George Rebane

A Brief History of Equality (2022) is the latest issue of socio-economic wisdom from the socialist-celebrated French socialist economist Thomas Piketty.  You might recall that Piketty gave us Capital in the Twenty-First Century (2013), his magnus opus comprised of “an 800-page book turbid with equations and numbers of all kinds, … is regarded as a game-changing weapon in the war to wrest wealth from the rich.”  Therein he introduced the world to “the central contradiction of capitalism” which elicited worldwide acclaim from collectivists of every stripe – progressives, Marxists, communists, … .  Its dense arguments made the tome’s 2.5 million copies sold as one of the most unread books of all time.  Nevertheless, adulatory columns and commentaries without end graced the pages and programs of the mainstream media.  With all those equations, it appeared that someone had finally put the demise of capitalism on a firm scientific basis.

The piece de resistance of ‘Capital’ was introduction of his signature inequality r > g, stating that the rate of return on capital always exceeds the growth rate of its underlying economy.  In a nutshell, that was his ‘central contradiction’ to which I return in a bit.  But as Tunku Varadarajan of the American Enterprise Institute explains (here), “Thomas Piketty attempts to lure readers unable to scale the mountain of ‘Capital’” with a series of socialist principles that would create equality (think social justice) by “flattening the wealth curve.”

Piketty does admit that there has been an historical movement toward equality along many dimensions – status, gender, race – since the late 1700s, but still not enough “to brag about.”  These gains have not been achieved by the increase in access to material wealth made possible by capitalist, profit-seeking entrepreneurs, but instead by revolutionary politics and class struggle.  “Efficient production, shrewd investment, or the genius and dynamism of innovators are sideshows”, because “all creations of wealth in history have issued from a collective process”.  For Piketty, this process has not only included but also depended on “the international division of labor, the use of global natural resources”, and most importantly “the accumulation of knowledge since the beginnings of humanity”, all blessings of the global collective.  Varadarajan correctly concludes from these claims that Piketty “is pure Bernie Sanders or AOC” and “may even be to their left.”

Now let’s take a closer look at Piketty’s r > g.  First, we remind readers that quantitative economic models deserve the same reputation as do the general circulation models that power climate change hysteria.  In neither of these disciplines have the models demonstrated any usable predictive power.  (For good measure you can throw in the short-term meteorological models that can’t predict next week’s weather.)  For all intents and purposes, an economy is just as complex, stochastic, and chaotic as is the earth’s top strata of atmosphere, water, and dirt that impacts climate – perhaps even more so because an economy is composed of myriads of interactions between countless purposive agents.

We witness daily evidence of the value of quantitative economic models with a steady stream of economists and financial pundits continually expressing surprise that so few of the predicted economic and financial variables turn out as predicted.  And we see further evidence of this when told of how vast agencies like the US Treasury and Federal Reserve misjudged this or that economic sign, and was either too late or early in adjusting interest rates, economic stimuli, their assets portfolio, etc.  The same with congressional committees fashioning budgets and their associated tax policies in the attempt to grow the economy, increase revenues, control national debt, and pay for larger entitlements.  They all have access to the best models, all of which point in different directions, and none of them work (save even a blind chicken finding a seed).  Citing them in making political decisions turns out to be nothing but a kabuki dance that provides an acceptable CYA function with the even less-informed voters.

Socialist economists suffer from several fundamental intellectual deficits.  First and foremost, they do not understand the basic elements of human nature – result, their policies to work requires the wholesale exercise of altruistic behaviors, which of course don’t exist.  They do not understand that marginal effort beyond the established norm requires an inviting possibility of marginal reward that exceeds normal compensation.  The key word here is ‘possibility’; in the overwhelming number of cases there is no guarantee of the size of the reward, if any – in short, ‘Hello risk!’  The part that risk plays in motivating marginal effort for marginal reward is terra incognita to collectivists of all stripes.

And to them, totally unknown is that marginal effort for uncertain reward and/or profit is the ONLY part of economic behavior that can lift a society out of a basic, poverty ridden, or commodity-level quality of life.  If everyone just worked for established wages because there was no upside benefit for doing something extra and different, then we have economies which work like those repeatedly demonstrated under socialist and communist regimes.  And even the commodity level of labor keeps sinking to dysfunctionality – ‘they pretend to pay us; we pretend to work’.  (Extra credit question: why do entrepreneurs from certain EU countries seek foreign shores for their enterprises?)

And now we can understand why return on capital invested in risky enterprises must exceed the growth rate of an economy.  Piketty’s blindfold does not let him see that more often than not, much of invested capital is inevitably lost due to the venture not working out as planned/hoped.  If the promised return on such capital is the same as staid wages for repetitive work or ‘risk-free’ interest rates of government bonds, then there is no point in assuming any added risk, simply because the added reward is not there.  With this understanding we see that in r > g, the QoL that is made possible by g, is fueled by r-g, the marginal reward obtained from successful risky investments – in short, r ≤ g  does not cut it.  This simple and intuitive fact is forever inaccessible to the likes of Bernie Sanders, Elizabeth Warren, AOC, …, and yes, Thomas Piketty.

As a coda to all this, let’s consider the qualitative impact of r – g (as taught by the more qualitative economists Mises, Hayek, and Freedman).  To attract more people into participating in risky ventures and flatten the Lorenz income curve of the Gini Index (here), we need to 1) lower the entry cost for new enterprises, and 2) reduce their risk/reward ratios.  This is only achieved by government minimizing friction-inducing regulations at the entry point, and lowering tax rates on profits at the exit point.  All other forms of risk reduction to invite marginal capital investment requires an established environment of government induced corporatism and corruption.  Such economies, as those promised by our Left, will then continue to increase r – g and motivate the world’s Pikettys and other social justice seeking collectivists to offer foolish and dysfunctional solutions like those that populate the pages of A Brief History of Equality (2022), Piketty’s latest attempt to explain the sad and confusing array of equations in ‘Capital’, accessible to a wider audience of the hopeful hoi polloi.