The Invisible Hand a Pickpocket
If we are to have a brighter economic future, some prevailing ideological bubbles must be burst, and now we have a very sharp pin to focus on the subject of inequality. French economist Thomas Piketty has pored over a century’s worth of economic data from thirty countries and written Capital in the Twenty-First Century, where he provides compelling details that burst the balloon of supply-side ideology. Specifically, his evidence deflates the claim that the key to the future is laissez faire capitalism, low taxes, and the arcane notion that capitalism is a dependable trickle-down success story.
Piketty’s work has been under unrelenting attack, especially by people who don’t want to believe it and likely won’t believe it, even if it holds up over time as a valid argument. But the manic condemnation has created a bestseller. Critics are desperately searching Piketty’s data in hopes of finding flaws that will enable them to dismiss the whole work. Doing so won’t be easy, though, because, apart from some noted arithmetic errors, his examples are exhausting and his timeline covers decades of trends in the demographics of wealth accumulation.
One glaring fact is undeniable: inequality is escalating globally at an alarming rate. The debate needs to go on until we sort the virtues from the vices of capitalism and get to the bottom of why so many working people remain in poverty.
Those who claim that Piketty is a Marxist obviously have not read the book. He favors capitalism, but he makes it clear that capitalism is an engine so powerful that when it idles, the return on capital outpaces general economic growth. This is why the top one percent is on course to accumulate more and more wealth, at the expense of the rest of the economy.
The imbalance will not stop without serious intervention, namely putting a governor on the carburetor of capitalism, in the form of a progressive tax that’s steep at the high end, to check the excessive growth disparity and bring an equitable balance to the population at large.
In a nutshell, Piketty argues that capitalism is a system whose algorithmic functionality accelerates advantage and then continues to favor that advantage disproportionally. It’s a snowballing effect that, if left unchecked, eventually becomes an avalanche. The gap between the growth of capital and the rest of the economy is small, but the consequences are enormous.
Piketty’s analysis aside, the rise in economic inequality in America during the last thirty years offers prima facie evidence that something in our capitalistic system is fundamentally flawed. Capitalism, it seems, systematically undermines its own success. According to the Wall Street Journal, 95 percent of income gains from 2009 through 2012 went to the top one percent. How much worse does this disparity have to get before the intransigent GOP wakes up and at least admits we have a problem?
The ideological friction between labor and capital is an ancient quarrel. “Labor is prior to, and independent of, capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration.” So said Abraham Lincoln, a prescient Republican president, in 1861.
Where is the higher consideration? Labor today gets scorn, contempt, and derision for even raising the subject. Why is the minimum wage stagnant despite significant growth in productivity? Simply put: although the precise identity of the culprits directly responsible may be subject to argument, the pockets of the working poor have been picked as effectively as if accomplished by a thief.
Adam Smith’s invisible hand is a powerful metaphor, and the self-interest it describes can and does improve lives all over the world. But Smith’s work has been corrupted and championed as a celebration of greed, which is the antithesis of his thinking. At its best, capitalism dramatically improves lives; at its worst, unchecked greed ravages the environment, oppresses individuals, and destroys culture.
Capitalism is analogous to radiation. Used carefully, it can produce miraculous results, while overuse kills. In Smith’s view, economic freedom does not come with the license to oppress because the very idea of doing so is immoral.
The government’s job is to keep the invisible hand from becoming a pickpocket by keeping any and all economic factions from acquiring enough power to be oppressive, whether the aggressor is the government itself, a corporation, or an individual. Whatever happened to the notion that “we the people” are the government?
Adam Smith advocated freedom in a sense of moral ethicality long since forgotten and absent from general public discourse. The ethos of Wall Street is so far out of sync with Smith’s view of ethical economic behavior, it seems almost extraterrestrial.
The idea that a self‐creating, self‐sustaining middle class can exist on nothing but low taxes, ambition, and individual initiative is absurd, and the hundred-year history in Piketty’s book makes this crystal clear. Middle-class societies require significant ongoing investments. Repeating adamant declarations that lowering taxes will always lead to economic growth will not make it so. American economic history well illustrates this point. Higher taxes do not necessarily result in economic downturns. Some of our greatest periods of growth and a thriving middle class have occurred when tax rates were much higher than those we have today.
Remember this: Never on this planet has there existed a civilization with a strong middle class and minimal poverty without an extraordinary government effort behind its creation and a substantial and ongoing investment in both hard and soft infrastructure to keep it viable. Never!
The existence of a middle-class is a purposeful effort. Don’t believe it? Find one that occurred by happenstance or sheer ambition. Offer an example. Please. Look the world over at all of the developed nations with a high quality of life, and you will find no great society arising solely out of the burning desire for individual success. Affluent societies are not accidental occurrences. Even in societies that are resource rich, substantial investments in the public interest have to be made. And yet, in America, Horatio Alger bootstrap nonsense is still touted as if personal drive is the only ingredient necessary for economic triumph.
Make no mistake, individual responsibility and initiative are important for success, but we don’t achieve middle‐class status without an overt public effort and the investment necessary for both creating and sustaining it. Rural electrification, the interstate highway system, the GI Bill, and the Federal Housing Authority were key ingredients that gave rise to America’s middle class, all paid for by much higher tax rates than are currently in effect.
Thomas Piketty describes this period in American history as an aberration, but it didn’t kill capitalism. To the contrary, it kicked the engine into overdrive, putting a governor on capital and providing enough equity that starting wages supported a middle-class lifestyle with only one person in a family working. To avoid taxes at the highest rate, business owners reinvested heavily in their companies, and their wealth increased accordingly.
Executive compensation today has everything to do with the power to loot with legal immunity. These days we hear a lot of talk about takers, but not much is said about those who have already taken far more than the value they create. Wall Street executives fled the 2008 meltdown with multimillion‐dollar bonuses, while people who were put out of work because of executive greed are routinely referred to as parasites for collecting unemployment.
In reality, the financial services industry is where we have an infestation of parasites. They skim the stock market with supercomputers, and cover their tracks with empty slogans about success, freedom, and the American Dream, having succeeded in getting the legislative license and political support not only to loot openly, but to be celebrated for it.
An ethos of self‐reliance is accepted as a core component of American culture. Ralph Waldo Emerson is the grand architect of this way of thinking about ourselves. But today’s politicized rhetoric about self‐reliance overlooks the fact that Emerson was anti‐materialistic to an extreme that few Wall Street cheerleaders can comprehend.
Much of our love affair with rugged individualism is based on mythology. We celebrate a history that never happened, obsessively calling attention to individual initiative, while ignoring the enormous government expenditure that made America possible. Millions of working people today depend upon paychecks in market economies that are subject to the whims of fashion and global recessions. Through no fault of their own, they find themselves out of work for months or years. The idea that without some kind of intervention or assistance, sheer determination will allow them to recover is patently illogical.
There is plenty of need for outrage in America, but it should focus on adjusting the engine of capitalism and the regulations that pose a danger to the public interest. Skyrocketing inequality and a shrinking middle class create a recipe for economic decline. The engine of capitalism is perfectly capable of working for everyone. It’s happened before and it can happen again, but the public will must demand an overhaul.
The profound irony is that the long-term future of our species depends not on economic growth per se, but almost its opposite: the exponential growth of knowledge toward reducing the human imprint on the natural world. Sadly, even to raise the subject that our impact on the earth is more important than our economic system is to invite ridicule and the questioning of one’s sanity.
Piketty’s research suggests that our long-term growth is inevitably likely to slow, but he is reluctant to predict a rate. He offers a brief discussion of the importance of addressing climate change, but says little about population growth and the consequences of finite resources. In his words, “The long-term dynamics of wealth distribution are potentially terrifying, especially when one adds that the return on capital varies directly with the size of the initial stake and that divergence in the wealth distribution is occurring on a global scale. The problem is enormous, and there is no simple solution.”
Put simply, civilization is a very expensive proposition, and if we continue to attempt to achieve progress with ego-driven criteria based on greed, a childish penchant for selfishness, and ethnocentric tribalism, the pursuit is likely to end badly. Nothing save a catastrophe will produce the resolve to do what needs to be done.
Charles D. Hayes