David R. Henderson  

Henderson on Piketty, Part 1

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My long review of Thomas Piketty's Capital in Twenty-First Century is finally out. It is titled "An Unintended Case for More Capitalism." Over the next few days, I'll be highlighting various parts of my review. Here's the first highlight:

Unlike many free-market critics of Piketty's book, I find his big-picture statistical analysis somewhat compelling, although like the other critics I see some serious problems with it. But even if his analysis is correct, I still find it much less important than he does, and I find his policy proposals appalling. Beyond his big-picture analysis and policy proposals, he discusses many issues: Social Security, the history of tax policy in the United States and France, global warming policy, immigration, and many others. On some of these, his analysis is good. On others, it is weak or outright wrong. Sometimes he gets his history wrong, and in important ways. Finally, he has a bad habit of questioning the motives of those with whom he disagrees.

Start with the big picture. "It is long past the time," he writes in the Introduction, "when we should have put the question of inequality back at the center of economic analysis and begun asking questions first raised in the nineteenth century." The center? Really? But if we put inequality at the center, we can easily miss the tremendous growth in well-being for a huge percentage of people in the world and for almost everyone in the United States and Western Europe. Much later in the book, Piketty shows that he is aware of those improved conditions, writing:

Nevertheless, according to official indices, the average per capita purchasing power in Britain and France in 1800 was about one-tenth what it was in 2010. In other words, with 20 to 30 times the average income in 1800, a person would probably have lived no better than with 2 or 3 times the average income today. With 5-10 times the average income in 1800, one would have been in a situation somewhere between the minimum and average wage today.

In his own way, he is pointing out, albeit less dramatically, what University of California, Berkeley economist Brad DeLong noted in a study aptly titled "Cornucopia." In that well-argued and documented paper, DeLong examines the 20th century and shows that the price of almost every item we buy--if stated in hours of labor required to earn enough to pay for it--has fallen to a fraction of its cost in 1900. Moreover, that reduction in cost understates the improvement in well-being because many crucial items that we buy today did not exist in 1900. Antibiotics, for example, are a 20th century invention. Their price in 1900 was effectively infinite.




COMMENTS (16 to date)
Tom West writes:

General progress is very good for those on the vanguard (i.e. the West).

But given very few are genuinely disconsolate at the fact that flying cars or other future developments aren't available now, is there any serious question that human happiness depends more upon relative wealth than absolute wealth?

Are people really happier being twice as wealthy if they're surrounded by people ten times as wealthy?

Of course, the catch is we compare with anyone anywhere (especially with modern media), so an increase in wealth in the any country can decrease the happiness of relatively egalitarian societies elsewhere, so egalitarianism (and the lower growth that goes with it) is pretty much pooched, no matter what.

Roger McKinney writes:

Tom, Is there any evidence that greater equality causes greater happiness? Schoeck in Envy: A Theory of Social Behavior offers good evidence that greater equality of incomes make people more unhappy. As income inequality shrinks, people fixate more on the remaining inequalities.

But why should happiness be a goal? A lot of psychologists assert that happiness is a choice. Rich people can be very unhappy while poor people can be happy.

Besides, why should inequality make people unhappy? It does because of envy. Do we really want to encourage envy or organize society around a fear of envy, as Schoeck wrote most societies through history have done?

CC writes:

DH, you got me to click through and read the whole review. Very thorough and readable. Nice work.

Don Boudreaux writes:

Superb review, David.

Todd Kreider writes:

These comparisons with life in 1900 or even 1800 are fun: How many hours would you have to work to light your hovel with two candles?, etc.

But the changes have been so dramatic that the comparisons essentially break down.

This will happen again if you try to compare the U.S. in 2030 with that of pre-internet 1990.

ThomasH writes:

Unless you think there are big trade offs between policies to promote growth and policies to promote less income (or consumption) inequality, bringing concern for inequality is unlikely to detract attention from growth. True, some things that politicians want to do to promote inequality could be so bad as to actually harm growth, but then many thing that politicians want to do to promote "growth" (roughly speaking the things that make the marginal tax rate on corporate income different from the average tax rate, subsidies for ethanol production, crop subsidies, water subsidies, waterway use subsides, failures to tax externalities, etc) harm growth.

I do not think the trade-offs need be very large and that there are enough bad policies around to allow for both more growth and less inequality. And faster growth would tighten the labor market.

Mark V Anderson writes:

Tom -- It seems to that almost all aspects of the good life correlates with more income. But little with more equality. A list of ways people are better off with more income (the rest of you can argue as to whether this means more happiness):

1) Obviously the elimination of poverty, such as starvation, having only rags to wear, no or very poor housing. This is still vitally important on a global basis.
2) Better medicine, so less disease.
3) More education (not the same thing as schooling of course).
4) Electronics, including computers, cell phones, TVs, Internet, music.
5) Travel.
6) More flexibility in one's life, including more leisure, choice in employment, choice of geography.
7) More variety in food, clothing, art, etc.
8) More stuff of whatever one considers to be important.

I maintain that all those things come with more income, and not constrained just because others have even more.

Tom West writes:

Roger McKinney

But why should happiness be a goal?

Because people refuse to structure society's goal to be "Tom West should finally win Angry Birds?"

Basically, when developing rules, we aim towards some goal, and very few outside of Libertarians seem to have the goal of maximizing freedom. Once that's off the table, maximizing happiness (with a zillion caveats) seems to be the logical step that the majority will tend to agree with.

why should inequality make people unhappy?

Seems something built into our DNA. If severe inequality makes people miserable (and it seems to), then it seems natural for people to want to structure society around wanting to avoid this.


Mark V Anderson

Tom -- It seems to that almost all aspects of the good life correlates with more income.

Agreed. However, I can't help but observe that I don't think that I'm vastly happier than my grandfather and substantially happier than my father. Nor do I expect that my sons will be substantially happier than me even though they have flying cars.

In fact, I suspect all 4 generations have much the same baseline happiness: fairly high because we're relatively ahead of the pack (i.e. in the West and middle class).

In fact the *worst* thing I could imagine for humanity is to have aliens come down and give us cold fusion or some other form of free energy while showing that we're at the back end of nowhere, and utterly, irredeemably "poor".

It would make us instantly vastly wealthier and reduce our new found wealth into a cosmic joke that we might never recover from, if the fate of many other cultures is any guide.

ted writes:

@Tom West

is there any serious question that human happiness depends more upon relative wealth than absolute wealth?

Certainly. If in doubt, try having your next surgery without anaesthetics. I'd argue that most things that affect our happiness are quite poorly reflected in income figures. Our children (that generally they live, and are healthy, unlike in the 1800s), our long lives, being effortlessly in touch with anyone we choose to, our endless opportunities for entertainment, eat tasty food, travel and do things they couldn't imagine back then etc. You do not need to be wealthy or indeed, not even middle class, to benefit from all these things.

You seem to care a lot about wealth inequality. I'd point out that all societies conscientiously shaped to fight this ended up poor and desperately unhappy, required totalitarian regimes to keep order and keep citizens in (most wanted to run away), and ironically, with far more (consumption, political, social) inequality than any capitalist system out there. We should be careful what we wish for.

I think that people are less prone to envy than the Left believes they should, and this little fact continuously stumps the Left. This is your answer in fact - people care a lot more about their absolute consumption level and general rights, instead of worrying too much about how much money some stranger's shares in corporations are nominally worth (this being the chief source of wealth inequality).

Interestingly, if people would as as flawed and prone to envy, they would never flourish in a socialist system by definition, since socialism requires flawless people...

Ken from Ohio writes:

My primary objection to Piketty is that he considers only physical capital and completely disregards Human Capital.

In fact he overtly states that Human Calital exists only within the institution of Slavery where a human can be bought and sold thereby establishing the value of that person.

So what is Human Capital?

As defined by Charles Murray: Human Capital is education, skills , marriage, industriousness, social connectedness and good health.

I submit that the ownership of Human Capital contributes more to happiness and prosperity than the ownership of physical capital

Mark V Anderson writes:

Perhaps it appears that happiness hasn't changed much for the middle class. It is mostly based on one's attitude and whether one is pretty much satisfied with spouse and family and employment. But happiness is certainly higher if one has escaped poverty, which is the case for a significant number of people over the last hundred years (because of higher income), especially if one looks at absolute poverty and not relative poverty of the times, as seems more popular these days.

But I would say I am happier than even my parents and grandparents, who were all middle class. The rising income of society gave me more choices of employment, caused me less stress that a major mistake would result in starvation, and gave me a fuller life of travel and access to the knowledge of the world through books and the Internet than they had. I doubt that any of us spent a lot of time worrying about how great the rich were doing,or whether our own status was increasing or decreasing in proportion.

Nathan W writes:

I can eat myself into obesity and get a flight anywhere in the world with a few weeks work at the minimum wage.

But inequality means that I cannot afford to take a date to restaurants that the top 1% eat in daily without even batting an eye at the budget and that

Personally, I don't care much for girls who cannot be had without a $200 meal or when failing to wear $80 designer t-shirts. If that's what it takes, then I haven't go the time of day for them.

But the point is that inequality really matters for a great number of people, no matter that we have largely left absolute poverty behind.

As per Amartya Sen, a worthy ideal is that all people should be able to participate meaningfully in their communities. Even when absolute poverty is behind us, in the absence of a major rejigging of values and preferences which are probably at least partly natural in humans, inequality will be an impediment to political and social participation if it is too extreme. How extreme is too extreme? People cannot access social or economic opportunity as a result of entrenched barriers.

Social mobility and something approaching equality of opportunity are worthy ideals. We have the choice to transcend our monkey selves, and to devise systems which propagate ideals which are conducive to a decent experience for most, or even all people.

David writes:

I must be missing something, because to me, the post reads like a giant non-sequitur. Pickety's normative suggestion was the we put inequality at the center of economic discussion.

Response: No, because... everybody is richer now, so, no. And the fact that we're richer now for some reason means that we shouldn't talk about inequality. And to model for everyone how to enter the brave new era of refusing to talk about inequality, I will talk some more about how we're all richer now. And squirrels.

Adrian Ratnapala writes:
Are people really happier being twice as wealthy if they're surrounded by people ten times as wealthy?

Well I personally don't pay much attention to how much or little money other people have, but I would very much like to have twice as much wealth. Even better, twice as much income as I do now.

And Tom, if you are be unhappy just because someone else is richer than you, then you deserve to be unhappy.

LD Bottorff writes:

I thought it was a balanced review. I don't know if David read the same review that I did. Prof. Henderson did not say we shouldn't discuss inequality, but he did point to the real possibility that Piketty's solution would make us less wealthy.
Discuss it all you want. The level of income or wealth inequality is a normative issue. There are plenty of people who think that the number of abortions is an important issue. The problem is that doing something about it requires a level of force that many of us are uncomfortable with. Even more force would be required to address inequality.

Tom West writes:

And Tom, if you are be unhappy just because someone else is richer than you, then you deserve to be unhappy.

One can argue the morality of it as one likes, but any system that ends up with a significant portion of its population unhappy is going to change, or it's system is going to have to be enforced militarily.

I'm all for trying to get the best out of men, but we can only build a society that is so far out of synch from our instincts before humans rebel.

Previously, high inequality without enforcement was protected by ignorance and distance. Now technology/media shoves the inequality in the faces of the poor, and the distance isn't so protective.

And of course, the other side of the equation: those who are very successful will naturally attempt to secure that advantage permanently. The greater the inequality (and thus the peril to one's descendents if they fail), the more imperative altering the system to guarantee the success of one's children becomes.

Obviously there can be enormous debate about how much inequality is desirable, and when does it become a problem. But there aren't a lot of human beings claiming it isn't a problem to be considered at all.

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