Dissecting the Economic Lunacy of Thomas Piketty Line by Line

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Since Keynes no longer has much credibility as a leftist prop, liberals are in a communal feeding frenzy over Thomas Piketty's "Capital in the Twenty-First Century." The book claims to offer progressives the proof they need to legitimize their socialist ideology that income redistribution and collective justice is moral.

Harold Meyerson's review in the Washington Post is one example. So before the grave of Adam Smith is further desecrated by economic lunacy, let's dissect the false rhetoric, piece by demagogic piece.

"Capitalism itself enriches the few at the expense of the many."

Incorrect. Capitalism is a system where wealth is created when private owners add surplus value to scarce resources and then trade in the free market to meet demand and share in a civil manner increasing the standard of living for all.

"The share of Americans' income going to the wealthiest 1 percent has risen to the level last seen just before the 1929 crash."

Even if correlation is not causation, why is this "statistic" a concern? Wealth is created by voluntary exchange. The more people you serve, the more wealth you accumulate, and the more incentives you give others to create wealth. The wealthiest 1 percent is not a static group of people unless immortality and omnipotence has been discovered only by "the wealthy."

"Piketty's chief conclusion is that, in most nations in most times, the interest on capital - income from investments and ownership - accumulates at a higher rate than that at which the overall economy is growing."

Using an apple's to oranges argument and stating "most nations in most times" does not lend much credibility to what one claims to be economic fact.

You can't compare the profit made by wealth, first created by serving others and later invested in areas of greatest demand, with the average overall economic growth rate. Investment in the most profitable areas in the economy because of high demand is a net positive for all. Lenders need borrowers just as much as borrowers need lenders; and the interest paid to savers is less than the profits available to entrepreneurs generating business, employing people, and meeting demand.

"The road to riches came through inheritance rather than even professional labor."

80 percent of millionaires make their fortunes by building businesses and serving others. The other 20 percent inherit wealth that was earned through entrepreneurship and "professional labor" in serving others. Wealth saved and transferred to freely chosen heirs strengthens the incentives for productivity and a thriving family institution far more then wealth seized by government and given to "special" voters.

"The reforms of the New Deal in the United States and of social democracy in Europe then boosted workers' incomes on both continents and gave rise to a sizable propertied middle class."

There is nothing in the New Deal that "boosted workers incomes," other than social engineering programs that used tax dollars to take from the "haves" to give to the "have-nots." Transferring wealth by legislated theft may seem to help those who are "seen" but it comes at the expense of more "unseen" and is certainly not economic growth.

Is it possible the boost was caused by the end of the war, the emergence in technology sparked by the war, the industrial capacity built by the war, and the entrepreneurial spirit of daring businessmen who cut their teeth fighting fascism and government abuse of power?

"The interest rate on property of all kinds was roughly 4 to 5 percent a year, while the overall economies of Britain and France were growing at a rate of just 1 percent (a figure Piketty derives by adding the nations' population growth to their economic growth)."

What economic law says the interest rate should mirror GDP? If the formula for GDP is: C + I + G + (X - M), then where is (P)opulation? Nowhere! Was it magically used in Piketty's growth model to manipulate a desired result. If population was a strong factor in GDP, why do many highly populated nations have dismal GDPs?

"Since 1980, however, their fortunes have swelled again - at the expense of everyone else."

Fortunes "swell" as you serve more people, either directly by creating wealth, or indirectly by lending the wealth you created to allow others to create wealth. Only government can take wealth "at the expense of everyone else." In a free market, the only "swelling" is the rising economic tide, or standard of living, lifting all "boats."

"Ronald Reagan and Margaret Thatcher slashed taxes on wealth, workers lost the ability to bargain for wages"

There is not one example in a legal free market where workers ever "lost their ability to bargain for wages?" Employers need workers and workers need employers. Wages are set by competition, productivity, voluntary exchange, and the laws of supply and demand.

"Piketty shows, the incomes of the top 1 percent have grown so high - chiefly due to the linkage of top executive pay to share value, a form of capital - that they soon will create the greatest level of income inequality in the recorded history of any nation."

Were the benefits and other assets factored into the income calculation for all workers? "Share value" creates the incentives for executives to be productive and efficient in meeting consumer demand as they have a lot to lose.

Second, most economic calculations today have a numerical value higher than "in the recorded history of any nation" due to inflation. Just because a $4.00 cup of coffee today is the highest in "recorded history" does not make it different then a 5 cent cup of coffee.

Furthermore, arbitrarily stating that something is "so high" based on a feeling is meaningless in economics. The laws of supply and demand are blind to numerical values, high or low.

"And with heightened accumulations of wealth come heightened accumulations of political power."

The left fears any "political power" that impinges on their ability to control "wealth" and create class polarization to build an uncontested constituency of victims for their utopian prison.

"No self-corrective mechanism exists" within capitalism to retard this descent into plutocracy"

Capitalism by its very nature is a self-correcting set of systemic principles that form Adam Smith's "invisible hand." These interacting parts move scarce resources effortlessly to their most desired use. The irony is the left missing a "self-corrective mechanism" to protect us from their self-corrupting plutocracy of government power.

"Its prevention requires political action: [Piketty] suggests a global tax on capital, which, he acknowledges, is a utopian solution, though others - empowering workers again, increasing the social provision of goods and services."

Even when the left slips up and utopian impossibilities are acknowledged; they forge ahead with more command, more control, and class warfare by telling the workers they have no power, big bad business is the enemy, and "we" are your meal ticket. Sounds nice but ends in misery. Just ask East Germany, Cuba, Venezuela, North Korea, et al.

"It makes for fascinating, grim and alarming reading."

What's "grim" are the command economies that murdered 97 million lives in the Soviet Union and China in the last century alone. What's "fascinating" is the market economies in early Greece, during the Italian renaissance, and America's first two centuries that raised the standard of living, life expectancy, and moved more people out of poverty than in any other time of human existence.

"Piketty gives us the most important work of economics since John Maynard Keynes's "General Theory."

Whether you're a confused Keynesian or "Pikettysion," people have a right to their opinion but not their own facts. In spewing nonsense, it's obvious that Piketty and Myerson's intention is to smear Adam Smith and capitalism in the desperate hope that the mere appearance of impropriety will win points with the electorate and their ideological flock.

Income redistribution and collective justice create inefficient policies that retards economic growth, lowers the standard of living for everyone, and is harmful to people and their property. That love affair is the essence of immorality.

Dean Kalahar recently retired from teaching economics and pyschology.  He has authored three books, including The Best of Thomas Sowell, a user-friendly guide to Sowell's insightful thinking on a wide range of social and political issues. 

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