The Trinity of Inequality

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Thomas Piketty and the Trinity of Inequality: What If Higher Taxes Are Not the Solution?

By James Pinkerton

Analyzing Piketty’s “Capital”, Pinkerton asks the pertinent question, what if inequality of income and wealth is a fundamental part of our technological, intellectual, and motivational existence?  What happens to progress if you try to crush income inequality with massive taxes on the rich?  He concludes that inequality of outcome is hard-wired into our makeup.  Nothing but murder and repression will “stamp out the varied expressions of human creativity”.

“What if inequality of capital is simply a proxy for other kinds of inequality—technological, intellectual, motivational? In other words, what if it’s the case that inequality is hardwired into everything?”

As Thomas Piketty is a former staffer of the French Socialist Party and is currently a columnist for the French socialist newspaper Liberation, it is logical to assume that he hopes his book will propel the left today as Karl Marx’s “Das Kapital” did in the 1800s. 

Piketty’s argument is that income inequality is rising because the rate of return on capital (investment) is higher than the growth rate.  So wealth is accumulating while wage income is stagnating. 

Income inequality is rising, but is it a problem?  It is clearly a political problem.  The election of Bill de Blasio as major of New York is an indication that Democrats see “class warfare” as an effective strategy.   But everyone is still better off.  For instance, 90% of Americans have cell phones.  1.3 billion people use Facebook.  Both the cell phone companies and Mark Zuckerberg have made a lot more money, increasing income inequality.  But that does not diminish the value they have provided to their users.

To the Left the causes of income equality is simple, the rich have too much money and the solution is to tax it away.  Krugman and Ezra Klein would like to see the top rate back up to 90% as it was in the early 60s.  In Piketty’s home country, France, they have already increased the top income tax bracket to 75% and people are leaving.  So Piketty wants a global wealth tax. 

But their diagnosis and prescription is naïve because it ignores powerful forces in the course of human development that are the real causes of income inequality: changes in technology, intelligence, and motivation.  Ignoring these and imposing confiscatory taxes could make the future violently worse. 

Technology is changing everything and as it does it destroys older technologies, such as digital cameras replacing film and bankrupting Polaroid which used to hire 140,000 people.  If this process is stopped by throttling capital and wealth, the benefits of technological progress will be sacrificed to maintenance of income equality.  Technology is increasing inequality on a massive scale.  Should we stop it?  Or would the cure be worse than the disease?

The intellectual power of human brains that created all the technology is also expanding, leading to increasing inequality.  So what would happen to the fruits of intellectual power if taxes were raised to 90%?  Would smart people still go into business or would they apply their genius to government or war? 

Most tyrants have been intelligent, but the people would have been better off it they had built cars instead of tanks and concentration camps.  The challenge is to create a system in which they are rewarded for doing good things instead of bad.

Wealth creation is hard work.  The real factors that create wealth are “IQ, caffeine, adrenaline, and elbow grease.”  Smart people, appropriately motivated can to amazing things.  Progress is the result of,

“… technological, intellectual, and motivational forces that defy all the egalitarian professors and their preciously concocted Gini eoefficients, …

“Are the traits of this trinity equally distributed? Are they fairly apportioned according to the Piketty/Krugman metric? Not at all. … Nothing, short of repression and murder, will stamp out the varied expressions of human creativity, from wealth creation to art creation.”

So “inequality is built into the complicated systems that define our lives today;”  Technology improves our lives and fracking provides us with energy and jobs.  Even if they make those who pioneer them very rich, they increase our overall prosperity and improve our lives.  Inequality is here to stay.  High progressive taxes can distort the motivation to create, but they will never suppress natural inequality. 

But what about the ill political effects of a population that believes the system is unfair.  Government investment in early technologies like ARPANET in the '60s paid great dividends in the development of the Internet.  So maybe the government should take a little bit of the expanding wealth pie and continue to seed technology.  This would at least help “assure the agreeable consent of the governed.” 

“Meanwhile, of course, Piketty and his ilk will continue living in their own hell of income inequality. They can offer class envy, but not economic growth, because growth comes from innovation and production, not taking and leveling. … Of course, the situation isn’t all bad for Piketty. He has a bestseller on his hands, and he will no doubt garner huge speaking fees as well. In other words, if he’s not careful, he could find himself piling up capital faster than others. So he, too, could be part of the phenomenon that he fears—or says he fears.

Inequality of income and wealth is a fundamental part of our technological, intellectual, and motivational existence, and the source of creativity and progress.  If is it crushed, progress and prosperity will die.  And the only way to crush it is with a tyranny of murder and repression. 

Thomas Piketty and Capital  the new best seller “Capital in the Twenty-first Century”

Inequality  a gateway to inequality, what is it, why it exists and why it matters?

The Income Inequality Mirage  how the way income inequality is measured misleads people