A Latter-Day Jacobin with a Lot of Data

Book Reviews 281 Chapter 10 includes a list of Kamhi’s favorite pieces of visual art. It is followed by some advice in the postscript, “What Can Be Done.” It is normally at this point in a review that the reviewer tells his readers to get the book if they are interested in its subject matter. But I want to do more than that. Not only should you purchase the latest efort of Kamhi, but, in case you don’t own a copy, you should also buy the 2000 book she coauthored with her husband, Louis Torres, titled What Art Is: he Esthetic heory of Ayn Rand. Both are enlightening and entertaining reads. If Kamhi is right and ilm isn’t a visual art, I want to close by paraphrasing Siskel and Ebert: two paintbrushes up. References Kandinsky, Wassily. 1912. Concerning the Spirit in Art. Translated by Michael T. H. Sadler. Online at: http://www.semantikon.com/art/kandinskyspiritualinart.pdf. Kelley, David. 1989. he Art of Reasoning. 3rd edition. New York: Norton. Kivy, Peter. 1990. Music Alone: Philosophical Relections on the Purely Musical Experience. New York: Columbia University Press. Rand, Ayn. [1966–67] 1990. Introduction to Objectivist Epistemology. Expanded 2nd edition. Edited by Harry Binswanger and Leonard Peikof. New York: New American Library. Seddon, Fred. 2003. Ayn Rand, Objectivism and the History of Philosophy. Lanham, Maryland: University Press of America. Torres, Louis and Michelle Marder Kamhi. 2000. What Art Is: he Esthetic heory of Ayn Rand. Chicago: Open Court. A Latter-Day Jacobin with a Lot of Data Hannes H. Gissurarson Capital in the Twenty-First Century Thomas Piketty Translated by Arthur Goldhammer Cambridge, Massachusetts: Belknap, 2014 696 pp. ABSTRACT: Piketty underestimates the disposable income of the poor, while he overestimates the corresponding income of the rich, for systemic reasons. Recently, global income inequality has gone down. Piketty’s belief that in the long run the rate of return for capital will surpass economic growth is not 282 T H E J O U R N A L O F AY N R A N D S T U D I E s plausible. Capital tends to disperse, and the creative powers of capitalism, leading to economic growth, should not be underestimated. Piketty is worried about the superrich, but he should rather be worried about the increased power of government. What will happen if the rich cease to create wealth, as described in Atlas Shrugged? French economist homas Piketty seems to be replacing American philosopher John Rawls (1971) as the essential thinker of the let. But there is an important, indeed crucial, diference between them. Rawls was concerned with the poor. He argued that income distribution in a society was not just unless the worst of were as well-of as they could be; he wanted, in other words, to maximize the minimum (the maximin rule). While there are several logical, empirical, and practical laws in Rawls’s theory of justice, capitalism probably is the system that best meets his criterion: with its immense creative powers it provides opportunities for all ambitious and hardworking people, however poor they initially may be, to better their conditions. In contrast to Rawls, Piketty is concerned with the rich. He believes that modern capitalism produces unacceptable income inequality: the problem, as he sees it, is that while the poor are not getting poorer, the rich are getting much richer. he share of the rich in total income and total wealth is increasing because the rate of return to capital, r, is bound to be higher, in the long run, than economic growth, g, or r > g. As a consequence, we are returning to the rentier capitalism of the early nineteenth century, vividly described in the novels of Honoré de Balzac. In his new book, Capital in the Twenty-First Century, Piketty presents a lot of data from all over the world to support his thesis. hese data are mostly derived from tax returns, but also from other sources. Piketty suggests a solution: coniscatory global taxes on high incomes and great wealth. Chris Giles (2014), economics editor of the Financial Times, has identiied problems in Piketty’s data on wealth distribution: he made some outright errors and questionable adjustments. While similar problems would most likely have been used to disqualify a nonletist scholar or journalist from the debate, in fairness it must be said that they do not seem to matter much to Piketty’s main point, that income inequality has greatly increased in the past few decades. Another criticism directed at Piketty (Bonnet et al. 2014)—that because of inlated real estate prices, he overestimates the value of privately held capital and therefore exaggerates wealth inequality—may also be true, but not relevant for the same reason. But there are other more systemic problems with his data on income inequality. In Piketty’s work, the income of the poor is underestimated, whereas the income of the rich is overestimated. First, Piketty uses the income of the poor before transfers. his surely makes the story he wants to tell simpler, but also less accurate. In most Western countries, the poor receive not only substantial Book Reviews 283 direct transfers from government, such as social assistance, child beneits, and food stamps, but also signiicant indirect beneits such as access to subsidized, or “free,” medical service, child care, and schools. What matters to most people is not their nominal income, but their access to goods, which determines their real living standard. Second, Piketty correctly identiies laws in traditional measurements of income inequality, such as the Gini coeicient (2014, 266–67). But his own preferred way of measuring inequality—that of comparing the share of diferent income groups in the total product—sufers from some of the same deiciencies. hink of a society with a given income distribution over a year, where the richest 10 percent enjoy 35 percent of total income, while the poorest 50 percent have 25 percent. Suppose that this society undergoes the change that a higher proportion of the population chooses to attend college. his normally means that a higher proportion of the population has lower income for the three to ive years spent at college, whereas these same people will enjoy higher income ater that, and also higher total income over their lifetimes. But ater this change the measurement of income inequality will show that the poorest 50 percent will have a smaller share of total income than before; the ranks of the poor have swelled, so to speak, with people who temporarily have a low income, namely college students. Conversely, the richest 10 percent (or, for that matter, 1 percent) will have a larger share. he same efect is produced by another kind of social change: when normal wage earners retire earlier. Since their pensions will be lower than their full-time salaries, the poorest 50 percent will now be shown to have a smaller measured share of total income. A third change will produce the same efect when people live longer, even if they retire at the same age as before. Again, the ranks of the poor—as deined and measured by Piketty—have swelled, but now with pensioners. But surely the society that has changed in this respect is no less equal than the original one. Moreover, all three changes—more education, earlier retirement, and greater longevity—are normally considered to be improvements. All three changes characterize Western societies over the past half century or so. herefore, an increase in income inequality—as measured by the Gini coeicient or by Piketty’s shares of diferent income groups—may not mean that real income inequality has increased at all. It may rather relect the fact that over the lifetime of typical citizens of a Western country, their individual distributions of income are more unequal in that they have higher income during their working years and lower income before and ater them. here is another systemic reason why, in Piketty’s account, the income of the rich is overestimated. Typically, the very rich are not wage earners; they receive most of their income from return on capital that they inherited or created. hey, unlike most wage earners, can and will engage in tax planning, trying with a horde of accountants and lawyers to move assets to untaxed or moderately taxed channels. Piketty 284 T H E J O U R N A L O F AY N R A N D S T U D I E s points out, correctly, that taxes on the (marginal) income of the rich were cut in most countries during the 1980s and 1990s. In Reagan’s America in 1981 the rate was cut from 70 percent to 50 percent, and in 1986 again from 50 percent to 28 percent, while deductions and exclusions were reduced. But this meant, as Martin Feldstein (2014) observes, that the rich moved from low-proit, tax-exempt investments like municipal bonds to high-proit and now moderately taxed investments. Moreover, the tax cuts made it more attractive for the rich to replace fringe beneits and deferred compensation with taxable salaries, and also to move their business income out of taxable corporations and onto their personal tax returns. hus, it was not necessarily the case that personal income had increased very much; it was rather that income, previously invisible, now became visible as it moved from untaxed to moderately taxed channels. For all these reasons, we have to mentally adjust the striking U-shaped graphs that Piketty produces in his book, showing a return to nineteenthcentury inequality, a wide gap forming anew between rich and poor. We have to bear in mind the reality that is not adequately relected in his data: the systemic underestimation of the income of the poor and the overestimation of the income of the rich. However, Piketty is probably right that there has been some—even quite a signiicant—increase in income inequality in the West over the past few decades. But Randians and Rawlsians alike would wonder why this should be regarded as a problem, since the poor have not become poorer, even if the rich have become richer. What is more important, the desperately poor in most developing countries, in particular the most populous ones, China and India, have become much less poor than they used to be. Global income inequality has indeed gone down, as Pinkovskiy and Sala-i-Martin (2009) have demonstrated. he really big news about twenty-irst-century capitalism is that it has reached China and India, however imperfectly, and that hundreds of millions of people in these countries have migrated into the middle class, thus giving new meaning to Rand’s famous saying, “he upper classes are merely a nation’s past; the middle class is its future” (Rand 1972, 3). Piketty and his associates operate a “World Top Incomes Database” with some intriguing online data. An important question is how ordinary Chinese people—those with incomes below that of the 10 percent consisting of “the new class” of communists and their cronies—have fared according to Piketty. he answer can be seen in Figure 1: from 1986 to 2002, the real incomes of ordinary Chinese, the bottom 90 percent, on average almost tripled. his is an astonishing success. While Piketty does not provide such data for India, probably a similar development, albeit less dramatic, has taken place there. he main cause of the tendencies observed—a rapid rise in the income of the superrich all over the world, a slow rise in the income of Western workers, and a rapid rise in the income of Chinese and Indian workers—is globalization: the extension of the system of market exchanges to most of the world population Book Reviews 285 Figure 1. According to Piketty’s own data, the income of the bottom 90 percent in China tripled between 1986 and 2002. Source: World Top Incomes Database. ater the collapse of communism, or in the case of China, ater its quiet abandonment. Many, not all, high-income people possess some abilities that cannot be reproduced or replicated by others (economists would call it rent, since supply is ixed while demand may be rising). hese people would for example be successful innovators like Bill Gates and Steve Jobs, canny investors like Warren Bufet and George Soros, or popular ilm stars, entertainers, or athletes like Leonardo DiCaprio, Madonna, and Tiger Woods. With globalization, this group suddenly found itself serving a market of three to four billion people instead of three hundred to six hundred million in North America and Europe. Hence, its income rose sharply (Forbes 2014). But who is worse of? Suppose there is a small country with an income distribution regarded as just by Piketty and his soul mates. hen Madonna tours the country, gives ten big concerts, and gets ity dollars from each ticket sold. he inhabitants lock to her concerts, a hundred thousand in total, aterward returning home quite satisied. Now, income inequality has increased: Madonna has ive million dollars, and a hundred thousand people have ity dollars less each. Is this second income distribution any more unjust than the initial one? Everybody is happier, except perhaps Piketty. Who has been harmed? Where is the injustice? his argument is best known from Robert Nozick’s (1974, 60–61) example of basketball player Wilt Chamberlain, but in fact William Buckley ([1951] 1986, 57) used the example of baseball player Joe DiMaggio much earlier. Again, because of globalization, workers in Western countries have found themselves competing with Chinese and Indian workers accepting longer hours and lower wages. Moreover, in the aluent, industrial societies of the West, demand for unskilled labor has gone down. In order to stay competitive, people have to acquire some expertise, and some ind this diicult. Like the Red Queen in Lewis Carroll’s story (1872), they have to run in order to stay in the same place. 286 T H E J O U R N A L O F AY N R A N D S T U D I E s It is also doubtful that in the long run, as Piketty believes, the rate of return of capital will always be higher than economic growth (r > g) so capital will accumulate in the hands of few, the superrich becoming ever richer. First, even were it true that in the long run r > g, capital is not made of the same stable, immobile, unbreakable material as Piketty seems to believe. Nowadays, capital is controlled not only by the landowners and bondholders familiar from Balzac’s novels, but also by innovators, entrepreneurs, and investors, big and small. Capital is also held by governments, universities, pension funds, and many other types of organizations from “the third sector.” Piketty is worried about inherited individual wealth. But capitalists are not only rentiers. hey face risk and uncertainty. Individual wealth is almost as diicult to hold on to as to create. For each Charles Koch whose inherited wealth has vastly increased through his own eforts and initiative, there is a Barbara Hutton who dies penniless. he rich man divorcing his wife for a mistress sees his wealth suddenly divided by a factor of two or even three; and if he has children and grandchildren, his wealth will be dispersed among them in one or two generations. Even in the nineteenth century, individual wealth did not go unchallenged. Consider the characters in Balzac’s novel, Old Goriot, oten mentioned by Piketty. One of Père Goriot’s two daughters, Anastasie, secretly has to sell of her husband’s family jewelry in order to pay her lover’s debts. he other one, Delphine, is married to a nobleman who has spent her dowry on speculative adventures. Piketty (2014, 238–40) quotes at length from the cynical observations of the novel’s chief villain, Vautrin, but he seems to miss Balzac’s main point about the ickleness or conditionality of wealth—the unifying theme in many of Balzac’s works. Economic growth also can, and oten does, surpass the rate of return on capital. Ever since Malthus (1798), pessimists have predicted the eventual slowing down or end of economic growth. But capitalism has time and again demonstrated its immense creative powers. However, if Piketty had his way, imposing coniscatory global taxes on high incomes and great wealth, he would probably witness a self-fulilling prophecy: economic growth would slow down or come to a halt. But this would not prove that he was right: quite the contrary. Capitalism is not about the accumulation of capital. It is about the activities of capitalists. People have worked by the sweat of their brows for many millennia. What inally made their work more productive was the division of labor and the use of knowledge brought about by capitalists. In order to grow, an economy needs innovators, entrepreneurs, investors. It also needs the toleration, acceptance, and even celebration of the rich. In the United States in 2010, the top 1 percent of earners paid almost 38 percent of all federal income taxes, while earning 19 percent of total income. he bottom 50 percent paid 3 percent of income taxes and earned 12 percent of income. Suppose the whole of the top 1 percent suddenly moved abroad. How would government then recoup the tax revenue lost by this move, the 38 percent that this group had contributed? his Book Reviews 287 is the reason why Piketty wants his coniscatory taxes to be global, so they will hinder the light of capital to “tax havens.” But Rand’s (1957) thought experiment in Atlas Shrugged is also relevant here: Suppose this top 1 percent quit producing the income out of which it contributed 38 percent of total income tax revenue. If they disappeared, how could their contribution be replaced? Of course the answer is that it could not. Unlike John Rawls, Piketty is much more concerned with the rich than the poor. He seems to think that there is something inherently immoral about being very rich. his is not an uncommon view. Mario Puzo (1969), another writer fond of quoting Balzac, put the following statement attributed to him on the irst page of a novel about Italian American criminals, he Godfather: “Behind every great fortune there is a crime.” While this statement is nowhere to be found in Balzac’s works, in Old Goriot the chief villain, Vautrin, says to an innocent country lad, “he secret of great fortunes with no apparent source is a forgotten crime, forgotten because it was properly carried out” (Balzac [1834] 1974, 136). Note that Balzac’s original statement is qualiied, unlike Puzo’s: great fortunes may have an acceptable source. his is the case, for example, with the wealth of Bill Gates, Warren Bufet, Ingvar Kamprad, the Kochs, the Waltons, and many others on the list of the world’s richest people. Some oligarchs, especially in developing countries, may have gained their wealth through political favors, such as politically protected monopolies. But then government is to blame, not capitalism. What is really wrong anyway with great fortunes? Compare two societies where the living standards of the poor (say, the bottom 10 percent) are similar, but where in one of the two many more superrich people are to be found. Arguably, that society is much more interesting, diverse, and dynamic and holds out more hope—both for the rich and those aspiring to become rich—than the more equal one. Not only will the rich there bear the brunt of the tax burden, as already observed, but they will also provide most of the venture capital vital to economic growth. Moreover, they will subsidize innovation by forming the initial market for luxury goods, which, with improved techniques, will be transformed into necessities, such as cars, airline tickets, and computers. Perhaps most important, the rich will act as a counterweight to political power, that of both professional politicians and bureaucrats. hey can aford to pursue a just cause in court, and to fund media campaigns or social movements against the abuse of power. he point is not the perfectly true one that some of the rich will not care, but the more profound one that if people of considerable means are not around, then nobody can and will perform this balancing function. hus, under capitalism the superrich are led by an invisible hand to promote an end that was no part of their intention. Perhaps Piketty is worried about some undue inluence of the superrich. But he wants to create a much more alarming structure of power: a global 288 T H E J O U R N A L O F AY N R A N D S T U D I E s agency for collecting the coniscatory taxes he envisages from the superrich and redistributing them to the poor, and a hierarchy of much more interventionist states than exist today. he problem is not only that wealth will disappear in the process of being extorted—that Atlas will shrug—but also that with the solution we will move from the imperfect to the intolerable. Perhaps wealth tends to corrupt, but power tends to corrupt much more, especially because it includes the enforcement of decisions: the policeman with his stick or the soldier with his gun always loom on the horizon, however distant they may seem. In a large, capitalistic, competitive society, there can hardly be any such thing as absolute wealth, where all resources would be owned by just one person, but over the centuries many examples are encountered of the almost absolute power of just one man, corrupting absolutely. he rich surely are imperfect human beings, but so are politicians and bureaucrats. Is not power most dangerous in the hands of those who seek it the hardest and enjoy it the most? Whereas those who enjoy wealth the most tend to spend it and to lose it in the end, as Balzac amply demonstrated in his novels. Again, with his grand scheme of global redistribution, Piketty seems to ignore Director’s Law (Stigler 1970): Redistribution by politicians and bureaucrats will tend to favor those who have the ability and the will to exert the greatest inluence on those very politicians and bureaucrats. he typically inarticulate and disorganized poor will not wield the greatest inluence on decision makers in a democracy, but rather small, energetic, well-organized groups—not least the champagne socialists like Piketty, hobnobbing in the Place des Vosges or other fashionable Parisian neighborhoods. One of the most revealing sentences in Piketty’s long book is this: “he problem is that the price system knows neither limits nor morality” (2014, 6). On the contrary, the price system knows limits: it is precisely a process for discovering and transmitting limits, telling people when they should, in production or consumption, turn from one scarce good to another one. Again, the price system certainly knows morality. It is the morality of choice, noncoercion, individuality. People essentially have three ways of obtaining what they desire from others: by persuasion, coercion, or payment. Persuasion is not practical among strangers. Coercion is, in the view of many, immoral unless in self-defense, and all would admit that it is dangerous. Ofering an exchange, at a negotiated price, is the peaceful, respectful, and moral way of mutual adjustments in a world of scarce resources and imperfect human beings who have limited sympathy with one another. To modify behavior, the gold coin is vastly preferable to the iron sword. Piketty does not seem fully to comprehend the system of private property rights and the rule of law gradually developing in the Anglo-Saxon countries ater the two successful revolutions of 1688 and 1776. While he consciously appeals to Marx—in the title of his book and in numerous references inside it—he is also a disciple of Rousseau and the French Jacobins. (Balzac’s villain Book Reviews 289 in Old Goriot, Vautrin, also claims to be a follower of Rousseau.) he French Revolution is frequently mentioned in Piketty’s work. It may even be said to be the specter haunting the book. But the crucial diference is that the English and the American Revolutions were at least modestly successful, while the French Revolution of 1789 failed dismally (Taine 2002): around forty thousand people were killed in the Terror, and many more on the battleields of Europe, under the banners of the Jacobin Republic and then Emperor Napoleon; and when the events of Balzac’s novel, Old Goriot—from which Piketty quotes so oten—take place in 1819, the old dynasty had been restored. Even today, France has not found a stable political structure. Piketty’s tome, written in clear, plain prose, poses a formidable challenge to all supporters of the system of individual choice, free exchange, and spontaneous development. It should not be dismissed lightly. It is full of interesting observations. Piketty is well aware of the objections raised here and elsewhere, but tends to respond by blithely shrugging his shoulders and muttering, “Possibly.” But capitalism will survive this work, as it has countless other prophecies of its immediate demise. References Balzac, Honoré de. [1834] 1974. Old Goriot. Translated by Marion Crawford. Harmondsworth, Middlesex: Penguin. Bonnet, Odran, Pierre-Henri Bono, Guillaume Chapelle, and Etienne Wasmer. 2014. Does housing capital contribute to inequality? A comment on homas Piketty’s Capital in the Twenty-First Century. Sciences Po Economics Discussion Paper, July. Buckley, William F., Jr. [1951] 1986. God and Man at Yale. South Bend, Indiana: Gateway Editions. Carroll, Lewis. 1872. hrough the Looking-Glass, and What Alice Found here. London: Macmillan. Feldstein, Martin. 2014. Piketty’s numbers don’t add up. Wall Street Journal (14 May). Forbes billionaires: Full list of the world’s 500 richest people. 2014. Online at: http:// www.forbes.com/sites/abrambrown/2014/03/03/forbes-billionaires-full-list-ofthe-worlds-500-richest-people/. Giles, Chris. 2014. Piketty indings undercut by errors. Financial Times (23 May). Malthus, homas Robert. 1798. An Essay on the Principle of Population. London: J. Johnson. Online at: http://www.econlib.org/library/Malthus/malPop.html. Nozick, Robert. 1974. Anarchy, State and Utopia. New York: Basic Books. Piketty, homas. 2014. Capital in the Twenty-First Century. Cambridge, Massachusetts: Belknap. Pinkovskiy, Maxim and Xavier Sala-i-Martin. 2009. Estimations of the World Distribution of Income. New York: National Bureau of Economic Research. Puzo, Mario. 1969. he Godfather. New York: G.P. Putnam’s Sons. Rand, Ayn. 1957. Atlas Shrugged. New York: Random House. 290 T H E J O U R N A L O F AY N R A N D S T U D I E s ———. 1972. he dead end. he Ayn Rand Letter 1, no. 20 (3 July). Rawls, John. 1971. A heory of Justice. Cambridge, Massachusetts: Harvard University Press. Stigler, George J. 1970. Director’s law of public income redistribution. Journal of Law and Economics 13, no. 1: 1–10. Taine, Hippolyte. 2002. he French Revolution. Volumes 1–3. Translated by John Durand (1880). Indianapolis: Liberty Fund. he World Top Incomes Database. n.d. Online at: http://topincomes.g-mond.parisschoolofeconomics.eu/.