Problems With Piketty
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? Piketty, however, detests the idea of the rich getting richer even if those less well off are prospering, too. Piketty even sees a silver lining in the Great Depression as it reduced wealth inequality (p. 275). Yet, he disdains the 1980s (p. 42) because, even though poverty declined and middle class prosperity rose, measures of wealth inequality increased. Piketty’s preference for greater statistical equality, even accompanied by increased poverty, over increased, possibly short term, inequality accompanied by widespread improvements in standards of living seems misanthropic.
Wealth has always been redistributed unevenly. Feudalism, mercantilism, socialism, and cronyism in our present day all involve those with political power using that power to enrich themselves and their allies at the expense of everyone else. Only free enterprise in which economic transactions are voluntary and therefore positive sum is truly just. Under such a system, nobody has power to take wealth from others. Individuals must instead earn wealth by rendering valuable economic services. In other words, people get richer not by doing something to others, but by doing something for them.
In every era, government itself has been and remains the primary source (crime being the other) of unjust negative-sum actions, yet Piketty wants to vastly increase the power of government to control the distribution of wealth. This is Capital’s message. I do not buy it.
Dr. Mark W. Hendrickson is an adjunct faculty member, economist, and fellow for economic and social policy with The Center for Vision & Values at Grove City College.
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