Saturday, June 14, 2014

On Piketty's "Capital": A Tale of Two Types of Inequality

The Left's assault on "income inequality"—i.e., on economic success—intensifies with the publication of the book  Capital in the Twenty-First Century by Thomas Piketty. I have not read the book. But I have read a Washington Post review of the book by Harold Meyerson. Judging by Meyerson's review, Piketty's book is based on numerous false premises.

Meyerson covers more ground in his review than I can discuss in one blog post. Therefore, I want to focus in on Piketty's main theme: He purports to prove, according to Meyerson, "how capitalism itself enriches the few at the expense of the many." Meyerson writes,

In his new book, in which he looks at tax records that in Britain and France date all the way to the late 18th century, Piketty has unearthed the history of income distribution for at least the past hundred years in every major capitalist nation. It makes for fascinating, grim and alarming reading.

Since Piketty takes direct aim at capitalism, the first question to ask is—What is capitalism? Let us briefly examine some essential characteristics of capitalism as they relate to Piketty's premise.

Capitalism is the system of individual rights and voluntary trade. 

Rights, properly understood, are moral principles that sanction the individual's freedom of action in relation to other individuals. Rights guarantee the liberty of each individual to use his reasoning capacity to direct the actions he judges necessary to sustain his life, without coercive interference from other people, including government officials, so long as he respects the same rights of others.  

Rights are strictly political, not economic; they guarantee the pursuit of values, not a "right" to values that must be provided by others. Under capitalism, the government has only one basic function; to protect individual rights, including property rights. In regard to production and trade—the economy—the government is separate from the economy; meaning, the government is forbidden to interfere in private economic decision-making until and unless evidence of intended or actual rights violations surfaces. (For a full explanation of rights and government, see Man's Rights and The Nature of Government by Ayn Rand, and Craig Biddle on rights and government.)

The capitalist economy is governed by the trader principle. Trade is a logical consequence of individual rights and rights-protecting government. Trade is a voluntary exchange of values, with each party to a trade giving up what by his own judgment is a lesser value than the one he intends to gain in return. In a capitalist, division of labor economy, the medium of exchange is money. Typically, trade features one producer supplying a good or service in exchange for another person's money. The former wins by receiving money for the good or service he provides, because he values the money more than the good or service. The latter wins by receiving the good or service, which he values more than the money. This is as true for the worker in relation to his employer as for the businessman in relation to his customers. In all of these cases, each acts selfishly, and there are no losers; there is only win-win. There are only gainers, because every trader has gained, by his free, uncoerced judgment, a greater value than that which he voluntarily gave to the other. (Of course, any particular trade may result is one party losing because of bad judgement. The main point is, each trader enters into the trade voluntarily, and with the intent of making a gain on the transaction.)

By way of illustration, let's consider a few industrial capitalist titans.

Every sale of the Microsoft operating system added to Bill Gates' fortune. But in what way did the voluntary purchase of a Microsoft product harm the consumer who voluntarily paid for it? It didn't. It made the consumer's life better. Otherwise, why would the consumer have bought it in the first place? Add untold millions of other consumers, and you have the Gates fortune. At whose expense was that fortune created? No one, because the monetary fortune resulted from the creation of a material value where none existed before, and which consumers were willing and able to buy. The same could be said of every industrial fortune earned through trade. In what way did John D. Rockefeller acquire his fortune at the expense of those who voluntarily bought his kerosene (which, before electrification, was the primary means of nighttime illumination)? Or Henry Ford's fortune at the expense of those who voluntarily bought his cars? Or Steve Jobs's fortune at the expense of those who voluntarily bought his iPhones? In fact, every dollar you spend to satisfy a need or desire is contributing to someone's earnings, and very often someone's fortune. Who is benefiting from these billions upon billions of daily trades? Both sides of the trade. Who is being harmed? No one; otherwise, the trade wouldn't take place. A refusal to trade does not constitute a loss. It is merely a non-gain.

The same principle—the trader principle—applies to the employer-employee relationship. Every individual who takes a job does so by voluntary agreement to mutual advantage. Both employer and employee agree on the terms of employment, each seeking his own personal gain; the employee the money he needs to support his life, and the employer the labor he needs to fulfill his company's productive mission. Gates and Rockefeller provided the intellectual firepower that drove their companies, but they couldn't realize their visions by themselves. So they hire people to perform the required tasks. Once again, we see that the Rockefellers and Gateses of the economy grow their fortunes by lifting, not harming, others.

Under capitalism, people earn different levels of income based on differences in ability, ambition, career interests, personal circumstances. But to the extent that every dollar is earned through trade, income inequality is just.

But there is another sense in which income inequality is unjust.

Meyerson writes that "Piketty has unearthed the history of income distribution for at least the past hundred years in every major capitalist nation." But this implies a false premise—a straw man; that capitalism actually existed for the past century. In fact, the last 100 years did not feature capitalism—that is to say, full laissez-faire capitalism—in any major nation on Earth. We've had a mixed economy; a mixture of capitalism and statism. A mixed economy is a politically corrupted economy; that is, an economy intertwined with initiatory government force in the form of confiscatory, redistributionist, discriminatory taxation, heavy regulation, and political cronyism in myriad forms. Under such a set-up, one must distinguish between two different types of fortunes. Piketty, at least by Meyerson's account, does not distinguish between the two types of fortune-builders, which Ayn Rand differentiates as the money-makers vs. the money-appropriators.

Certainly, some fortunes—or parts of fortunes—were made by theft or government favors. Such fortunes certainly can be said to have been "made" or appropriated at the expense of everyone else. But to the extent that fortunes are capitalist fortunes, the money is made—i.e. earned—by lifting others. The GM bailout, to the extent that people profited from it, is an example of money "made"—i.e., appropriated—at the expense of others. The sale of Ford's cars—which didn't take a bailout—is an example of money made—earned—by lifting others (exchanging value for value). Under capitalism, no one can seize economic gains by government force what he can not gain by voluntary agreement (trade) in the free market.

When one understands capitalism, Piketty's premise that "capitalism itself enriches the few at the expense of the many" collapses of its own weight. Piketty simply doesn't get—or want to acknowledge—capitalism. Under capitalism, to the extent that it exists, fortune building goes hand in hand with general prosperity.

Related Reading:

Man's Rights and The Nature of Government—Ayn Rand

Obama's Corrupt "Equality" Campaign and the 99/1 Premise

Capitalism: The Unknown Ideal—Ayn Rand

Steve Jobs and the Money-Making Personality—Richard M. Salsman

Related Listening:

The Money Making Personality—Ayn Rand


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