The maldistribution of common sense

There really is nothing the left can complain about the market economy other than some people are able to earn more than others. Piketty and his Capital in the Twenty-First Century has opened up the latest front in the perennial attack on free markets and the entrepreneurial economy. The socialist centralisers never go away. This is the abstract of a paper titled “The Equalizing Hand: Adam Smith and Inequality” that is about to be given at the LSE which blames the greatest social scientist in history for the relative poverty of those who are richer by a hundred fold than their equivalents at the time The Wealth of Nations was published. For what it’s worth, I do not for a second believe that the market economy leads to inequality although I do believe that the welfare state does. Here’s the abstract:

That the market economy inevitably leads to inequality is widely accepted today. The prediction is traced back to the canonical text of classical liberal political economy, Adam Smith’s Wealth of Nations. Even the most progressive interpretations of Smith assume he accepts inequality, rationalized as the inevitable trade-off for increasing prosperity compared to less developed but more equal economies. However, the prediction cannot follow from the building blocks of Smith’s system. In the economy that Smith envisaged, profits should be low and labor wages high, legislation in favor of the worker is “always just and equitable,” land should be distributed widely and evenly, inheritance laws liberalized, taxation can be high if it is equitable and used to spur productivity, and the science of the legislator is necessary to put the system in motion and keep it aligned. Political theorists and economists have highlighted some of these points, but the counter-factual “what would the distribution of wealth be if all the building blocks were ever in place?” has not been posed. Doing so prompts the question why steep inequality is accepted as an inevitable outcome of the market.

There are such blockheads in the world!

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13 Responses to The maldistribution of common sense

  1. 2dogs

    There are two main problems I have with Piketty’s analysis:

    1. His inequality data foes not cover the global population. By only using the US and UK, he is effectively only comparing the top few percentiles of the world’s income with the next few percentiles. If he took a global picture, then, yes, the second place getters are relatively worse off, but there are many lower down in the pack from both of these groups that are substantially better off.

    2. Unsubstantiated attribution. If inequality is rising, he does little more than assume capitalism is to blame, without testing this assertion. I’d like to suggest an alternative hypothesis, and a way to test for it. Rising inequality might be the result of political processes such as crony-ism and corruption. In divising the test, note that political processes occur within nations. As there is, thankfully, no world government, one would expect such political processes to have less of an effect between nations. Capitalism, on the other hand, would by itself not differ in its effect between or within nations. So what does the data say? Well, inequality between nations is falling. The source of inequality is those political processes. Capitalism is exonaerated; it may even be source of equality.

    [Note: I do realise his untested assertion is an analytical result, from his r>g. I don't accept this analysis, it is rather strained and there appear to be a few non-sequiturs in it.]

  2. Yohan

    I cannot remember where I read it, but someone compared the wealth of Crassus, richest man in the Roman Empire, to Bill Gates, richest man today. Bill Gates wealth is far bigger (by 100′x of times) than Crassus’ fortune was, relative to the average worker. But when you look at the relative lifestyle difference, Crassus lived in palaces and opulent luxury while the Roman labourer in absolute poverty. Compare that to the average worker vs Bill Gates. Bill has a better car, goes on better holidays, has a bigger boat, his TV is 100″ versus my 55″ e.t.c, but the relative lifestyle difference is now far closer to the elites than ever before in history.

    We have access to a standard of living, gadgets, medical care e.t.c that was unheard of for the average person of society in ages past.

    As Mises said, the only way to a higher standard of living is to increase the per-head quota of capital invested. Piketty wants to reverse 200 years of capital accumulation and progress just to satisfy what seems a psychological desire of envy.

  3. Ralph

    G’day,

    Please tell me why I should give a stuff about inequity. I don’t care if some zillionaire has a dozen super yachts what I care about is that I can improve my own situation, now if they are using their economic/political power to artificially maintain monopolies or trade restrictions for their own benefit that’s another matter, but as long as Mr & Mrs Average have the opportunity to improve themselves I don’t care.

    ta

    Ralph

  4. JohnA

    That the market economy inevitably leads to inequality is widely accepted today.

    Well, that is a great statement for getting the argument off on the wrong foot entirely.

    The (other) untested assumption is that equality for individuals
    a) is possible
    and
    b) has been achieved at some stage but has since been lost by the action of the market economy

    That’s just philosophical bulldust, contrary to the concept(?) of the uniqueness of each individual. From there, totalitarians proceed to the idea that equality must be enforced (which is a demonstration that it cannot be innate or the default state of humanity).

    I really appreciate the Cat forum. I don’t have to waste so much reading time on rubbish like “The Equalizing Hand” :-)

  5. Watching It Unfold

    Nicely put, Ralph – that’s what makes Australia the best place in the world. If you want to ‘get somewhere’, people will encourage you, if you want to do nothing, its the best place in the world to do it. If you sit on your arse, don’t complain when your neighbour saves enough to buy an investment property.

  6. Pedro

    It must be true that the market economy will allow those who are smarter, thriftier and/or more conscientious to end up with more wealth than their opposites. But it is equally true that every other social system also leads to differences in wealth. The important point about the market economy is that it is more likely to allow people achieve their goals and aspirations within the limits of their abilities.

    To my mind the question is not how to achieve equality but why.

  7. Leo G

    “he is effectively only comparing the top few percentiles of the world’s income with the next few percentiles.”

    Is it even logically valid to measure inequality by comparing wealth and income at levels that are so high in the psychological hierarchy of needs? The vast majority of the human race don’t rely on attaining extreme wealth to esteem themselves or to actualise what they feel is their potential. Such wealth might even be regarded by many as a hindrance to achieving those ends.
    Better to define physiological, safety and familial needs as they apply in a person’s formative years and examine how their distribution has changed over time.
    Piketty et al are in effect using an envy and disdain index to make judgements about inequality.
    What motivates their concern surely compromises their judgement.

  8. Hugh

    I have to share this great take on equality by St Maximilian Kolbe (martyred by the Nazis). What a breath of fresh air after listening to our Catholic bishops & Pope Francis blundering away on social justice!

    “When he sees the luxurious residence or the charming country house of a wealthy person, a poor workingman often asks himself: ‘Why do I not possess such wealth, too? Why is there such inequality in this world?’

    How many volumes have been written about equality among men! How much blood has been spilled for this idea! And yet, in spite of it all, we still have the rich and the poor.

    Four years ago I passed through Moscow. As the train was scheduled to stay there for a few hours, I got down from the railway car to visit the city a bit, hoping to see for myself how the slogan, so highly publicized and so widely proclaimed, of equality and the common possession of goods, was worked out in practice. But even there I found some people clad in rags, while others wore elegant clothes cut in the latest style. So not even in the Bolshevik state have they succeeded in bringing about equality.

    Let us imagine, however, that one day all the inhabitants of the world would assemble to put into effect this sharing of all goods; and that in fact each person, granted that the world is very big, received an exactly equal portion of the wealth existing on earth.

    Then what? That very evening one man might say, ‘Today I worked hard; now I am going to take a rest.’ Another might state, ‘I understand this sharing of goods very well; so let’s drink and celebrate such an extraordinary happening.’ On the other hand, another might say: “Now I am going to set to work with a will so as to reap the greatest benefit I can from what I have received.” And so, starting on the next day, the first man would have only the amount given him; the second would have less, and the third would have increased his. Then what do we do? Start redistributing the wealth all over again. . . To continue the argument, even if there were only two persons in the world, they would not succeed in maintaining absolute equality; for in the whole universe there are no two things completely identical in every respect. . . This is how it has been, how it is now and how it will always be, simply because man will never attain absolute perfection.

    In spite of all this, the human mind still desires to bring about a certain equality among men, Is there any possibility that this can happen? Yes, no doubt. Every man, whoever he is, whatever he possesses and whatever he is capable of doing, owes all this to God the Creator of the universe. Of himself man is nothing. From this point of view all of us are absolutely equal. Furthermore we all possess free will, which makes us master of all our actions. This too constitutes the basic equality of all men on earth. [Kolbe Reader, 11, 131-132]

  9. Mr Rusty

    In any discussion where the words “equality” or “inequality” crop up I ALWAYS demand that the speaker qualify their use of the term; eg. “Equality of…what? Opportunity, outcome, wealth, misery, body mass, looks, health, disease, miles per gallon, mobile phone monthly talk minutes?” etc. From there it’s a few simple talking points and real-life examples and you can just sit back and watch lefties self-dismantle and slowly choke on their own bullshit.
    The “equality” meme is the most futile, boring, worthless heap of meaningless dung dredged up by narcissistic feel-goodists at the end of an inner-city dinner party over the remnants of the Pinot Grigio and soy lattes. The legalisation of marijuana would go a long way to killing off this futile pigs vomit of endorphin induced smugness.

  10. .

    Friedman made much the same argument made here by the post and comments.

    Sure, we have inequality, but a poor person in the West is much more equal to a plutocrat like Gates compared to a poor person in a tin pot dictatorship to their dictator.

    So the foundation of Piketty is wrong anyway. Like others note, he ignores this data.

  11. .

    BTW

    Piketty is a crank. Inequality causes recessions. What an idiot.

    His idea that capital reinvestment outstrips economic growth and thus causes calamity – pure crankery.

    Anyway, back to the “inequality causes recessions”…

    The last US recession was caused by an idea to create equity in lending practices. It created crony capitalism further down the line.

  12. Mr Rusty

    The last US recession was caused by an idea to create equity in lending practices.

    The lending practices were equitable before they were interfered with dot; you got the means you get the loan. It was INequity in lending that was forced on the lenders that caused the GFC; the equation could no longer be balanced; no means equalled you got the loan regardless. It was in seeking the equality of outcome that the opportunity side had to be forcibly distorted and mangled.

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