as Piketty’s task is distorted by the focus on categories instead of real people, so is his categorization of the “average” rate of return, which is critical to his thesis that investment returns are greater than economic growth and thus inevitably a source of growing inequality.

Averages are often misleading and irrelevant.  A six-foot man can drown crossing a river with an average depth of four feet.  A man with one foot in the freezer and one foot in the oven is not comfortable just because the average temperature is normal.

Within the average return on capital are the hugely successful and the bankrupt.  But that return is what drives capital to socially productive purposes.  Efforts to centrally influence or control the flow of capital can have disastrous ramifications, as we observed during the mortgage collapse. 

When Piketty suggests that we tax the wealth of the richest, exactly what does he think will happen to it?  The government will spend it – but on what?  Does he think that some politically motivated bureaucrat will allocate that capital to a more socially useful purpose than Warren Buffett would?  In which hands would that capital seek growth and job creation?  In which hands will it most likely pay farmers not to grow, and workers not to work?

Our safety net succeeds in eliminating the crushing poverty known by the third world.  Our challenge is to avoid replacement of the soul-deprivation of numbing poverty with the soul-deprivation of dependency.  Our biggest problem with the health of the poor in America is not starvation, but obesity.  As Paul Ryan framed it, we do not want to turn the safety net into a hammock.

Wealth more often dissipates in a few generations and moves to stronger hands.  Dynasties are rare; most fortunes are lost in a few generations.  We do not really need centrally planned redistribution; this problem generally takes care of itself when capital deployment is subject to competition and human frailties.  Inequality is a natural outcome of the competitive allocation of capital, and we are all better-served when capital is in strong hands and deployed wisely.  Rarely are those hands attached to the long arms of the government.

Henry Oliner blogs at  www.rebelyid.com.