The Sins of Inequality (and Why You Shouldn’t Care)

The Wall Street Journal has this little review on Thomas Pinketty’s Capital this morning, stating that the author himself believes his findings have been skewed by the radical left:

The book’s central proposition, that inequality in capitalist societies will inevitably grow, can be summed up with a simple equation: r>g. That is, the return on capital (r) outpaces the growth rate of the economy (g) over time, leading inexorably to the dominance of inherited wealth. Progressives such as Princeton economist Paul Krugman seized on Mr. Piketty’s thesis to justify policies they have long wanted—namely, very high taxes on the wealthy.

When he narrows his focus to what he calls “labor income inequality”—the difference in compensation between front-line workers and CEOs—Mr. Piketty consigns his famous formula to irrelevance. “In addition, I certainly do not believe that r>g is a useful tool for the discussion of rising inequality of labor income: other mechanisms and policies are much more relevant here, e.g. supply and demand of skills and education.” He correctly distinguishes between income and wealth, and he takes a long historic perspective: “Wealth inequality is currently much less extreme than a century ago.”

Ouch.

I will say this: Pinketty’s book was a lengthy tome indeed, but one of its salient points was that inequality — whether it is income or those vicious “Lexus Lanes” that allow wealthy people to drive on better roads — is really, really bad.  The point being that in a republic, people need a common language and a common frame of reference.  Inequality harms that conversation, because the family living in an upper class neighborhood where every kid has an iPad is going to have a difficult time relating to the single mother with four kids living in a trailer in Caroline County (sic).

Of course, the real problem here is that “r > g” isn’t just simplistic, it’s brute force.  Moreover, it doesn’t quite work with the elegance of a scalpel:

Many mainstream economists had reservations about Mr. Piketty’s views even before he began walking them back. Consider the working paper issued by the National Bureau of Economic Research in December. Daron Acemoglu and James A. Robinson, professors at the Massachusetts Institute of Technology and Harvard, respectively, find Mr. Piketty’s theory too simplistic. “We argue that general economic laws are unhelpful as a guide to understand the past or predict the future,” the paper’s abstract reads, “because they ignore the central role of political and economic institutions, as well as the endogenous evolution of technology, in shaping the distribution of resources in society.”

In short, the reason why I don’t mind that upper class family?  Why we don’t mind inequality here in the United States?  It is because in America (unlike other parts of the world), if I work hard enough, I could join their ranks.

There are other flaws too, most notably that most economists — with more unanimity than “global climate warming change cooling weather” — reject the idea that America is somehow entering a new Gilded Age.

The evidence simply doesn’t exist to support the assertion, and given the recent economic malaise and an economy too jittered to act given the massive degree of government action coming from Washington, those gilded few (read: small businesses and entrepreneurs) have far less wealth to create the economic wealth required to support the state socialism our friends on the left require and at times demand of free enterprise.

Obviously, free marketeers should be concerned about a level playing field.  Opportunity for investment, reduction in red tape, making sure local governments and civic associations aren’t squeezing out small business owners in Richmond or banning sidewalk cafes in Fredericksburg — these are all admirable and worthy efforts for our Burkean little platoons to go forth and conquer.

Moreover, expanding such economic opportunities will eat away at the very monster Krugman et al. claim to fear, but would rather combat with a Leviathan state of their own.  Best of luck improving the economic station of millions in such a soviet.

The real point is that inequality is the space that allows for advancement.  It’s the capital of the well-to-do that finances the loan of the small businessman to go forth and prosper.  It’s the prosperity of others that allows the manufacturer to give raises to skilled workers.  It’s the opportunities to advance that allow people to rise up from their lower class beginnings and identify themselves not through what their parents did but who they themselves want to be — and whether that’s through education, business opportunities, participation in the public square, or profession — that’s what makes America unique.

The stumbling block for our friends on the radical left is that the free market is the only institution that has lifted the great mass of humanity out from poverty.  No government has accomplished this, though many have indeed accomplished the inequality and authoritarianism they claim to struggle against.  Inequality may be viewed by those such as Pinketty and Krugman as a sin against republican forms, but it is — much like sins of passion — the sort that Dante would say leaves the individual barely singed.

In the argument over”r > g” one might want to give “g” a chance.  Or better still, give us all a chance at “g”.

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