The Problem of Inequality

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Left unfettered, the capitalist system always has and always will produce a rising standard of living for the poor and the middle class, and for the people as a whole. It also produces a constant circulation of wealth among economic classes, ensuring that great capitalist enterprises will eventually be overwhelmed by competition, and great private fortunes will soon be dissipated by their heirs, who will be replaced in the economic hierarchy by nouveaux riches. Another way of putting this is that the poor will get richer and the rich will get poorer — but there will always be large differences of wealth between the people who are most successful at the moment and the people who aren’t.

If you don’t like that, you can consider what happens under the precapitalist system, which fools are always trying to revive — the system in which the state constantly tries to control economic differences by redistributing wealth, thereby destroying it. Isabel Paterson said it best: “Destitution is easily distributed. It’s the one thing political power can insure you.”

The poor will get richer and the rich will get poorer — but there will always be large differences of wealth between the people who are most successful at the moment and the people who aren’t.

Recently, after reading some of Hillary’s Clinton’s demagogic rants about “inequality,” I happened on some words that reminded me of the unfortunate fact that total ignorance of political economy is nothing new. The words are part of an essay, “The Absurd Effort to Make the World Over,” by the early sociologist William Graham Sumner. They were published in 1894, and they show how persistent economic fallacies, and their political exploitation, have been. They were chronic even in Sumner’s time, which was supposedly the great age of laissez-faire.

Sumner writes:

It is repeated until it has become a commonplace which people are afraid to question, that there is some social danger in the possession of large amounts of wealth by individuals. I ask, Why? I heard a lecture two years ago by a man who holds perhaps the first chair of political economy in the world. He said, among other things, that there was great danger in our day from great accumulations; that this danger ought to be met by taxation, and he referred to the fortune of the Rothschilds and to the great fortunes made in America to prove his point. He omitted, however, to state in what the danger consisted or to specify what harm has ever been done by the Rothschild fortunes or by the great fortunes accumulated in America. It seemed to me that the assertions he was making, and the measures he was recommending, ex-cathedra, were very serious to be thrown out so recklessly. It is hardly to be expected that novelists, popular magazinists, amateur economists, and politicians will be more responsible. It would be easy, however, to show what good is done by accumulations of capital in a few hands — that is, under close and direct management, permitting prompt and accurate application; also to tell what harm is done by loose and unfounded denunciations of any social component or any social group. In the recent debates on the income tax the assumption that great accumulations of wealth are socially harmful and ought to be broken down by taxation was treated as an axiom, and we had direct proof how dangerous it is to fit out the average politician with such unverified and unverifiable dogmas as his warrant for his modes of handling the direful tool of taxation.

Great figures are set out as to the magnitude of certain fortunes and the proportionate amount of the national wealth held by a fraction of the population, and eloquent exclamation points are set against them. If the figures were beyond criticism, what would they prove? Where is the rich man who is oppressing anybody? If there was one, the newspapers would ring with it. . . . Wealth, in itself considered, is only power, like steam, or electricity, or knowledge. The question of its good or ill turns on the question how it will be used. To prove any harm in aggregations of wealth it must be shown that great wealth is, as a rule, in the ordinary course of social affairs, put to a mischievous use. This cannot be shown beyond the very slightest degree, if at all.

I can think of only one exception to this line of argument, but the exception has become a mighty one. When people become convinced that wealth is indeed dangerous, and they create a political culture based on the fallacies Sumner reproved, they transform their fears into reality; they make wealth dangerous. Most rich people are politically harmless, but some act on the fallacies they have been taught, and try to better the country by political activism. The heirs of Ford, Rockefeller, Kennedy, and many others have done this. George Soros is doing it right now. Almost always, these people work toward constricting the capitalist system and therefore (strange, unanticipated, and unrecognized effect) toward freezing poor people in their poverty. And as government, under such influences, attains more power, it attains the power to generate fortunes directly. This, not the capitalist system, is the origin of the vast Clinton fortune, a fortune now being used, as was the fortune of Julius Caesar, the richest man in Rome, to devastate the republic in which it grew.

This, I believe, may be the great domestic political problem of our time. (We have a lot of others, I know.) How will libertarians address it?




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Wrestling with Reality

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I’m well aware of the old adage, “Never let the facts get in the way of a good story,” so I approach films that proclaim themselves to be “based on a true story” with a healthy dose of skepticism. In the case of Foxcatcher, nominated this week for five Academy Awards, including Best Picture, Best Director, Best Actor, and Best Supporting Actor, a phrase used tongue-in-cheek by last year’s American Hustle is more a propros: “A part of this actually happened.”

Some of what we see in Foxcatcher is true: brothers Mark and David Schultz (played in the film by Channing Tatum and Mark Ruffalo) actually did both win gold medals for wrestling in the 1984 Olympics (in different weight divisions). David did find success as a coach and trainer post-Olympics, while Mark struggled financially (wrestlers aren’t the most marketable athletes for selling toothpaste and breakfast cereal, even when they have gold medals; as one character sniffs in the film, “Wrestling is so low”). Wealthy chemical heir John du Pont (played by Steve Carell) did fancy himself a wrestling coach and did build a state-of-the art wrestling facility on his farm called Foxcatcher. Both Schultz brothers did work as coaches and trainers for du Pont’s team, although never at the same time. From what I can discern, eyewitnesses say that the shocking ending of the film is quite accurate in terms of what happened, but not necessarily in terms of why it happened. New motives have been manufactured for this tale.

However, the middle of the film “doesn’t let the facts get in the way of a good story,” and the story is admittedly much more interesting with the two brothers working at Foxcatcher together, where they display a family dynamic — two brothers abandoned as toddlers by their father (also not true) — that resonates almost voyeuristically with viewers, especially as it is juxtaposed against the bizarre and painful filial dynamic between du Pont and his cold and haughty mother (Vanessa Redgrave) as portrayed — that is, fictionalized — in the film.

When Carell's du Pont smiles he reveals teeth and gums, reminiscent of a shark unhinging its jaw for a kill.

This story focuses on loneliness: the loneliness of gold medalist Mark Schultz as he gives talks to middle schoolers for 20 bucks a pop and eats ramen noodles for dinner because they are filling and can be purchased 10 for a dollar; the loneliness of John du Pont, who has everything money can buy — even friends and medals — but relates to his own mother from a distance; and the loneliness of a mother who cannot accept or appreciate her son and his choices. Mark is looking for a father figure, and du Pont is looking for someone to parent. They fall into these roles through a pathetic sense of desperation.

Only David seems to have a grasp on reality. Married to a smart and sassy wife (Sienna Miller) with two adorable children, he doesn’t need the money or the glory du Pont dangles in front of him. But he does need to protect his brother, and that’s what (in the film) lures him to Foxcatcher. The relationship between these two brothers is deep, intimate, and exclusive, and the two actors fall into their roles with a vulnerability seldom seen on screen between men. In an early scene they prepare for a training session in an elegant, graceful warmup dance. They nuzzle each other like animals testing each other’s strength. Neck-to-neck they press into each other’s shoulders, and then roll across to face each other from the other direction, hands on the other’s back or ribcage, becoming increasingly aggressive as they warm for the match.

Into this relationship comes John du Pont, trying to buy a team, a medal, and a sense of importance. Steve Carell, known for his bumbling comedic roles in TV’s The Office and such movies asGet Smart and Date Night, is about as unlikely a casting decision as one could imagine for the crazed, withdrawn du Pont. But director Bennett Miller could see beyond the comedic roles that have marked Carell’s career. “I think all comedians are dark,” Miller said after casting Carell, and indeed Carell plays du Pont with a reserved aggression that never breaks character. He peers down his large (prosthetic) nose with eyes that are distant and unreadable. When he smiles he reveals teeth and gums, reminiscent of a shark unhinging its jaw for a kill. The real Mark Schultz has said of the real du Pont, “Everything about him was weird, from the dyed red Ronald McDonald hair with layers of dandruff in the roots to his dark yellow teeth, caked with food.” Carell captures this benign yet dangerous person perfectly.

How could someone so disgusting, unlikeable, and antisocial secure a corner for himself as a trainer and a sponsor for USA Wrestling? If the film is to be believed (and remember, it’s “based on a true story”), you can buy just about anything in this world with money. Nonprofit organizations purport to put their cause first, but in reality, the buyer is always right — and in the nonprofit world, the buyer is the one donating the money. It’s not a happy system, but until wrestlers and artists and others who enjoy esoteric pursuits can find a way to sell their efforts directly to the consumers, it’s the only one we have.


Editor's Note: Review of "Foxcatcher," directed by Bennett Miller. Annapurna Pictures, 2014, 129 minutes.



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Hong Kong in Context

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Taking a casual survey of American political rhetoric, one would suspect that we were at the dawn of a new age — or at least that this nation had a poor memory. Somehow everything has become unprecedented. Unprecedented healthcare reform; unprecedented opposition to healthcare reform; unprecedented Republican victories in the midterm elections; unprecedented demonstrations in Hong Kong. But China has a long memory.

The recent protests in Hong Kong have adhered to the choreography of Chinese politics in at least one important respect: the Communist regime has accused its political opponents of being unpatriotic. Xinhua, the state news agency, recently published a commentary denouncing celebrities who supported the protests for the putative crime of challenging the authority of the Party, and — by a heroic leap of logic — of betraying a lack of love for the motherland. CY Leung, the Chief Executive, has accused foreign actors of orchestrating the demonstrations. He did not specify who these foreign actors were, but we all know that he means the United States, as if we weren’t content with the existing friction in bilateral relations and decided on a whim to make life more difficult for the Chinese government.

The democratic aspirations of the people of Hong Kong should be framed, by them and by their friends abroad, not in terms of their unique identity, but in terms of universal values that all Chinese can share.

Such hamfisted tactics could be dismissed, were it not for the real danger that the accusations might actually be taken seriously. There is an ugly history of antagonism between the people of Hong Kong and their estranged brethren on mainland China, inspired by subjects ranging from the status of the Cantonese dialect to patriotic education to reports of tourists doing unseemly things in unseemly places in Hong Kong. To people from mainland China, the aloofness of people from Hong Kong often smacks of arrogance and snobbery. But the Chinese can put up with snobbery. It plagues Beijing and Shanghai, and nobody seems to mind. In the case of Hong Kong, the danger is that the protests may be viewed in light of this antagonism and interpreted as a posture of “more-democratic-than-thou.”

Hong Kong has always been viewed as an enclave of wealthy, westernized Chinese, enjoying a wide measure of civil liberties that have been resolutely denied to people from the mainland. There is a significant possibility that they will be regarded as spoiled children, not content with their privileges and clamoring for more. The Communist regime will avail itself of every opportunity to cast aspersions on the pro-democracy demonstrators, and any indication that this is a struggle for Hong Kong’s exclusive rights will only serve to alienate it from the rest of China.

The democratic aspirations of the people of Hong Kong should be framed, by them and by their friends abroad, not in terms of their unique identity — for that would invite references to their former status as a colony of the West — but in terms of universal values that all Chinese can share. To Americans nurtured on the idea of universal values, this should not seem unprecedented.

/p




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Are Poor People Happier?

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Some people believe that those living in utter poverty, in the wretched parts of the world, know best how to smile and enjoy life. “Poor people,” they say, “live simple, contented lives, with fewer worries and distractions.” Some of the best-known spiritual teachers — Stephen Covey, Wayne Dyer, etc. — have talked about greater happiness, deeper connections with the earth, and higher levels of spirituality among the poor societies they have visited. Many celebrities (John Lennon, Richard Gere, etc.) and business leaders (the late Steve Jobs, for example) spent extended time in India to seek spiritual enlightenment.

To a casual observer, all this may look very reasonable. But the reality is completely different. And we’re not talking about a minor, insignificant error: such beliefs seriously affect what we mean by progress (Is poverty better than prosperity?) as well as the public and financial-aid policies we adopt in relation to poorer societies, often with horrible consequences. Even within this strand of erroneous views there are two schools of thought. On one hand there are people who want to restrict all developments in “primitive” areas “to preserve their languages and cultures,” whether those societies want development or not; on the other there are people who want to impose democracy on these societies and flood their poor people with cash, because “they deserve a better material life, their fair share.”

So what is it about poor societies?

Some people living in big cities cherish a romantic notion about rural places within their own area. Romantic, and mistaken: it is often a huge error to presume that rural people believe in simple living, have a higher sense of community, are closer to nature, are friendlier and more compassionate, and are physically more active and healthier.

I have been to scores of the world’s poorest countries, and I have spent extended periods there. I have done several spiritual retreats in India. I have found poor people very hospitable and generous toward me. But one must live there long enough to understand what is behind the facade. One must ask whether poor people are, indeed, happy.

A wretched life is survivable only on the foundation of numbness. Early in life, very poor people learn to switch off feelings, to avoid sensing the nonstop pain of poverty and tyranny. Those in hunger lack an interest in philosophy, a sense of right and wrong, or an aspiration for higher meaning in life. Their lives are driven by expediency, not morality or reason. They relieve the stress of living under tyranny by passing it on to those more vulnerable. They have, quite rightly, one overpowering obsession: survival. Poor people process the world through dogmatic beliefs and faith.

To poor people, a visitor is a novelty, a reason for catharsis, a much needed escape from their mostly wretched existence. The visitor provides them with a sense of comfort, a tacit knowledge that they are not in competition with him for resources. But visitors (and readers of visitors’ reports), beware: it is hazardous to jump to any conclusions about the character of a poor society and its state of being, simply because of a short, smiley encounter. Anyone who calls poverty spiritual is misled, shallow-thinking, or condescending.

* * *

I must expect some readers to respond that I am “over-generalizing.” They fail to comprehend that we always generalize. Was Saddam Hussein a bad guy? Indeed he was. But that is a generalization. In parts of his life, he was a good guy. He was a hero for people from his community. We might say that politicians are corrupt or that bureaucrats are lazy. That does not mean that good politicians cannot exist or that you’ll never find an efficient bureaucrat. Similarly when I talk about poor people, I am referring to the average.

* * *

But aren’t people in poor counties free from the “depression” felt by people in the richer, developed world? Yes, but for a very wrong reason. Poor people just don’t have the time (or the future) in which to feel depressed. On the surface of their existence they create all possible noise, chaos, and smell to keep themselves distracted, to avoid examining their inner selves. If they did find a reason for self-examination, they would emerge extremely frustrated. History shows that a lot of social revolutions happen, ironically, as people emerge from hand-to-mouth existence — the inertia of pre-rational thinking does not necessarily change even after they have started becoming prosperous.

Creating policies based on erroneous assumptions, either to aid poor countries or to change their regimes forcefully, has had disastrous consequences. If we really want to be an impetus for change, we must accept facts as they are, objectively, even if they counter the instinctive sympathy we feel for the weak.

Are the meek inheriting the earth?

In today’s age of technology, poverty does not come easy. Most poor people are poor because that is what they deserve. It is a result of their spiritual poverty, of their failure to imagine abundance and a win-win society, of a sinful state of thinking and worldview in which envy, tribalism, irrationality, and fatalism dominate. It is with their mental paradigms that they elect their leaders. Those in positions of power indeed are tyrants, but see what happens when the underclass is suddenly elevated to higher positions. You should normally expect worse.

Why else did Iraqi institutions built at the cost of trillions of dollars (including the money spent removing a tyrant) collapse like a house of cards within months of being left to themselves? It is just very hard to change the human mind, and without changing that, there is no hope. The removal of Saddam Hussein was at best a result of extraordinarily naive thinking. There is no escape from drudgery until people individually wake up.

Poor people are very materialistic, if you understand that “materialism.” Material acquisition is their obsession, a result of their minds being tuned only to survival. Moreover, when they start earning a surplus — and when they become nouveau riche — their worldviews don’t change easily and may not for several generations. A volcano of crudeness and rudeness erupts. And why venture to exotic countries to understand this? Look into your own backyard. Have you ever wondered why some in the poorest communities in your area have the most expensive cars? Look for information about those who won hundreds of millions in lottery tickets. Most of them end up worse than where they started, with unpaid bank loans, drug addiction, and wrong company.

* * *

A lot of confusion is created by using terms improperly. Some people tend to use “capitalism” in place of “materialism.” While they are not parallel terms and hence not strictly comparable, in essence they are often antonymous. “Materialism” has its roots in addiction to material acquisition and “capitalism” in individual liberty. In my experience those who seek personal freedom often lack any obsession for material acquisition. And one can live in utter opulence and still not be materialistic, if material acquisition is not the driving force in one’s life.

* * *

In the South African capital of Johannesburg, one is awed by Lamborghinis, Jaguars, and other very expensive cars, mostly driven by those who were very poor not long before, but got easy access to cash because of redistribution policies. Those who thought that this money would have gone toward better purposes have been proven wrong.

In my backwater city in India, where cars and houses were traditionally modest, signs of prosperity are now the same as signs of bankruptcy: people buy Audis and BMWs on loans they cannot afford to pay. Alcoholism among women, slum-dwellers, and rural people is on the rise, rather rapidly. A culture of self-denial (owing to the socialistic past) has rapidly mutated into one of pleasure-centeredness. Ironically, the switch was easy; it merely required a change of rules — there was no time-consuming, painful critical evaluation, for such a concept does not exist in the culture.

* * *

One might ask where Indian spiritual teachers emerge from. The reality is that spirituality is a rare concept in Indian society. Religions teach fatalism, dogmas, and superstitions. Magical stories of kings and queens and the myths that go with them grip the mind very early in life and combine to cripple people from thinking rationally. There is too much of materialistic expectation in the concept of the afterlife developed from dogmatic religion, making indoctrinated individuals very resistant to change. The corrupt leaders and sociopaths who benefit have entrenched themselves extremely well, over hundreds of years; and this entrenchment is not going to go away easily, for the sufferer and the tyrant are often two sides of the same coin. In such an ecosystem, those with an interest in spirituality are outcast — J. Krishnamurti, for example — and hence tend to gravitate to certain pockets of protection or interest, mostly catering to American and other Western followers.

* * *

But aren’t Chinese and Indians thrifty? Don’t they have huge savings? Haven’t the Chinese provided trillions in credit to the developed world? Consumption of Louis Vuitton and other exotic luxury goods — brands that I cannot pronounce or remember — is exploding in China, Thailand, Malaysia, and so on. The Confucian culture of China, a culture that encourages saving, is mostly a myth that prevails among China bulls (and I am one, but for a different reason), a retrospective rationalization for China’s successes of the last three decades. Not too long back, the Chinese were seen as spendthrift, lazy, and unhygienic.

* * *

Macau today is a much bigger gambling and sin city than Las Vegas, and growing. An upcoming hotel will soon have the biggest fleet of Rolls-Royces anywhere in the world. The cost of a suite for one night will be $135,000. Each suite will have a private access, perhaps to provide the ultimate in hedonism. I don’t decide what people should do, but I do wish they used their newly minted money for better purposes. However, I have invested some of my money in these pleasure centers. I will leave the reader to worry if I am a hypocrite.

* * *

What does this mean for the future?

What will human society look like in the future, as it continues on the path of economic growth and technological revolution? If poor societies are not really spiritual and deep-thinking, the trajectory they will take and the influence they will have on the larger society as they become richer and more globalized will be very different from what it would have been if their poverty were a result of nothing but their political institutions.

For a long time, I thought — very erroneously — that poor societies would use their initial excess cash to invest and provide for personal development. I had made the same error that I now blame others for.

In reality, poverty would almost instantly disappear were the poor capable of strategizing their lives, of looking at life rationally with the long term in mind. A visit to malls in Asia convinces me that the growth of luxury goods and high-end services will continue to trend upward. As soon as people have enough to eat, they start to consume rotten junk food, and their brand consciousness kicks in, making them spend a disproportionate amount of money on status goods. They must own a Louis Vuitton bag or drive an expensive car, even if it means sharing a room with several other people.

I have devoured with great pleasure the books of Jared Diamond, in which he attributes the success of the West to “guns, germs, and steel” and those of Niall Ferguson, in which he argues that beginning in the 15th century, the West developed six powerful new concepts or “killer applications” — competition, science, the rule of law, modern medicine, consumerism, and the work ethic — allowing it to surge past all competitors in the East. But have all these concepts not been available to the rest of the world for at least the past two centuries?

Did Cambodia (where a large population was killed in the civil war), Mao’s China, and vast parts of Africa not use guns for self-defeating purposes? Despite the fact that these poor people had suffered from huge tyrannies, the first thing they did when given the power was set-up worse a tyranny. The truth is that the Renaissance, the Enlightenment, and the scientific revolution never really happened outside the West, and without those historical revolutions the “killer applications” may be copied but are not understood and do not stick. The guns and the steel have horrendous consequences. Societies outside the West, without an intellectual infrastructure of rationality and ethics, lack the eyes to understand what made the West great; and it isn’t clear that the West still remembers its own moral underpinnings.

You cannot help poor people by artificially giving them power or by merely bringing a regime change to democracy. You can have a hope only if you can inculcate the concept of critical and self-critical reason.

There is nothing glamorous about poverty. Poverty is mostly a reflection of inner emptiness, irrationality, and the paradigms of pre-rational days. Poor people not only have no clue what spirituality means, but lack the awareness, or even the time or patience, to understand it. Those who are keen on getting rid of poverty must do the emotionally hard work of understanding what lies at its roots.




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Another Perspective on Piketty

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Someone acquainted only secondhand with Thomas Piketty’s book translated as Capital in the Twenty-First Century or who has only skimmed it might well dismiss it as a mere leftist, redistributionist tract. That would be a mistake and injustice — and thus counterproductive. Libertarian critics should try to answer Piketty’s findings, attitudes, and recommendations respectfully and seriously (unless, of course, they find themselves converted away from their own doctrine).

His tome of viii + 685 pages, full of tables, charts, and citations, is an impressive work of resourceful scholarship. A massive and detailed web site supplements it. I have neither the time and energy nor the competence to verify his voluminous statistics. Pieced together, as some of them are, from fragmentary sources (such as tax and probate records) of decades and even centuries ago, they must incorporate some elements of interpolation and educated guessing. Still, no reason is apparent for questioning his and his collaborators’ diligence and honesty.

Piketty avoids the pretensions of so much academic economics — decorative mathematics and dubious econometrics. (“[M]athematical models ... are frequently no more than an excuse for occupying the terrain and masking the vacuity of the content,” p. 574.) His book employs, and sparingly, only the simplest algebra; but I did find a few symbols and their definitions bothersome.

Piketty’s case for reforms is not mainly an economic argument but a sustained appeal to the reader’s intuition against extreme inequality.

For example, Piketty makes much of the inequality r>g as the condition of growth of the ratio of capital (wealth) to national income, g being the growth rate of the denominator. The condition would be trivially obvious if r, the numerator, were the growth rate of the capital stock; but Piketty usually, and misleadingly, calls it the “rate of return on capital.” That description would apply if all and only the earnings on capital were saved and reinvested. Expenditure of some capital earnings on consumption instead would reduce the growth of the capital stock and the capital-income ratio, as Piketty occasionally mentions; and saving or dissaving from labor income would also affect the ratio’s growth (or shrinkage).

Nevertheless, Piketty’s compilation of long-term statistics for several countries suggests a trend to him. Only occasionally does he mention that most of his income figures are of income before taxes and before supplementation by government redistribution. Anyway, the long-term trend of the capital-income ratio seems to have been upward, exacerbating the inequality of both wealth and income. The chief historical exception is the period 1914–1945, when wars and depression destroyed so much wealth.

Piketty gives particular attention to the concentration of income and wealth in the top 1%, or even the top tenth or hundredth of 1% of their distributions. He seems particularly concerned about great inherited fortunes and the lavish leisured lifestyles that they make possible (as in novels by Jane Austen and Honoré de Balzac, mentioned as a welcome change of pace from dense argument).

His remedy for great inequality would be not only highly progressive income and inheritance taxes but progressive annual taxes on total wealth itself. He recognizes the political unlikelihood of getting his wealth taxes enacted and enforced, however, because implausibly close international collusion of governments would be required. He draws on the literature of Public Choice little if at all. He supplements his arguments with page after page of the history of taxation in different countries.

Nowhere, as far as I noticed, and to his credit, does Piketty blame inequality for economic crises and depressions or commit the crude Keynesianism of recommending redistribution to raise the propensity to consume. He does not maintain that the apparent trend toward greater inequality will continue without limit. He does not maintain that the extreme wealth of only a few thousand families will give those few tyrannical power over their fellow citizens — far from few enough, actually, to be a coherent oligarchy. Nor does he (or his translator) toss about words like “unfair” and “unjust,” although he does occasionally aspire to more “social justice” and “democracy” in the inexpediently and popularly stretched sense of the latter word.

One might expect concern about inequality to include concern about further concentration of resources and power in the state. However, Piketty does not expect his more drastic and broad-based progressive taxes to raise much more revenue. Nor, perhaps inconsistently with not expecting this, does he worry about damaging incentives to work and innovate. Possibly he agrees with John Stuart Mill in thinking that the distribution of wealth can be separated from its production. Possibly, like José Ortega y Gasset’s Mass Man (The Revolt of the Masses, 1930), he regards the wonders of modern industrial civilization as automatically existing, like facts of nature. Although an avowed socialist in the loose European sense of the term, he does not want to destroy capitalism. He even welcomes considerable privatization: government agencies and employees need not themselves provide all the services that tax money pays for.

Wealth is not something that belongs to the government, which it may leave to its producers or redistribute as the country’s rulers see fit.

For Piketty, reducing inequality is a goal in its own right. I agree so far as reducing it means undoing government measures that actually foster it. These include aspects of crony capitalism: subsidies, tax privileges, protection from both domestic and foreign competition, and most of what makes highly paid lobbying worthwhile. Also at others’ expense, arguably, a policy of artificially low interest rates benefits Wall Street operators and wealthy stock investors and traders.

As I ended reading his book, I realized that Piketty’s case for reforms is not mainly an economic argument but a sustained appeal to the reader’s intuition, although not explicitly to envy. Intuition presumably carries more weight if the reader comes to share it himself without having actually been told what to think. If so, Piketty’s economic language and massive quantities of ingeniously gathered statistics amount to what I call a Murray Rothbard or Alan Reynolds style of argument: deploy such an array of facts and figures, dates, places, mini-biographies, and even personality sketches that, even if they scarcely add up to a coherent argument, you come across to your reader or audience as a consummate expert whose judgments command respect. But saying so may exaggerate; for Piketty’s tables, charts, and sketches of characters in novels may usefully jog the intuition. Anyway, one should not disparage Piketty’s impressive research and methods and their likely application in projects beyond his own.

As for an intuition against extreme inequality, I confess to one of my own, although it does not mean welcoming heavier and more progressive taxes. We should worry about undermining respect for private property as a human right and essential pillar of any functioning economic system. Wealth is not something that belongs to the government, which it may leave to its producers or redistribute as the country’s rulers see fit.

Still, the intuition persists, as it did with Henry Simons, that saint of the Chicago School of economics in its early days, who found inequality “unlovely,” and as it persisted with Nobelist James Buchanan, prominent libertarian, who advocated stiff inheritance taxes. Somehow, I am uneasy about the pay of executives said to be 600 times as great as the pay of their ordinary workers, even though they may well contribute more than that much to their companies’ revenues. I am uneasy about lifestyles of opulent leisure permitted by great inherited wealth, rare though they may be. I cannot justify or explain my intuition, which, anyway, is not crass envy.

I don’t call on public policy to heed that intuition, any more than I share the apparently spreading expectation that some authority take action against whatever offends somebody, whether the lifestyle, the behavior, the speech, or the suspected thought of someone else. I wouldn’t want an egalitarian intuition implemented in anything like Piketty’s ways. Government measures to alleviate or avoid actual poverty, even beyond the “safety net,” are something quite different.

An intuitive dislike of extreme inequality does not rule out unease at Piketty’s line of thinking. Again, however, I warn libertarians: don’t risk a boomerang effect by unfairly dismissing his work as a mere ideological tract. It is indeed a work of genuine scholarship. Dealing with its challenging ideas can strengthen the libertarian case.


Editor's Note: Review of "Capital in the Twenty-First Century," by Thomas Piketty, translated by Arthur Goldhammer. Belknap Press, 2014.



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Mind the Gap

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“Capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine democratic societies.” — Thomas Piketty, Capital in the 21st Century

French professor Thomas Piketty’s new book — ranked #1 on Amazon and the New York Times — is a thick volume with the same title as Karl Marx’s 1867 magnum opus, Capital. Many commentators have noted the Marxist tone — the author cites Marx more than any other economist — but that’s a distraction.

The author discusses capital and economic growth, and recommends a levy on capital, but the primary focus of the book is inequality. In mind-numbing minutiae of data from Europe and the United Staes, Piketty details how inequality of income and wealth have ebbed and flowed over the past 200 years before increasing at an “alarming” rate in the 21st century. Because of his demonstrated expertise, his scholarship and policy recommendations (sharply higher progressive taxes and a universal wealth tax) will be taken seriously by academics and government officials. Critics would be wise to address the issues he raises rather than simply to dismiss him as a French polemicist or the “new Marx.”

According to his research, inequality grows naturally under unfettered capitalism except during times of war and depression. “To a large extent, it was the chaos of war, with its attendant economic and political shocks, that reduced inequality in the twentieth century” (p. 275, cf. 471) Otherwise, he contends, there is a natural tendency for market-friendly economies to experience an increasing concentration of wealth. His research shows that, with the exception of 1914-45, the rate of return on property and investments has consistently been higher than the rate of economic growth. He predicts that, barring another war or depression, wealth will continue to concentrate into the top brackets, and inherited wealth will grow faster with an aging population and inevitable slower growth rates, which he regards as “potentially terrifying” and socially “destabilizing.”

If market-generated inequality is the price we pay to eliminate poverty, I’m all in favor.

His proposal? Investing in education and technical training will help, but won’t be enough to counter growing inequality. The “right solution” is a progressive income tax up to 80% and a wealth tax up to 10%. He is convinced that these confiscatory rates won’t kill the motor of economic growth.

One of the biggest challenges for egalitarians like Piketty is to define what they mean by an “ideal” distribution of income and wealth. Is there a “natural” equilibrium of income distribution? This is an age-old question that has yet to be resolved. I raised it in a chapter in “Economics on Trial” in 1991, where I quoted Paul Samuelson in his famous textbook, “The most efficient economy in the world may produce a distribution of wages and property that would offend even the staunchest defender of free markets.”

But by what measure does one determine whether a nation’s income distribution is “offensive” or “terrifying”? In the past, the Gini ratio or coefficient has been used. It is a single number that varies between 0 and 1. If 0, it means that everyone earns the same amount; if 1, it means that one person earns all the income and the rest earn nothing. Neither one is ideal. Suppose everyone earns the same wage or salary. Perfect equality sounds wonderful until you realize that no economy could function efficiently that way. How you could hire anyone else to work for you if you had to pay them the same amount you earn?

A wealth tax destroys a fundamental sacred right of mankind — the right to be left alone.

Even social democrats William Baumol and Alan Blinder warned in their popular economics textbook, “What would happen if we tried to achieve perfect equality by putting a 100% income tax on all workers and then divide the receipts equally among the population? No one would have any incentive to work, to invest, to take risks, or to do anything else to earn money, because the rewards for all such activities would disappear.”

So if a Gini ratio of 0 is bad, why is a movement toward 0 (via a progressive income tax) good? It makes no sense.

Piketty wisely avoids the use of the Gini ratios in his work. Instead he divides income earners into three general categories, the wealthy (top 10% income earners), the middle class (40%), and the rest (50%), and tracks how they fare over the long term.

But what is the ideal income distribution? It’s a chimera. The best Piketty and his egalitarian levelers can do is complain that inequality is getting worse, that the distribution of income is unfair and often unrelated to productivity or merit (pp. 334–5), and therefore should be taxed away. But they can’t point to any ideal or natural distribution, other than perhaps some vague Belle Époque of equality and opportunity (celebrated in France between 1890 and 1914).

Piketty names Simon Kuznets, the 20th century Russian-American economist who invented national income statistics like GDP, as his primary antagonist. He credits Kuznets with the pro-market stance that capitalist development tends to reduce income inequality over time. But actually it was Adam Smith who advocated this concept two centuries earlier. In the Wealth of Nations, Smith contended that his “system of natural liberty” would result in “universal opulence which extends itself to the lowest ranks of the people.”

Not only would the rich get richer under unfettered enterprise, but so would the poor. In fact, according to Smith and his followers, the poor catch up to the rich, and inequality is sharply reduced under a liberal economic system without a progressive tax or welfare state. The empirical work of Stanley Libergott, and later Michael Cox, demonstrates that through the competitive efforts of entrepreneurs, workers, and capitalists, virtually all American consumers have been able to change an uncertain and often cruel world into a more pleasant and convenient place to live and work. A typical homestead in 1900 had no central heating, electricity, refrigeration, flush toilets, or even running water. But by 1970, before the welfare state really got started, a large majority of poor people benefited from these goods and services. The rich had all these things at first — cars, electricity, indoor plumbing, air conditioning — but now even the poor enjoy these benefits and thus rose out of poverty.

Piketty and other egalitarians make their case that inequality of income is growing since the Great Recession, and they may well be correct. But what if goods and services, what money can buy, becomes a criteria for inequality? The results might be quite different. Today even my poor neighbors in Yonkers have smartphones, just like the rich. While every spring the 1% attend the Milken Institute Conference in LA that costs $7,000 or more to attend; the 99% can watch the entire proceedings on video on the Internet a few days later — for free. The 1% can go to the Super Bowl for entertainment; the 99% gather around with their buddies and watch it on an widescreen HD television. Who is better entertained?

Contrary to Piketty’s claim, it’s good that capital grows faster than income, because that means people are increasing their savings rate.

Piketty & Co. claim that only the elite can go to the top schools in the country, but ignore the incredible revolution in online education, where anyone from anywhere in the world can take a course in engineering, physics, or literature from Stanford, MIT, or Harvard for a few thousand dollars, or in some cases, for absolutely nothing.

How do income statistics measure that kind of equal access? They can’t. Andrew Carnegie said it best, “Capitalism is about turning luxuries into necessities.” If that’s what capital and capitalism does, we need to tax it less, not more.

A certain amount of inequality is a natural outcome of the marketplace. As John Maynard Keynes himself wrote in the Economic Consequences of the Peace (1920), “In fact, it was precisely the inequality of the distribution of wealth which made possible those vast accumulations of fixed wealth of and of capital improvements which distinguished that age [the 19th century] from all others.”

A better measure of wellbeing is the changes in the absolute real level of income for the poor and middle classes. If the average working poor saw their real income (after inflation) double or triple in the United States, that would mean lifting themselves out of poverty. That would mean a lot more to them than the fortunes of the 1%. Even John Kenneth Galbraith recognized that higher real growth for the working class was what really mattered when he said in The Affluent Society (1959), “It is the increase in output in recent decades, not the redistribution of income, which has brought the great material increase, the well-being of the average man.”

Political philosopher James Rawls argued in his Theory of Justice (1971) that the most important measure of social welfare is not the distribution of income but how the lowest 10% perform. James Gwartney and other authors of the annual Economic Freedom Index have shown that the poorest 10% of the world’s population earn more income when they adopt institutions favoring economic freedom. Economic freedom also reduces infant mortality, the incidence of child labor, black markets, and corruption by public officials, while increasing adult literacy, life expectancy, and civil liberties. If market-generated inequality is the price we pay to eliminate poverty, I’m all in favor.

I have reservations about Piketty’s claim that “Once a fortune is established, the capital grows according to a dynamic of its own, and it can continue to grow at a rapid pace for decades simply because of its size.” To prove his point, he selects members of the Forbes billionaires list to show that wealth always grows faster than the average income earner. He repeatedly refers to the growing fortunes of Bill Gates in the United States and Liliane Bettencourt, heiress of L’Oreal, the cosmetics firm.

Come again?

I guess he hasn’t heard of the dozens of wealthy people who lost their fortunes, like the Vanderbilts, or to use a recent example, Eike Batista, the Brazilian businessman who just two years ago was the 7th wealthiest man in the world, worth $30 billion, and now is almost bankrupt.

Piketty conveniently ignores the fact that most high-performing mutual funds eventually stop beating the market and even underperform. Take a look at the Forbes “Honor Roll” of outstanding mutual funds. Today’s list is almost entirely different from the list of 15 or 20 years ago. In our business we call it “reversion to the mean,” and it happens all the time.

Prof. Piketty seems to have forgotten a major theme of Marx and later Joseph Schumpeter, that capitalism is a dynamic model of creative destruction. Today’s winners are often tomorrow’s losers.

IBM used to dominate the computer business; now Apple does. Citibank used to be the country’s largest bank. Now it’s Chase. Sears Roebuck used to be the largest retail store. Now it’s Wal-Mart. GM used to be the biggest car manufacturer. Now it’s Toyota. And the Rockefellers used to be the wealthiest family. Now it’s the Waltons, who a generation ago were dirt poor.

Piketty is no communist and is certainly not as radical as Marx in his predictions or policy recommendations. Many call him “Marx Lite.” He doesn’t advocate abolishing money and the traditional family, confiscating all private property, or nationalizing all the industries. But he’s plenty radical in his soak-the-rich schemes: a punitive 80% tax on incomes above $500,000 or so, and a progressive global tax on capital with an annual levy between 0.1% and 10% on the greatest fortunes.

There are three major drawbacks to Piketty’s proposed tax on wealth or capital.

First, it violates the most fundamental principle of taxation, the benefit principle. Also known as the accountability or “user pay” principle, taxation is justified as a payment for benefits or services rendered. The basic idea is that if you buy a good or use a service, you should pay for it. This approach encourages efficiency and accountability. In the case of taxes, if you benefit from a government service (police, infrastructure, utilities, defense, etc.), you should pay for it. The more you benefit, the more you pay. In general, most economists agree that wealthier people and big businesses benefit more from government services (protection of their property) and should therefore pay more. A flat personal or corporate income tax would fit the bill. But a tax on capital (or even a progressive income tax) is not necessarily connected to benefits from government services — it’s just a way to forcibly redistribute funds from rich to poor and in that sense is an example of legal theft and tyranny of the majority.

Second, a wealth tax destroys a fundamental sacred right of mankind — financial privacy and the right to be left alone. An income tax is bad enough. But a wealth tax is worse. It requires every citizen to list all their assets, which means no secret stash of gold and silver coins, diamonds, art work, or bearer bonds. Suddenly financial privacy as guaranteed by the Fourth Amendment becomes illegal and an underground black market activity.

Third, a wealth tax is a tax on capital, the key to economic growth. The worst crime of Piketty’s vulgar capitalism is his failure to understand the positive role of capital in advancing the standard of living in all the world.

To create new products and services and raise economic performance, a nation needs capital, lots of it. Contrary to Piketty’s claim, it’s good that capital grows faster than income, because that means people are increasing their savings rate. The only time capital declines is during war and depression, when capital is destroyed.

He blames the increase in inequality to low growth rates, when, says, the economic growth rate falls below the return on capital. The solution isn’t to tax capital, but to increase economic growth via tax cuts, deregulation, better training and education and productivity, and free trade.

Even Keynes understood the value of capital investment, and the need to keep it growing. In his Economic Consequences of the Peace, Keynes compared capital to a cake that should never be eaten. “The virtue of the cake was that it was never to be consumed, neither by you nor by your children after you.”

What country has advanced the most since World War II? Hong Kong, which has no tax on interest, dividends, or capital.

 

If the capital “cake” is the source of economic growth and a higher standard of living, we want to do everything we can to encourage capital accumulation. Make the cake bigger and there will be plenty to go around for everyone. This is why increasing corporate profits is good — it means more money to pay workers. Studies show that companies with higher profit margins tend to pay their workers more. Remember the Henry Ford $5 a day story of 1914?

If anything, we should reduce taxes on capital gains, interest, and dividends, and encourage people to save more and thus increase the pool of available capital and entrepreneurial activity. A progressive tax on high-income earners is a tax on capital. An inheritance tax is a tax on capital. A tax on interest, dividends, and capital gains is a tax on capital. By overtaxing capital, estates, and the income of our wealthiest people, including heirs to fortunes, we are selling our country and our nation short. There’s no telling how high our standard of living could be if we adopted a low-tax policy. What country has advanced the most since World War II? Hong Kong, which has no tax on interest, dividends, or capital.

Hopefully Mr. Piketty will see the error of his ways and write a sequel called “The Wealth of Nations for the 21st Century,” and will quote Adam Smith instead of Karl Marx. The great Scottish economist Adam Smith once said, “Little else is required to carry a state from the lowest barbarism to the highest degree of opulence but peace, easy taxes, and a tolerable administration of justice.” Or per haps he will quote this passage: “To prohibit a great people….from making all that they can of every part of their own produce, or from employing their stock and industry in the way that they judge most advantageous to themselves, is a manifest violation of the most sacred rights of mankind.”


Editor's Note: Review of "Capital in the Twenty-First Century," by Thomas Piketty, translated by Arthur Goldhammer. Belknap Press, 2014.



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Not Just Your Typical Zombie Film

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"From forth the fatal loins of these two foes, / A pair of star crossed lovers take their life." These words from Shakespeare's Romeo and Juliet suggest that humans are controlled by destiny and fate, not by choice and accountability. Romeo and Juliet meet by fate; their families are at war by fate; and their story ends tragically by fate.

The foundation story appears in Greek mythology as "Pyramus and Thisbe," and is oddly set not in Greece, but in an unnamed location in the Orient. This suggests that the story has an even earlier foundation. It is also found in the Old Testament in the form of the story of Dinah, the Israelite daughter who goes for a walk in a heathen town and is taken by a local boy who wants to marry her. Shakespeare set his version of the story in Italy as Romeo and Juliet, and was so taken with the myth that he presented it again in A Midsummer Night's Dream through the clownish traveling troubadours. Prokofiev's ballet is another favorite, especially the powerful "Dance of the Knights" (Montagues and Capulets). Choreographer Jerome Robbins saw the exciting possibilities of Irish and Puerto Rican gangs duking it out through dance and convinced Leonard Bernstein and Arthur Laurents to write West Side Story. Other musicians and artists have adapted the story as well.

Often the sole focus of R&J is the love story, with the feuding families fading so far into the background that it is hard to understand why they are fighting, but that isn't always the case. One of the most fascinating interpretations I have seen of R&J was a recent production by the Hudson Valley Shakespeare Festival set in modern Afghanistan. In this version, Romeo is an American soldier, and Juliet is a local Muslim girl. Audiences truly "got it" in this interpretation when Juliet's mother appeared dressed in a burqa and her father smacked her so hard across the face that she fell down screaming. Still, her love for her soldier endured.

The core story of Romeo and Juliet has resonated throughout the centuries because it represents change and resistance to learned cultural values and prejudices. The star-crossed lovers from warring families epitomize independent thinking, change, tolerance, and acceptance. And it's a great love story to boot.

The latest offering is Warm Bodies, a film that opened this week. The movie focuses more on the differences between the two families, and the allusions are subtler than in most adaptations; in fact, it didn't hit me that R&J was the core story until the balcony scene, and then it all fell into place: the girl named Julie (Teresa Palmer), her dead boyfriend named Perry (Dave Franco), her new boyfriend known as "R" (Nicholas Hoult), her friend Nora (Analeigh Tipton) who wants to be a nurse. Oh — and did I mention that R is a Corpse?

The "idle class" is now made up of poor people, while the wealthy are working their tails off. We are being eaten alive by the entitlements given to the poor.

This unusual adaptation is set in a dystopian future where an incurable disease has turned humans into walking corpses who feed on living humans. Truly serious cases become "boneys," who "will eat anything." Uninfected humans have built a gigantic wall around their city to protect themselves, but they need supplies from the other side. At the center of the film is a love story between Julie, who goes outside the wall with her young friends to forage for medicine, and "R," a cute and quirky young Corpse who narrates the story. He communicates through grunting and doesn't know his own name, but he begins to change because of his growing love for Julie.

The film is fun and clever despite its zombified cast, and the young lovers are fresh and sweet. (Well, she's fresh. He smells like rotten meat — in fact, he protects her from other Corpses by smearing goo on her face to cover her fresh scent. But he does it in a way that is as likely to elicit an "Awww" as an "Ewww" from the audience.)

What sets this film apart is the depth of possibilities provided by the core story — the star-crossed lovers from warring cultural groups who find a common ground of understanding and tolerance. I don't know what director Jonathan Levine and author Isaac Marion intended audiences to think, but that's the beauty of a well-formed myth or metaphor — it can be interpreted in a multitude of ways. I think this version makes an insightful statement about the conflict between working Americans and nonworking Americans.

As the film opens, R is wandering through an abandoned airport. Other Corpses wander there too. "I don't remember my name anymore," he thinks out loud. "Sometimes I look at others and try to imagine what they used to be. We're all dead inside." Like Gregor Samsa, the traveling salesman in Kafka’s The Metamorphosis, who wakes up one morning to discover that he has become a bug, R and the others in the airport have succumbed to the rat race. Work has dehumanized them. "It must have been so much better,” he muses, “when we could communicate and feel things."

Corpses don't work or produce anymore. They just eat people. I see this as a metaphor for the welfare state, in which more and more people are being infected by entitlements. A wall of intolerance is being erected today between working people and nonworking people. There is a deadness in the eye of people who scurry from business meeting to business meeting without time for love and relationships, but the tragedy of not working or producing is even more deadening. As the infection spreads and more people become nonproducers, even the producers begin to suffer. The collapsing standard of living is not caused by the wealthy having too much, but by the 47 % producing too little. Ironically, the "idle class" is now made up of poor people, while the wealthy are working their tails off. We are being eaten alive by the entitlements given to the poor.

Another interesting social commentary in this film is the way young people are treated. They are the draftees. While the older folks remain safely behind the wall, the youths are given a pep talk about honor and patriotism by Julie's father (John Malkovich) and then sent out to face the dangers of the Corpses and Boneys. Their mission is to bring back supplies for the grownups inside. Julie and Nora look sexy and buff as they cock their rifles to defend themselves. (And that's a little creepy, given all the crazy shootings that have been experienced in America lately.) When the older folks do go outside, they travel inside tanks and jeeps. They are the cavalry; the kids are the infantry. I guess that's where the word "infantry" comes from. How despicable is war.

What changes R? Partly it's the chemistry of love: his attraction to Julie reboots his heart. But it's more than that. Caught in the world outside the wall and surrounded by Corpses and Boneys who want to eat her, Julie needs protection. She needs food. She needs warmth, shelter, clothing, and entertainment. And R has to provide all these things for her. In the process of producing and providing, he becomes human again. I love that idea, whether Jonathan Levine intended it or not.

What changes the other Corpses? Hope. As they see R change through the power of love (or the power of producing), they gain hope that they might change too. They begin to sleep and to dream again, which is something Corpses aren't able to do. Their dreams cause them to wake up and act for themselves. They begin to come alive.

But they Boneys don't like it. They are like the politicians and welfare bureaucrats who want to keep the poor in their place, receiving their spiritually deadening entitlements but never learning to live or to feel joy. As R laments, "The Boneys are too far gone to change."

The Corpses are not "too far gone," however. They just need to wake up. We are surrounded by welfare Corpses today, and the infection is spreading to epidemic proportions. Some have become Boneys, but others can be cured. They can be changed through the power of pride and production and love. If they will join the Townies to fight against the Boneys, they can dream again. And wake up again. And live again.

#39;s the beauty of a well-formed myth or metaphor


Editor's Note: Review of "Warm Bodies," directed by Jonathan Levine. Summit Entertainment, 2013, 97 minutes.



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Europe’s Next Tax Horizon

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If they weren’t so snide, smug, and supercilious, you would almost be tempted to pity the wretched Europeans — you know, the culturally superior members of the human race. I mean, they are more or less bankrupt, what with their “generous” and “compassionate” welfare states now running out of tax money. And, brother, do they have taxes — in the matter of taxation, they are the wet dream of Obama-worshipers. They have confiscatory income taxes (in France, now set at 75% for the highest bracket), massive property and gas taxes, and national sales taxes (aka VAT taxes) in the mid-20% range that is standard in the rapidly declining continent.

The idea of cutting the sickeningly bloated welfare state is unpopular in these benighted regimes, and normal tax sources are now taxed to the max. So the challenge to the welfare statists is to come up with new tax sources.

The Germans — ever keen and crafty — may have solved the problem. It was recently reported that the more left-wing German political parties (the Social Democrats and the Greens) are now suggesting a wealth tax of 1% on total assets of 2 million Euros or more. So even if you are retired or otherwise unemployed, but along the way you and your spouse have managed to buy a nice home, jewelry, perhaps a portfolio of stocks and bonds, maybe some artwork — the total value will be assessed (at no doubt inflated valuations — remember, the entity doing the assessment will be precisely the one that pockets the money), and looted.

Anyway, that’s where it will start. Remember, the original American federal income tax started very low (top rate of 7%). So did the VAT tax in all the European countries cursed with it. What happens is that the burst of new revenue always results in not just the expansion of existing social welfare programs but the creation of whole new ones, which — like bay cockroaches — will only grow and multiply further.

Indeed, one German “thinktank” has called for a one-time tax of 10% on all wealth over 250,000 Euros. This would likely bring in about the equivalent of 9% of GDP, and an eager exit of capital from the country.

But again, who believes it would be done just once? The same egalitarian arguments for doing it once will be used to justify doing it (say) every other year, or even every year, or even every 6 months, or even . . .




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Hurting the Poor, Helping the Rich

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Coming from Randian roots, I have a deep appreciation for the virtues of business, and of wealth that has been earned. I do not consider myself to be a liberal-tarian. I usually agree with the Right and disagree with the Left. But the more I look around, the more I see that socialism is really a tool by means of which millionaire elites keep the poor masses from rising up. Libertarianism or “classical liberalism,” on the other hand, can accurately be described as the friend of the poor and the enemy of the rich. I have already written in Liberty (January 2010) about how capitalism helps the poor. What I want to focus on in this Reflection is how statism helps the rich, especially the old money aristocracy, the metaphorical James Taggarts of the United States.

The evidence is overwhelming. Look at education. Rich people send their own children to expensive private schools, which put them on track for Ivy League universities and white collar jobs; meanwhile the political establishment makes sure that the only choice available to poor children is a horrible public school system that teaches nothing and trains students only for low-income jobs. The public schools are controlled by teachers' unions that oppose merit-based pay and favor a seniority system, which is a terrible model for achieving high educational excellence. The modern liberal reply is to say that the system is broken but could be fixed by raising taxes to give more funding to public schools. The real solution is to use school vouchers so that poor children can attend the rich children’s schools — a prospect that few wealthy parents care to consider.

Or look at business. Statism helps wealthy corporations in many ways — not by giving them tax breaks as the modern liberals complain, but by giving them rentseeking handouts such as farm subsidies and defense contracts. Ending all subsidies and all pork barrel spending would be a huge loss for rich people with political connections, yet the modern liberals have bamboozled the poor into thinking that statism actually helps the poor and hurts the rich. On Wall Street, the SEC’s maze of rules makes legal compliance so difficult that it is virtually impossible for newcomers to compete with the old established investment banks. Established businessmen use taxes and regulations to stifle competition from start-up entrepreneurs and up-and-coming small businessmen who can’t afford to hire compliance lawyers and tax consultants, as their old money rivals can. Yet small business is precisely the engine of opportunity for hard-working ambitious people from poor backgrounds.

Now look at the professions. Affluent professionals in the medical and legal fields enjoy salaries that are artificially increased because the AMA and the ABA maintain systems of doctor licensing and lawyer licensing that restrict the supply of new doctors and lawyers. I predict that if ObamaCare does lead to a socialist single-payer national healthcare system, that system will be run by AMA-approved bureaucrats whose inefficiency and nepotism will drive up the price of healthcare, allowing doctors favored by the state to make more money than they would have in a free market. In the ObamaCare nightmare the rich will probably be able to afford to obtain treatment from high-quality doctors, but the poor will be faced with no alternative to the low-quality healthcare that the system is certain to produce. ObamaCare will be a disaster for the working poor.

In every situation mentioned, above socialist measures help the rich and hurt the poor, creating a caste system in which vast fortunes can be inherited but cannot be built up from scratch. The instances described above have all been justified on the ground that they benefit society as a whole or protect the whole public from the dangers of free markets — in itself a distinctly socialist justification. But a logical person would expect socialism to favor the wealthy, because it vests tremendous economic power in the class of bureaucrats and government officials, and one would expect the upper class to have the means to exploit that power. The rich are the ones most likely to be able to afford to run for office and to purchase influence among politicians by means of campaign contributions and special interest lobbying.

Socialism favors the wealthy because it vests tremendous economic power in the class of bureaucrats and government officials, and it is the upper class that has the means to exploit that power.

What I am offering is not an empirical claim but a deductive argument: the wealthy are inherently better positioned than the poor to exploit the state’s power; therefore, the more powerful the state becomes, the more advantage the rich have over the poor in terms of the opportunity to make money. Ayn Rand hinted at this idea when she contrasted “the aristocracy of money,” that of people who earn wealth, with “the aristocracy of pull,” that of people who exploit the state to obtain wealth. But in the end I think Rand loved the rich so much that she failed to see how socialism may actually be a plot by the rich against the poor.

My criticism is directed mainly at wealthy members of the socialist or extreme-leftist wing of the Democratic Party. It is no coincidence that many of the most famous Democratic politicians who preach that they are the champions of the poor graduated from Ivy League universities that most poor people could never get into because they could not afford to attend the most prestigious private high schools. Many of these millionaires could not possibly imagine what it is like not to have enough money to pay your bills or to have to work two shifts to make ends meet.

Consider Democratic presidential candidates, past and present. President Obama comes from Harvard Law. John Kerry has the Heinz fortune. Bill and Hillary Clinton were products of Yale Law. And the members of Joe Kennedy’s clan have vast amounts of wealth and several Ivy League degrees behind them. Looking farther back, Franklin D. Roosevelt, the champion of the socialist New Deal, was a man of wealth and privilege; the Rockefeller family inherited an enormous fortune, yet produced many left-leaning politicians, one of them a presidential candidate. People like the ones just mentioned have no right to say that they speak for the poor and underprivileged. Such people are merely exploiting leftism to maximize their already substantial influence.

It is true that the higher taxes championed by modern liberals would hurt the rich. But the bottom line is that in the American capitalism-socialism hybrid, the leftist rich retain the ability to own their vast fortunes while also exploiting the advantages of socialism to prevent ambitious poor people from competing with them. While socialist interference in the economy drives up prices and eliminates jobs, the rich retain their connections, their ability to land good jobs, and their ability to pay for what they want to buy. By contrast, the poor have no choice other than to accept whatever goods and services the government-ruined markets have to offer, and they must desperately seek jobs in a market crippled by taxes and regulations.

The socialist wing of the Democratic Party thinks that decades of the welfare state have made the American poor so lazy and dependent upon government charity that they can be controlled like dogs and trained to bark at capitalism whenever the leftists blow the whistle. This twisted scheme has worked to some extent: common sense and conventional wisdom now hold that lower-class economic interests are aligned with the welfare state.

Libertarians would be well served to focus our ideological energy on fighting this myth. The working poor in the United States have enough trouble to worry about as it is, and it’s not fair to them to tolerate a political system that hurts the poor and favors the rich.




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Invoking TR

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Simple facts.

  • In 1910, Theodore Roosevelt went to Kansas and made one of his “square deal” speeches, promising to give the little guy a fair shake. The same theme had inspired much of his popularity as president during the preceding decade.
  • In 2011 Barack Obama went to Kansas and invoked Roosevelt in a speech promoting higher taxes on wealthy folks to pay for more government spending on education and “infrastructure.” He too called for a square deal, but with less colorful language. He preferred the word “fair,” as in "pay your fair share."
  • After Teddy had provided a “square deal” for seven years, federal spending as a percentage of GDP was under 10%.
  • After Barack had provided his for three years, federal government spending as a percentage of GDP was about 40%.

Couldn’t we just settle for more than twice the fairness that Teddy demanded, by cutting the government in half?




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