'We Don't Have to Go All the Way to Socialism'

A recent book on wealth inequality by Thomas Pikkety, a left-leaning French economic historian, has just become an Amazon bestseller. In this interview, Pikkety allows that in his opinion, 'we don't have to go all the way to socialism' – well, what a relief. What he means is probably that we will have to at least go three quarters of the way, since we are obviously already half-way there.

Pikkety thinks 'we need not only progressive taxation, but also a progressive tax on net wealth'. In other words, incomes are to be taxed not once, but twice (this actually happens already, there are after all capital gains taxes). This echoes the wealth confiscation scheme propagated by the IMF not too long ago, which is supposed to bail out the over-indebted governments of the euro area (see our previous article “Is a Large Wealth grab on the Way?” for details on this pernicious confiscation plan).

Thomas Pikkety: intellectual handmaiden to a wealth grab.

(Photo via sueddeutsche.de / Author unknown)

It is probably no coincidence that these ideas are so heavily promoted at the current juncture. Robert Shiller, the behaviorist who recently shared a Nobel Prize in economics with Eugene Fama for their respective work on financial markets, has also voiced the opinion that higher taxes are allegedly needed to 'reduce inequality' (as an aside, Shiller's and Fama's views about financial markets are diametrically opposed. In other words, at least one of them must be wrong. One wonders how the Nobel committee arrived at the decision to give its prize to both of them. It seems to make no sense. We actually believe both of them are wrong by the way).

Shiller recently published an editorial arguing in favor of taxing wealth in the New York Times (where else?), inter aliaquoting Pikkety's views. Allegedly, we 'need insurance against inequality' and higher taxes are what will provide it:

“Professor Piketty talks about instituting a “global tax on capital” but acknowledges that it is a utopian idea and says that “it is hard to imagine the nations of the world agreeing on any such thing anytime soon.” He talks about raising the rate of the top tax brackets and raising inheritance taxes but sees “little reason for optimism” that this will happen. There have been big increases in taxes on the rich in the past, but he points out that these tax increases were put in place only in response to wars — specifically, World War I and World War II.

Let’s try not to have another major war. Instead, there are some positive things we can do now. As I said in my 2003 book, it would be wise to start amending the tax system immediately. I suggested this fundamental reform: Taxes should be indexed to income inequality so that they automatically become more progressive — meaning that the marginal tax rate for the highest-income people will rise — if income inequality becomes much worse. Ian Ayres of Yale and Aaron Edlin of the University of California, Berkeley, made a similar argument in 2011 in The New York Times.

There is a practical reason for starting now. If we wait until income inequality is much more severe, we will have a whole class of new superrich who will probably feel entitled to their wealth and will have the means to defend their interest. That’s already gone far enough. We shouldn’t let it become more extreme.

There is also a theoretical reason. It is what the psychologists Yaacov Trope of New York University and Nira Liberman of Tel Aviv University called temporal construal theory. They showed that people are more idealistic and generous when dealing hypothetically with the distant future than they are about actions they need to take today. That’s why it pays to ask people to decide on measures to uphold egalitarian ideals when they don’t have to cough up the money immediately.

We don't share Pikkety's view that a 'global tax on capital' is necessarily a 'utopian idea' that won't be realized anytime soon. On the contrary, the fact that the idea is so heavily promoted lately makes us suspect that the next crisis will probably be used to push this or a similar type of wealth grab through, along with ancillary regimentation measures (such as capital controls) that will be needed to make the scheme effective. It should perhaps also be mentioned that people are already taxed to death by the socialist government of France. Pikkety can ascertain for himself how well this works – the best and brightest of France's citizens are abandoning ship in droves (London is by now the 'sixth largest French city'). Shiller meanwhile seems terribly eager to advise the government on how to best loot an obviously unwilling citizenry. The fact that he is recommending psychological tricks to push the scheme through speaks for itself: he evidently believes that it would be resisted otherwise.

A Fundamental Error

All these views are based on the erroneous assumption that inequality as such is somehow 'bad' and that 'we' (read the State, which is actually not 'we') should therefore strive to impose more egalitarianism by means of coercion and theft (to call a spade a spade). However, inequality is completely irrelevant from a socio-economic perspective if everyone has the opportunity to attain more material wealth. It is even more irrelevant if the lot of everyone in society is in fact improving over time. We have discussed this point in detail before. 

There are two major drivers of inequality today: one is absolutely nothing to  worry about, while the other cannot be 'fixed' with higher taxes. The driver that is not worth worrying about is connected with structural changes that have taken place in the economy in recent decades that have increased the demand for highly skilled labor.  They have of course also increased the incomes of highly skilled workers (this aspect is discussed in detail in a paper by Brink Lindsay, which we have referred to before).

The other major driver of wealth inequality is a government institution: the central bank. By creating money from thin air, it causes a 'reverse distribution' of wealth, from later to earlier receivers of newly created money. There can be no doubt whatsoever that this effect takes place (note that it also occurs if a banking system using fractional reserves is in place that lacks a central bank, but it is far more limited in that case and tends to self-correct, especially if – as is likely -  a sound market-chosen money is employed). The effect has been well-known ever since Richard Cantillon first wrote about it in the early 18^th century, and the idea has been elaborated further by later authors, inter alia Ludwig von Mises. And yet, neither Pikkety nor Shiller mention this fact with a single word.

Richard Cantillon – the effect discussed above is even named after him. New money enters the economy at discrete points, and thereby creates winners and losers.

(Image via Wikimedia Commons)

It should be obvious who profits the most from this 'reverse distribution' effect. The primary beneficiaries are, in this order, the government (which essentially imposes an 'inflation tax' on society), the banks (which can create deposit money from thin air at will and are aided and abetted in this endeavor by the central bank) and – ta da! – the wealthy.

The reason why the wealthy are favored by monetary inflation to the detriment of the poorer strata of society is that the bulk of their wealth is usually embodied in assets (such as stocks, bonds, real estate, etc.) the prices of which tend to rise disproportionately as a result of an inflationary policy. Cash holdings usually represent only a tiny portion of their total wealth.

The system of progressive taxation currently in force is already a huge disincentive to wealth creation. As George Reisman once pointed out, one must not forget that:

“The benefit of the capitalists’ means of production to non-owners of means of production extends not only to the buyers of the products of those means of production but also to the sellers of the labor that is employed to work with those means of production. The wealth of the capitalists, in other words, is the source both of the supply of products that non-owners of the means of production buy and of the demand for the labor that non-owners of the means of production sell.

It follows that the larger the number and greater the wealth of the capitalists, the greater is both the supply of products and the demand for labor, and thus the lower are prices and the higher are wages, i.e., the higher is the standard of living of everyone. Nothing is more to the self-interest of the average person than to live in a society that is filled with multi-billionaire capitalists and their corporations, all busy using their vast wealth to produce the products he buys and to compete for the labor he sells.”

Since every single iota of society's wealth is in fact created by the private sector. Wealth does not grow on a government tree somewhere – the government ultimately obtains its entire revenue by means of confiscating part of the wealth created by the private sector. As Reisman notes further:

“Of course, this does not apply to wealth which has been acquired by such means as obtaining government subsidies or preventing competition through protective tariffs and other forms of government intervention. These are methods which are made possible to the extent that the government is permitted to depart from a policy of strict laissez-faire and thereby arbitrarily reward or punish firms.

Apart from such aberrations, the way that business fortunes are accumulated is by means of the high profits generated by the introduction of new and improved products and more efficient, lower-cost methods of production, followed by the heavy saving and reinvestment of those high profits.

Government's control over the monetary system is one of the 'other forms of intervention' Reisman mentions and indeed represents the by far most pernicious of these interventions. It falsifies economic calculation, brings about boom-bust cycles and disproportionately favors the above mentioned groups. That the wealthy happen to benefit from an arrangement that was primarily introduced to benefit government is simply a side effect.

A Statist Promotion by Statist Intellectuals

We have often mentioned in these pages that the output of today's intellectuals is for the most part 'mediocre and viciously statist', as Hans-Hermann Hoppe has once put it. Pikkety and Shiller are obviously no exceptions to this rule. They are preparing the way for society to accept an arrangement that once again benefits mainly the government and its bureaucracies and is bound to reduce the private sector's incentive to create more wealth. It may well be true that it ends up decreasing current levels of inequality – but at the price of making everyone poorer and more miserable.

If these authors were really interested in a solution that leads to an optimal outcome for society, they would argue in favor of a low flat tax (or even better, the replacement of taxation with voluntary contributions) and in favor of adopting sound money and a free banking system. However, that would mean biting the hand that feeds them. To quote Hoppe:

“ [Instead,] intellectuals are now typically public employees, even if they work for nominally private institutions or foundations. Almost completely protected from the vagaries of consumer demand ("tenured"), their number has dramatically increased and their compensation is on average far above their genuine market value. At the same time the quality of their intellectual output has constantly fallen. What you will discover is mostly irrelevance and incomprehensibility. Worse, insofar as today's intellectual output is at all relevant and comprehensible, it is viciously statist. There are exceptions, but if practically all intellectuals are employed in the multiple branches of the state, then it should hardly come as a surprise that most of their ever-more voluminous output will, either by commission or omission, be statist propaganda.”

When a small section of the population obtains ever greater wealth while the less well off strata of society either see their wealth stagnating or declining at the same time, social harmony will eventually fray. Obviously no-one wishes for this to happen. However, it is erroneous to assume that this problem can be fixed by the government obtaining an even greater share of the citizenry's wealth. This would only lead to even more scarce capital being wasted and make everyone poorer in the end. Inequality is not unnatural – people are not the same, they are different in terms of their talents, their work ethic, their aspirations, and so forth. As long as everyone is free to pursue his dreams without hindrance in an environment of well-protected property rights, there is no problem that needs to be 'solved' by means of social engineering.

Conclusion:

In order to propose effective solutions, it is necessary to first correctly identify and acknowledge the root causes of the problem. Contrary to what Shiller and Pikkety appear to assume, we do not need more socialism, we need less of it -  a lot less.

Addendum:

In California a proposal to limit the pay of corporate managers – naturally also by means of introducing additional taxes – is currently under discussion. Since the salaries of managers are paid by privately held corporations, this is a decision that should be up to their owners, i.e., shareholders. As Julian Adorney points out here, the so-called 'maximum wage myth' does certainly not withstand close scrutiny either.