Inequality Matters

Published October 30, 2014


There are two familiar responses to the problem of human need. Conservatives say that the problem is poverty, and the answer is to create wealth. Liberals say that the problem is inequality, and that the answer is to confiscate wealth. Conservatives say that by confiscating wealth, socialist and communist systems of government throughout the 20th century raised no one out of poverty, but lowered quite a lot of people into it. Liberals retort that wealth-creation always benefits the owners of capital more than it benefits those who live from wages, and therefore the long-term effect of the free economy is to transfer property from the poor to the rich. How, they ask, can this be a benefit to the poor, and in any case how are we to persuade the poor to accept it?

The liberal position has received an enormous boost from the publication of Capital in the Twenty-First Century, by the French left-wing economist, Thomas Piketty, an academic who is also an advisor to French socialist politicians, notably to Ségolène Royale. The book has been ecstatically received 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 as dangerous as liberals say they are. Roughly put, Piketty argues that capitalism is advancing inexorably towards the kind of crisis foretold by Marx, as wealth is drained from the economy and piled up in a useless hoard of gold.

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

Piketty bases his argument on two premises, one a priori, the other empirical. The first is the well-known law that the rate of return on capital tends to exceed the rate of growth of the economy: for if it did not, there would be no motive for investment. This law, that r > g, is, with certain qualifications, widely accepted, not as the whole truth about a modern economy but as a principle governing the rational disposition of capital. The second of Piketty’s arguments is empirical, and based on a detailed analysis of tax returns and other evidence, to show that the growth in income among wage earners has in recent times been significantly less than the growth of the returns to investors. In other words, r > g is not just an a priori speculation, but an empirical truth.

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

Piketty’s arguments have been pretty well exploded, and by no one more effectively than Jonah Goldberg, writing in Commentary Magazine. Most telling, perhaps, is Piketty’s examination of the Forbes list of the world’s wealthiest people, in order to establish that the largest fortunes grew much more rapidly than average wealth during the period 1987 to 2010. The data seem to show that the wealth of the Forbes list grew during that period by an inflation-adjusted 7% – even higher than the 4-5% return implied by the r > g argument. So the rich really are getting richer at our expense, and by quite a lot! However, Piketty neglects to mention that the people on the Forbes list today are almost all completely different from those on the list in 1987. In other words, the data show that capital is not accumulating in the hands of those who already possess it, but moving around in just the way that social mobility and growing wealth require.

Two questions are raised by Piketty’s argument. First, why is inequality so bad? And secondly, if it is so, what is the remedy? Piketty suggests that inequalities breed revolutions, and that – as the transfers from poor to rich continue – the situation becomes ever more explosive. But, even if that is so in France, it is not so in America. Research suggests that Americans live happily 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 is needed to lift people out of it, inequality included. A poll in January conducted by McLaughlin & Associates (for the YG Network) found that Americans by a margin of 2:1 (64 percent to 33 percent) prefer expanding economic growth to narrowing the gap between rich and poor. In 1990, Gallup asked Americans whether the country benefits from having a class of rich people. Sixty-two percent said yes. In 2012, 63 percent said yes.

It seems, therefore, that most Americans do not think in the zero-sum way of French left-wing economists. They do not believe that the rich are rich because the poor are poor. They don’t want to confiscate wealth from the wealthy, but to create wealth for themselves.

That is not Piketty’s solution. For him inequality is the prime evil, and it is to be overcome by the constant confiscation of capital. He proposes achieving this by a tax on wealth, and by a marginal tax-rate of 80% on the highest incomes – in other words, by the kind of policies that French socialist governments have been introducing into Europe’s unhappiest country.

Piketty does not ask what then happens to this confiscated wealth. Who holds it, for what purpose, and with what effect? The answer is clear: wealth confiscated from the wealthy is held for political purposes. Instead of being translated into goods and services according to the desires of freely associating citizens it is retained in the form of political power – the power of the socialist politicians and their advisors over the people whom they tax. In this society of massive confiscation there will be just as many accumulations as in the old market economy. But they will not be accumulations of goods that are constantly dispersed and redistributed by our 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 in this case there really will be a one-way traffic in assets, since all power that accumulates in the state is stolen from the rest of us.

 Roger Scruton is a Senior Fellow of the Ethics and Public Policy Center.

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