Richard Epstein devotes a column for the Hoover Institution’s “Defining Ideas” to tackling some of the ideas French economist Thomas Piketty has put forward to address income inequality.
One of the most striking defects of the Piketty analysis is its flawed understanding of the relationship between social wealth and income inequality. The initial point goes to the question of how ordinary people ought to regard the accumulation of vast stores of wealth by the few, much of which gets passed on by inheritance to other people. For Piketty, their greater wealth leaves (all else being equal) poorer people worse off because of their apparent loss of political influence to the great and mighty.
Not so fast. First, as an economic matter, the increase of the wealth of some without a decline of wealth in others counts as a Pareto improvement, which is in general to be welcomed, even if it increases overall levels of inequality. But to egalitarians like Piketty, the increased wealth inequality is bad in itself, as their objective is to minimize differences in wealth and income, rather than to increase their overall totals. Piketty’s assumptions lead to the conclusion that a world in which the rich average 1,000 and the poor average 10 is less desirable than a world in which the rich average 300 and the poor average 5, given that the absolute and relative differences in wealth are lower in the second state of the world than the first.
Piketty does not actually state this conclusion in those bald terms. Instead he makes the argument that the wealth of the rich gives them too much influence over political affairs in a democratic society. But in so doing, he misses the key point that the wealthiest among us include the two Koch Brothers ($40 billion each), and also Bill Gates ($76 billion), Warren Buffet ($58.2 billion), and George Soros ($23 billion) whose political preferences move in decidedly different ways.
It is pure fantasy to assume that the super rich move as a unified political bloc. Nor should it be assumed that they have disproportionate influence. To James Madison, the great concern with democratic (as opposed to republican) forms of government was that voters with more influence in the political arena could satisfy, as it is put in Federalist 10, “a rage for paper money, for an abolition of debts, for an equal division of property, or for any other improper or wicked project.”
Progressive writers in the twentieth century and after have taken strong exception to Madison’s views. But my point here is descriptive, not normative. The place of large concentrations of capital in a democratic society is deeply vulnerable to majoritarian politics, as evidenced by the strongly progressive income tax rates and estate tax rates. In other words, the great wealth of the few makes them politically vulnerable, not politically unstoppable. In a political climate that treats as a major political objective the rectification of inequalities of fortune, the net transfers in the United States are not to, but from, the financial elites.
