June 26, 2014

More Piketty Problems

Donald J. Boudreaux

Senior Fellow, F. A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics
Summary

Evidence is readily available against Piketty's naive notion that, as the rich “claim” larger and larger shares of national income, they will successfully oppose “progressive” government policies. According to Piketty himself, income inequality in America today is near an all-time high. Yet the last two U.S. presidential elections saw decisive victories for one of the most “progressive” and pro-redistribution candidates ever to run for that office.

Contact us
To speak with a scholar or learn more on this topic, visit our contact page.

As suggested in my column “Naive & ignoring basic economics” , Thomas Piketty's blockbuster economics book “Capital in the Twenty-First Century” features little economics.

Piketty clearly believes that economic inequalities are rising to unacceptable levels. Also clear is his confidence that the world would be much improved if governments had more gumption and power to tax the rich at confiscatory levels.

Yet Piketty seldom does in his book what good economists do routinely. Rarely does Piketty look for unintended consequences. Hardly ever does he reveal an awareness of human creativity or craftiness (unless it's the craftiness of some rich people to exploit poorer people). Piketty is blind to the nuances of human action and to the complex functions of economic institutions — nuances and functions explained by acclaimed economists such as Armen Alchian, James Buchanan, Deirdre McCloskey, Joel Mokyr, Douglass North, Julian Simon and Vernon Smith. He cites none of these towering scholars. Had he consulted their works, Piketty's narrative would perhaps be very different.

Consider Piketty's argument that “wealthier people obtain higher average returns (on their investments) than less wealthy people.” He correctly notes that exceptionally good wealth-management consultants and financial advisers command higher fees than do mediocre consultants and advisers. But Piketty wrongly concludes that only the wealthy can afford the services of exceptionally good financial consultants and advisers.

Small and medium-size investors can pool their funds to create larger funds; it then pays to hire top talent to manage these funds. Mutual funds are an example. A worker with only, say, $15,000 to invest can, by purchasing shares of mutual funds that hold billions of dollars, arrange for his small puddle of investable wealth to be managed by some of the best wealth managers in the business.

Or consider Piketty's concern that greater economic inequality means greater political power for “the rich.” While this fear superficially seems sensible, a moment's thought calls it into question.

The rich are not a unified group. Some rich people, such as George Soros, support liberal causes. Other rich people, such as Sheldon Adelson, support conservative causes. And still other rich people, such as Charles Koch, support libertarian causes. Ignoring this political diversity, Piketty leaps too hastily to the conclusion that a greater concentration of income at “the top” means greater pressures on government to pursue policies that help the “1 percent” at the expense of the “99 percent.” But it's common for Soros and many other rich people to support political candidates and causes that generally oppose tax cuts.

Even the narrow economic interests of the rich are not as uniform as Piketty believes. Tycoons who are heavily invested in oil and natural gas are harmed by many policies that enhance the wealth of tycoons who are heavily invested in “green” technologies.

Evidence is readily available against Piketty's naive notion that, as the rich “claim” larger and larger shares of national income, they will successfully oppose “progressive” government policies. According to Piketty himself, income inequality in America today is near an all-time high. Yet the last two U.S. presidential elections saw decisive victories for one of the most “progressive” and pro-redistribution candidates ever to run for that office.