"The Greens are proposing one of the most aggressive tax regimes of its kind anywhere in the developed world..."

 

"The Greens are proposing one of the most aggressive tax regimes of its kind anywhere in the developed world, resulting in a broad-based raid on Kiwis who’ve worked hard, saved, and built something over a lifetime. 

"The idea this only hits the wealthy simply doesn't stack up. One in five Kiwi homes is held in a trust, and the Greens would tax those assets from the first dollar. In Auckland, that means an annual bill of over $18,000 on a mortgage-free family home, or $3,600 for first home buyers with a twenty-percent deposit.

"And it doesn't stop there. A 33 percent death tax would force many families to sell farms, homes, or businesses just to pay the bill. Inheriting the average dairy farm would trigger a $1.2 million tax bill. There is nothing fair about taxing grief, or taxing the same income again when it's earned, saved, and finally passed on.

"Most countries that have tried wealth taxes have scrapped them because they drive investment and talent offshore. Death taxes are even worse, New Zealand tried one and abandoned it in 1993 because it crushed farming families and raised almost nothing.

“This package is light on evidence, heavy on populism, and green with envy.”

~ Austin Ellingham-Banks on the Taxpayer Union's 'NEW REPORT: Green With Envy: Wealth, Death, And Trust Taxes Examined'

"One 'solution' to inequality ... is the wealth tax. ... This taxing away of capital means less means of production and thus less production and higher prices. At the same time, it means less demand for labour and thus lower wages. [The] programme is a call for mass impoverishment....

"Taxing wealth is not merely a levy on individuals but a direct seizure of the capital required for production, which ultimately harms everyone's standard of living. ...

"As [Ludwig Von] Mises observed* ...., almost all of the technological advances of the last centuries are available to and can be fully understood by engineers in even the most impoverished corners of the world. What stops the implementation of those advances is not any lack of technological knowledge but a lack of capital. Thus, a farmer in India who has seen a tractor on television can easily understand the value of using one. What stops him from using one is certainly not any lack of technological knowledge. It is certainly not that he does not know how to operate a tractor or could not easily be taught how to do so. What stops him is that he cannot afford a tractor. He does not possess the capital necessary to buy a tractor and cannot find a lender to provide it. This is a lack of capital that probably could not be made good by any rise in the local capital/income ratio. It reflects generations of insufficient local capital accumulation."

~ George Reisman from his comment on 'The Problem with the Wealth Tax' and his 'Piketty’s Capital: Wrong Theory/Destructive Program' [emphases mine]

"New Zealand’s productivity challenges are strongly linked to low capital intensity. ... New Zealand’s slowing labour productivity growth is likely to reflect both slowing growth in innovation and declines in the capital to labour ratio. ... New Zealand’s capital intensity [already] lags other countries...."

~ Treasury from their 2024 report 'Causes of New Zealand’s low capital intensity'

* Ludwig Von Mises, in his chapter 'Capital Supply & American Prosperity'--in which he observes that "the average standard of living is in [America] is higher than in any other country of the world, not because the American statesmen and politicians are superior to the foreign statesmen and politicians, but because the per-head quota of capital invested is in America higher than in other countries."

BOOK REVIEW: 'The Capitalist Manifesto: Why the Global Free Market Will Save the World,' by Johan Norberg

The IEA's Kristian Niemitz reviews Johan Norberg's important new book.

I first came across Johan Norberg almost exactly 20 years ago, when the German translation of his book In Defence of Global Capitalism came out. The book argued that globalisation was a success story. In large parts of the developing world, poverty, infant mortality and illiteracy were falling, life expectancy was rising, nutrition was improving, and democracy was spreading. These positive trends were, according to the younger Norberg, likely to continue, and they were not a product of chance. They were a result of the spread of capitalism.

At the time, this was considered an outrageous thing to say.... The almost universally accepted conventional wisdom of the day was that “globalisation” meant the exploitation of poor countries by multinational corporations, and that the world was going from bad to worse. ...

With his most recent book The Capitalist Manifesto: Why the Global Free Market Will Save the World, Norberg goes back to the beginning.... The era of “globalisation” is generally said to have started around 1990, so when In Defence of Global Capitalism came out, it was still in its relatively early stages. We now have three decades to go by. What happened in those three decades?

Quite a lot. 

• Extreme poverty fell from 38% of the world’s population to less than 10%, 
• child and infant mortality fell from 9.3% to 3.7%, 
• global life expectancy increased from 64 years to over 70 years, 
• illiteracy dropped from 25.7% to 13.5%, 
• child labour decreased from 16% to 10%, and so on, and so forth. 

The countries and regions which performed best are the ones which did precisely the opposite of what the anti-globalisation movement wanted them to do, while the most spectacular counterexample is the movement’s erstwhile poster child of Venezuela. ...

There are genuine problems, though. In some Western countries, NIMBYism is driving up the cost of housing. This makes it harder for people to move to where the best job opportunities are, and it gives younger generations a worse deal. In addition, the extension of occupational licensing is erecting market entry barriers. None of this has anything to do with “neoliberalism” or “hyperglobalisation”, though – quite the opposite....

But have classical liberals benefited from this, in any way? Has being right made us more successful in winning over hearts and minds? Are there more people now who embrace free-market capitalism, or who at least accept that, even if they don’t like it, it is the most powerful motor of economic and social progress known to man?

Very far from it ... in addition to the anti-capitalist Left, we have also seen the rise of an anti-liberal Right. ... Where In Defence of Global Capitalism was able to concentrate on one enemy, The Capitalist Manifesto has to fight a two-front war. Some chapters are primarily aimed at the anti-capitalist Left, others are primarily aimed at the anti-liberal Right, and some could apply to both in roughly equal measure. ...

• Chapter 3 concentrates on the ... misplaced nostalgia for the economic structure of the postwar decades ... Norberg shows that automation and productivity improvements have contributed far more to job losses in the manufacturing industries than free trade, and that ... the same processes that make some jobs redundant also lower consumer prices and thereby make us richer, [creating] demand for new jobs in other sectors ...
• Chapter 4 addresses the old Marxist idea that wealth must be built on exploitation, but also some of the more recent literature on inequality, such as Thomas Piketty’s Capital in the Twenty-First Century and The Spirit Level by Kate Pickett and Richard Wilkinson. In market economies, people do not get rich by exploiting others. They get rich because they offer something that lots of people are prepared to pay for. Left-wing celebrity authors like Michael Moore and Bernie Sanders understand that perfectly well when it comes to their own book sales, but they are not capable of extending that logic to entrepreneurial activities. ...
• Chapter 5 picks up another perennial Marxist theme: the idea that capitalism supposedly leads to greater and greater industry concentration over time. ... The best antidote to worrying too much about market concentration, though, is to read an article from 20 or 30 years ago that was worrying about the same thing. This is because a lot of the behemoths of yesteryear have since faded into obscurity. ...
• If there is one thing those of us on the pro-globalisation side were wrong about 20 years ago (and in Chapter 7, Norberg is very open about that), it was our belief that freer trade and freer markets would lead to the spread of Western liberal values, and Western-style liberal democracies. In China, this has clearly not happened. Under Xi Jinping, China has gone into reverse, both in terms of economic and political liberty. However, none of this means that economic nationalists, who seek to decouple Western economies from China, are right.... 
• One of the weirder phenomena of the past five years or so was the rise of a new wave of militant, anti-capitalist eco-movements: the Greta Thunberg movement, Extinction Rebellion, Just Stop Oil, and their various offshoots and counterparts in other countries. It is weird because it happened after the environmentalist side had already won the debate on climate change. ... On green issues, anti-capitalists are as wrong as they are about everything else. As Norberg shows in Chapter 8, market economies can and do address environmental problems very effectively.

All in all, the slightly older Norberg skewers the bad of ideas of the 2020s as effectively as the young Norberg skewered the bad idea of the early 2000s.

>> FULL REVIEW HERE: PART ONE  AND PART TWO.

Out-of-focus on inequality

“People who focus on inequality often seem to forget a historical fact: market economies have allowed a great many people to get rich and to get out of poverty. This effect is unprecedented in history. ... The speed at which the market economy allows sections of humanity to get us out of poverty should make us marvel."

~ French economic journalist Jean-Philippe Delsol, from his essay 'The Great Process of Equalization of Conditions' collected in the Anti-Piketty: Capital for the 21st Century, pp5-6 [readers of The Anti-Piketty, says this review/summary, will be innoculated against Piketty’s ill-considered analysis and policies]

 

Piketty's (and David Parker's) blind spot

Since Revenue Minister David Parker is such a fan of French statistics-diddler Thomas Piketty (the man who claims the world is ripe for “participatory socialism”), and it is Piketty's principles that seem to be guiding Parker's just-announced "far-reaching" fiddling with the tax-and-surveillance system, it's worth reminding ourselves of one of Piketty's major blind spots; that, as Steve Fritzinger points out in this guest post, while they're both happy to attack (and tax) wealth, neither he (nor Parker) apparently have any idea how that wealth was created, and whom it really benefits ...

Piketty's (and Parker's) Blind Spot

Guest Post by Steve Fritzinger

In an old joke, President Bush (it doesn’t matter which one) claims that the problem with the French is that they have no word for "entrepreneur." I don’t know if that joke is supposed to be on the Bushes, the French, or both. I do know that readers of French economist Thomas Piketty’s book Capital in the Twenty-First Century might be convinced that the joke is actually true.

Piketty’s opus is an economic tome 700 pages long. It purports to show that the central problem with capitalism is that return on investments automatically grows faster than the economy as a whole. If true, that phenomenon would allow a small group of investors to grab an ever-increasing share of the world’s wealth. Eventually, those economic overlords would essentially own everything. All the land. All the machines. All the opportunities to live a happy life.

In Piketty’s view, the only thing that has saved us from this fate so far is the wholesale destruction caused by a pair of world wars. If not for that silver lining in an otherwise very dark cloud, average people would already be little more than serfs, living at the pleasure of a filthy-rich leisure class that produces nothing.

Since its publication, Piketty’s book has received its share of praise and criticism. On the left, progressives believe Capital is the ultimate justification for their political program. Free-market economists, on the other hand, have questioned his data sources and methods. Pundits on both sides have debated his policy recommendation of a global wealth tax to leech away the riches’ ill-gotten gains.

Other commentators are better qualified than I am to judge the empirical quality of Piketty’s work. I’d like to concentrate instead on his peculiar blind spot.

For a book about wealth, Piketty is shockingly incurious about where wealth comes from. In the first half of the book, the word "entrepreneur" is only used in the technical accounting sense of income earned by working for oneself. The idea that the entrepreneur takes risks and works hard to build new businesses is almost completely absent.

To Piketty, wealth is something that is inherited or something that one lucks into. People who receive income from investments aren’t frugal. They aren’t engaged in the socially useful activity of capital formation. They are not funding new businesses or shepherding new products to market.

In Piketty’s view, they are “rentiers,” a word that a French-speaking acquaintance tells me has unseemly, possibly even dirty, connotations. It implies that the rentier never lifts a finger. Like a Mafia Don, the rentier receives a cut of all the economic activity that occurs in his “territory” simple because he controls it.

As someone who has had his share of success and failure with investing, I can tell you that generating above-average returns for decades is not as easy as Piketty thinks. As famed tech investor Marc Andreesen noted in a recent interview, “The funny thing about Piketty is that he has a lot more faith in returns on invested capital than any professional investor I've ever met.... He assumes it's really easy to put money in the market for 40 years or 80 years or 100 years and have it compound at these amazing rates. He never explains how that's supposed to happen.”

About halfway through the book, Piketty admits that his depiction of the rentier might be a little harsh. He assures the reader that he uses the word only in a narrow, technical sense and means no insult by it.

But this admission comes after hundreds of pages discussing rentiers and would-be rentiers who are willing to lie, cheat, and even murder to keep or gain their coveted status. Piketty frequently turns to characters from Jane Austen and Honoré de Balzac novels to illustrate just how bad “rentiers” are. After that litany of capitalist villains, methinks the economist doth protest too much. An inattentive reader might miss Piketty’s disclaimer and come away thinking pitchforks and torches are in order.

Though his ideas of how productive capital works might be a bit off, there is one form of capital that does closely match Piketty’s expectation. That is political capital. Having powerful friends is the closest you’re likely to get to a risk-free, high-yield investment.

Take, for example, former U.S. Secretary of State Hillary Clinton. Clinton claims that when she and President Clinton left the White House in 2001, they were worse than “dead broke." They were actually drowning in debt. Today, the Clintons enjoy a fortune estimated to be worth more than $100 million. From dead broke to the 1 percent of the 1 percent in 12 short years. That’s a rate of return that should make professor Piketty quake in his boots.

Far from fearing the returns on political power, Piketty sees it as the solution to our problems. He proposes the creation of a worldwide 80 percent annual wealth tax, with periodic extra assessments, to both tax away huge fortunes and fund government programs Piketty thinks are needed to reduce inequality. Enforcing this tax would require the equivalent of a global, financial NSA capable of tracking every economic transaction everywhere and a global police force to make sure no one dodges his or her obligations.

Piketty seems oblivious to the abuses inherent in such an organisation.

Seeking to protect us from a potential economic elite who would have too much control over our lives, Piketty would give more power to the existing political elite that already has too much control over our lives. Fortunately, Piketty himself admits that there is no chance of nations implementing his schemes. That won’t stop progressives from trying, though. The amount of damage they are likely to inflict on the world might make the rest of us wish we were living in a Balzac novel.

* * * * 

Steve Fritzinger is a business consultant in the Washington, D.C., metro area. He the regular Economics Commentator on the BBC World Service Business Daily programme, where he uses Austrian Economic ideas to explain current events and other puzzles. He wrote the annotated version of “Fear the Boom and Bust,” the first Keynes/Hayek rap video, and blogs at 2nd Hand Ideas. Steve is a founding member of Liberty Toastmasters, a DC-based group dedicated to helping liberty advocates develop public speaking skills, and is a member of Liberty on the Rocks DC.

How the State Worsens Economic Inequality

 

Guest post by Philipp Bagus

Thomas Piketty´s book, Capital in the Twenty-First Century, on growing inequality in capitalism, has become a bestseller. Piketty offers much data claiming that inequality is rising and draws the conclusion that the state should fix that ‘problem’ with additional taxes on the rich.

It is true that the distance between the ‘super rich’ and the rest of the population has been increasing in recent decades. It has become more difficult to reach average net wealth with an average income. But maybe the most important reason for this development has been widely neglected in the debate: our monopolistic monetary system - as Andreas Marquart and I show in our new book, Blind Robbery! How the Fed, Banks and the Government Steal our Money.

In a fiat-money system the costs of money production fall to virtually zero. Thus, the incentive to produce new money is almost irresistible. [For Keynes and his followers, this is a feature not a bug – Ed.] And all money production redistributes income and wealth, because not all economic agents receive the new money at the same time. Some people get the new money earlier, some get it later. The first receivers of the new money benefit, as they have higher cash balances and can buy at the old, still low prices. Once the first receivers spend the money, it flows to the next receivers who still profit but less than the first receivers since prices start rising. Successively the new money spreads across the economy and pushes prices upward. In the same manner as first or early receivers of the new money profit, there are late receivers that lose, because they have to watch prices increasing before their income increases, if it increases at all. The purchasing power of the later receivers of the new money is eroded.

But who are the first receivers of the new money in our fiat money system? Those who want to benefit from the new money must receive it where it is produced, namely in the banking system in form of a loan. And in order to get a loan from a bank it is helpful to be rich. Rich people owning large amounts of assets such as stocks or real estate may pledge their stocks or real estate as a guarantee for new loans. They may then use these loans to acquire even more stocks and real estate that, in consequence, keep rising in value.

Since the costs of money production are close to zero in a fiat money system, where both central banks and other banks may create money, a continuously rising money supply can be expected. Therefore, prices tend to increase steadily. In such a system, it does not make much sense to save in the form of cash, in order to buy assets such as a house later. It is rational to indebt oneself early in order to purchase a house before it is even more expensive and pay the debt back in depreciated currency.

Since assets such as property, bonds or stocks may serve as a guarantee or collateral for new loans, and as such as a means to become a first receiver of new money, in our fiat monetary system asset prices tend to rise relative to prices of goods and services, i.e. wages. This is one reason why it takes ever longer to purchase an average house by saving an average income. This is also a reason why it is easier for the rich to stay rich and more difficult for the poor to become rich in our fiat money system than it would be in a commodity money world.

While the super-rich, the financial industry and big business all profit from their fast and direct access to the newly-produced money, the working and middle classes, who tend to be late receivers, have to cope with rising housing, energy and food costs. Due to rising living costs and high taxes, it becomes ever more difficult for the working and middle classes to save and invest in financial markets.  In short, our monetary system leads to redistribution and there is a tendency for wealth and income to flow to the rich.

Our monetary system is a creation of the state. We have monopolistic state money, a central planner in monetary affairs (central banks), and banks that receive special privileges from the state. Thus, Piketty’s view that markets are responsible for growing economic inequality is mistaken. Rather it is the state itself that causes increasing inequality, which it pretends to fight.

---

Philipp Bagus is an associate professor at Universidad Rey Juan Carlos. He is an associate scholar of the Mises Institute and was awarded the 2011 O.P. Alford III Prize in Libertarian Scholarship. He is the author of The Tragedy of the Euro and coauthor of Deep Freeze: Iceland's Economic Collapse.
    The Tragedy of the Euro has so far been translated and published in Greek, German, French, Slovak, Polish, Italian, Romanian, Finnish, Spanish, Portuguese, British English, Dutch, Brazilian Portuguese, Bulgarian, and Chinese. He is also co-author with Andreas Marquart of the German language book Warum andere auf Ihre Kosten immer reicher werden.
    Visit his website at PhilippBagus.com.
    This post first appeared at the Mises Daily.

.

Labour’s global wealth tax?

I thought you might like to know that one of the top contenders for Labour’s vacant presidency position is Professor Nigel Haworth, from Auckland University, whose recommended summer reading included the much-debunked tome Capital in the 21st Century by French academic Thomas Piketty calling for a global wealth tax.

Perhaps some aspiring journo might ask Mr Little if we might expect Piketty-style rhetoric from the party should Mr Haworth achieve his desired position?  And Mr Haworth if he shares Piketty’s envy problem, and agrees with his anti-capitalism, his alleged facts, his rejection of liberté, and his obvious ignorance of the role of capital in raising wealth and wages?

Economics for Real People: Economic inequality: A problem in need of a solution?

Here’s what’s on this evening at the Auckland Uni Economics Group. Why not head along?

On Monday the NZ Herald revealed that ANZ New Zealand's David Hisco is NZ’s top-paid chief executive with a total pay package worth $4.1 million. That's a lot of money!  It's cases like this that fuel the debate about income inequality, about whether someone should earn so much more than the average worker.

• How can economics inform this debate?
• Is economic inequality something to be concerned about?
• Or something to embrace!?
• And do policies adopted by those concerned about inequality actually lead to the poorest
         becoming poorer?

In tonight's seminar we address these questions by drawing on powerful economic ideas and theories. While economic inequality is clearly of concern to many today (Piketty's best-selling Capital in the Twenty First Century is a case in point), we shall see that many of the great thinkers and ideas on the subject are largely ignored today.

        Date: Thursday, October 2
        Time: 6-7pm
        Location: Case Room Two, Level Zero, Owen G. Glenn Business School
                                (carparking under the Business School, entrance off Grafton Rd)

All are welcome to attend. We look forward to seeing you there.

PS: Keep up to date with us on the web at our Facebook group.

Demolishing Piketty

The spectre of Piketty’s book Capital in the Twenty-First Century still stalks world best-seller lists, learned pontification on National Radio, and the wet dreams of Laila Harre and John Minto.

Neither dreams nor pontifications –nor book sales – find themselves encumbered by the realisation that Monsieur Piketty just does not know his subject.

He purports to have written a book on capital and growth, claiming the rise in the former will outstrip the latter, thereby increasing inequality and undercutting wages. What he fails to understand – what he is utterly blind to – is the fact that it is capital itself that pays wages, and makes wage growth and real economic progress possible.

To this fact Monsieur Piketty is fundamentally blind, writing as a consequence a 700-page screed on a subject he knows nothing about, drawing conclusions as a consequence that are entirely erroneous, and making recommendations that would undermine the very growth and wage increases he claims in the book and subsequent interviews to favour.

The good news however, as Ryan McMaken points out, is that George Reisman read Piketty’s Capital so you don’t have to.

It seems Reisman is one of the few people who has actually read it. More good news: Reisman tells you what you need to know in a short and pithy monograph, and not in 700 pages like Piketty. The monograph is available at Amazon and at Reisman’s web site. 

Reisman provides a comprehensive list of topics that gives you the flavour of the demolition:

• Prelude to Piketty: The US Government’s Assault on the American Economic System
• Piketty’s Destructive Program
• Overview of Piketty
• Piketty’s Ignorance of the Role of Capital in Production
• The Actual Role of Capital Accumulation and Technological Progress
• Technological Progress as a Requirement for Capital Accumulation
• The Contribution of a Higher Capital/Income Ratio
• The Relationship between Technological Progress and Capital Accumulation Is Reciprocal
• Piketty’s Theory of Profit
• Piketty’s Fear of Saving and Higher Capital/Income Ratios
• Piketty’s Contradiction on the Productive Contribution of Capital
• Time Preference versus Piketty’s Alleged Limitless Rise in the Capital/Income Ratio
• Contrary to Piketty, Capitalism Progressively Raises Real Wages and Increases the Wage Share of National Income While Reducing the Profit Share
• Higher Aggregate Costs as the Source of Lower and Progressively Falling Unit Costs and Prices
• Piketty’s Failure to Realize that a Higher Capital/Income Ratio Signifies not More Profit but a Still Lower Rate of Profit
• No Tendency toward a Falling Rate of Profit
• The Actual Effects of the Capitalists’ Activities
• Unravelling Piketty’s Confusions: The Increase in the Quantity of Money as the Cause of Continual Net Saving and Net Investment
• Collapse of Piketty’s Alleged “Second Fundamental Law of Capitalism”
• The Connection between Profit and Net Investment: The Net-Investment/Monetary Component in Profit
• The Net-Consumption Component in Profit
• The National-Income/Net-National Product Identity
• Reductions to Consumption
• The Monetary Component in the Rate of Profit Need Not Signify Inflation
• Why Saving in the Real World Is Not Accompanied by a Falling Rate of Profit
• Taxation that Reduces Saving and Investment Increases Profits and Reduces Wages
• Piketty’s Program Would Increase the Amount and Rate of Profit
• For the Capitalists to Cause the Harm Piketty Says they Will Cause, They Would Have to Do the Exact Opposite of What He Fears They Will Do
• Contra Piketty: In Defense of 1,000:1 Income Inequality
• Contra Piketty: The General Interest in the Inequality of Wealth and Income
• Piketty’s Data Are Fundamentally Flawed
• Profit as the Original and Primary Form of Labor Income
• Profits as a Labor Income Not Contradicted by Their Variation with the Size of the Capital Invested
• Economic Inequality and a History of the World in Two Scenes

Read it or buy it now.

Thomas Piketty and ‘The Anti-Capitalistic Mentality’

Guest post by Andrew Wilson

Ludwig Von Mises’ treatise on why capitalism sits in the dock, falsely accused of various crimes against humanity, is a classic: his book The Anti-Capitalistic Mentality bravely saying what still needs to be said. It offers a robust rebuttal to the jaundiced view of capitalism found (most recently and conspicuously) in Thomas Piketty’s Capital in the Twenty-First Century.

In The Anti-Capitalistic Mentality, Mises asks: Why do so many people “loathe” capitalism? He gives a threefold answer.

The first factor is simple ignorance. Few people credit capitalism for the fact that they “enjoy amenities that were denied to even the most prosperous people of earlier generations.” Telephones, cars, steel-making, and thousands of other advancements are all “an achievement of classical liberalism, free trade, laissez faire, and capital” — with the driving force being the profit motive and the deployment of capital used in the development of better tools and machines and the creation of new products. Take away capitalism and you wipe out most or all of the extraordinary progress that has been made in raising living standards and reducing poverty since the dawn of the Industrial Revolution.

The second factor is envy, the green-eyed monster, which causes many people to think they have gotten the short end of the stick. As Mises observes: “Capitalism grants to each the opportunity to attain the most desirable positions which, of course, can only be attained by the few … Whatever a man may have gained for himself, there are always before his eyes people who have outstripped him … Such is the attitude of the tramp against the man with the regular job, the factory hand against the foreman, the executive against the vice-president, the vice-president against the president, the man who is worth three hundred thousand dollars against the millionaire, and so on.”

And finally, the third factor is the unceasing vilification of capitalism by those who seek to constrain or destroy it. As Mises notes, the critics and anti-capitalists go on telling and re-telling the same story: saying that “capitalism is a system to make the masses suffer terribly and that the more capitalism progresses and approaches its full maturity, the more the immense majority becomes impoverished.”

Indeed, that is the story Piketty tells in his book, which has soared to the top of the New York Times and Amazon best-seller lists. Does inequality rank as the great defining issue of the twenty-first century? If you agree with Piketty, it does. He contends that disparities in income and wealth are spiralling out of control, setting the haves- against the have-nots. Without “confiscatory” taxes to create a new social and economic equilibrium, he warns, today’s democracies may ultimately collapse, taking capitalism and the capitalists down with them.

Piketty makes much of the seeming fact (some dispute his statistics) that those at the highest levels of income in the United States have claimed a sharply rising share of total U.S. national income over the past three or four decades. From there he leaps to the conclusion that the vast disparity in income between the top 1 percent and the bottom 90 percent will lead over time to the emergence of a new “patrimonial capitalism.” With nothing (save perhaps violent revolution) to worry about, the heirs to big fortunes will turn into a new class of rentiers, living off the rent they receive from owning land and other forms of capital.

In his analysis, it is set in stone that return on capital (r) outstrips economic growth (g), which means that the heirs to great fortunes stay on the fast track to even greater wealth – without even having to work – while the lower and middle class are condemned to economic stagnation or utter hopelessness. His little formula, r>g, is supposed to be one of the great takeaways from the book, but it points up one of the problems of presenting a far-too-static picture of how people behave in a competitive marketplace. [Ironically, Marx’s (and Keynes’s) prediction about the instability of the capitalist system was based on the inevitability of falling rates of profit. It seems of you’re an anti-capitalist, it’s more about the anti-capitalism than the analysis. – Ed.]

That would not have escaped Mises’ attention. Mises would have challenged Piketty’s assumption that the heirs to great fortunes would manage their money wisely, or that they would have the same success as others (more driven than they) in searching out the best investments. Mises maintained that “the dull and stolid progeny” of people who built business empires were likely to “fritter away” their heritage and “sink back into insignificance.”

Under a capitalist system worthy of the name (meaning, to Mises, a competitive market economy free of the crippling effects of state planning and controls); it is neither the powerful industrialist nor the rich investor who calls the shots; it is ordinary people in their capacity as consumers. Through their “buying or not buying,” consumers provide “a daily referendum on what is to be produced and who is to produce it.” They have the whip hand – the power to “make poor suppliers rich and rich suppliers poor.”

One may almost pity the poor capitalist portrayed by Mises. However hard he might work or fast he might run, someone is probably gaining on him. At all times, other suppliers are striving to unseat the incumbents by discovering new and better ways of serving their customers. In comes a Wal-Mart or Target and out goes a Sears or K-Mart. It is a battle fought with an unending supply of fresh recruits, and it is never the case (as Piketty claims) that “The past (i.e. wealth accumulated from previous success) devours the future.” Rather, it is the future (whatever the next big thing may be) that replaces the present with something better.

In The Anti-Capitalistic Mentality, Mises states unequivocally: “Nobody is needy in the market economy because of the fact that some people are rich. The riches of the rich are not the cause of the poverty of anybody.”

Look at the fastest-growing countries in today’s world. Is there not a natural compatibility – as opposed to an inherent contradiction – between major advances in the standard of living in some countries and the ability of their most enterprising citizens to make spectacular gains? That is what has happened in China as a result of economic liberalization: the number of Chinese billionaires has skyrocketed (and is now close to the number of U.S. billionaires), while hundreds of millions of people inside China have worked their way out of poverty.

Is it true – as Piketty contends – that we are witnessing a hyperconcentration of wealth inside the United States?

It might be true if the people with the highest incomes remained the same from one year to the next – over an extended period of time. But they are not the same people. Just as Mises would have expected, it is an ever-changing cast of characters. A recent report from the Tax Foundation data shows IRS data on people reporting a million dollars or more in income over a nine-year period. Fully half of these people made a one-time-only appearance. Only 15 percent of them reported at least a million in income two of the nine years and only 5.6 percent made it all nine years.

There is no danger of an oligarchy of the rich taking shape here to rival the power and permanence of the landed aristocracies in the pre-capitalistic France and Britain.[1]

But there is something else to worry about – something that caused Mises to lose sleep. That is the thought that the natural tendency under capitalism “towards a continuous improvement in the average standard of living” will be stymied by a growing “absence of capitalism” due to “the effects of policies sabotaging the operation of capitalism.” Among those perverse policies, Mises pointed to credit expansion, gunning the money supply, and raising minimum wage rates. Still more, he railed against progressive policies that diminish individual choice and leave more and more economic decision-making in the hands the state. Mises’ greatest fear was that people would “renounce freedom and voluntarily surrender to the suzerainty of omnipotent government.”

Ironically, the most ardent proponents of big government are those who carry on the most about inequality. Do they want nothing more (to paraphrase Churchill) than an equal sharing of misery?

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Andrew B. Wilson is a resident fellow and senior writer at the Show-Me Institute, a free market think tank based in St. Louis, Missouri.
This post first appeared at the Mises Daily.

Turning Piketty Right Side Up

In all the criticism and commentary on Frenchman Thomas Piketty’s criticism of ‘Capital in the 21st Century,’ one very important thing has until now not been pointed out.

Piketty’s simple formula sets capital against wages and general prosperity, suggesting that as capital rises in value then wages will miss out. Yet, as should be obvious to any student of capital, it is capital that pays wages and raises general prosperity.

Thus, Piketty comes at his subject from the wrong side up. In this guest post, George Reisman turns him right side up.

Turning Piketty Right Side Up

Thomas Piketty, a neo-Marxist French professor, has written a near-700-page book, published by Harvard University Press. His book is titled Capital in the Twenty-First Century, in honor of Karl Marx’s nineteenth century Das Capital. It has been greeted with fervent applause from the left-wing intellectual establishment and has been on The New York Times’s and Amazon.com’s best-seller lists.

While his book is ostensibly devoted to the study of capital and its rate of return, Piketty comes to his subject apparently without having read a single page of Ludwig von Mises or Eugen von Böhm-Bawerk, the two leading theorists of the subject. There is not a single reference to either of these men in his book.

There are, however, seventy references to Karl Marx.

Piketty's Envy Problem

French rockstar economist Thomas Piketty has responded to his critics, mostly to the Financial Times who claimed his data is shoddy, cherrypicked and some of it “made up out of thin air.” Tyler Cowen reports:

There are 4,400 words here, mostly on the FT kerfluffle, and Neil Irwin summarizes it here: “The short version: He doesn’t give an inch.”

In this Guest Post by Peter Schiff, Schiff argues Piketty has an envy problem – and it’s this most fundamentally that explains his popularity.

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Piketty's Envy Problem

There can be little doubt that Thomas Piketty's new book Capital in the 21st Century has struck a nerve globally. In fact, the Piketty phenomenon (the economic equivalent to Beatlemania) has in some ways become a bigger story than the ideas themselves. However, the book's popularity is not at all surprising when you consider that its central premise: how radical wealth redistribution will create a better society, has always had its enthusiastic champions (many of whom instigated revolts and revolutions). What is surprising, however, is that the absurd ideas contained in the book could captivate so many supposedly intelligent people. 

#Piketty: Bad Theory, Bad Data

“Up until Giles's shock revelations, Capital in the Twenty-
First Century was the liberal-left's philosopher's stone:
the magical device capable of transforming base socialist
instinct (greed, envy, hatred, control-freakery, love of the
state, obsession with equality) into intellectual gold. This
week, it's just another worthless leftist screed in the dustbin of history.”
- James Delingpole, “Piketty -- Author of Das Kapital in the 21st Century -- Rumbled”

“Piketty said the discrepancies were simply
adjustments to raw data to smooth
them over time and across countries.”
Kate, from Small Dead Animals blog, 
from her post “Everything He Knows, He Learned
From Temperature Records”

Thomas Piketty’s best-selling book Capital in the 21st Century has sailed forth arguing that capitalism holds a fatal flaw. Having been virtually sainted in the four short weeks since the book’s release, the SS Piketty appears to have hit a reef now that reviewers have had time to delve into his working.

Numerous reviewers have already pointed out problems with Piketty’s theory that mature capitalism inexorably produces a fatal wealth inequality only remedied by a global wealth tax – many of which you can read here at NOT PC -- problems to which when pointed out he and his opponents have simply responded “but look at the data.”

So the Financial Times’s senior economics editor Chris Giles did look at the data, comparing it to the sources Piketty claims for it. They gave it a really close look, trying to emulate his charts and tables from the data sources. Their conclusion, after trying, is that Piketty’s results are too often overcooked, cherrypicked, mistakenly transcribed, incorrectly fitted to each other, and (in the case for example of U.S. records for over a century) simply “made up out of thin air.”

What Giles and his colleagues found appears devastating.

They found that the data, as presented, contained (to say the least) substantial inaccuracies. More bluntly, if the correct figures from the sources he cites are used, and the calculations are performed correctly, the effects he claims to describe vanish entirely.
    You can click the FT link above to read the big-picture (ungated) story, and this (gated) link to see the specific allegations about Piketty’s data errors.
    Giles explains what led him to start questioning Piketty’s historical figures on wealth and income concentration, which most other reviewers (including me!) had simply assumed were in the ballpark:

[W]hen writing an article on the distribution of wealth in the UK, I noticed a serious discrepancy between the contemporary concentration of wealth described in Capital in the 21st Century and that reported in the official UK statistics. Professor Piketty cited a figure showing the top 10 per cent of British people held 71 per cent of total national wealth. The Office for National Statistics latest Wealth and Assets Survey put the figure at only 44 per cent.

Whoa! Piketty’s figure for wealth concentration in the present–so we’re not quibbling over 1810 here–was off by 27 percentage points. Like Will Ferrell, that’s kind of a big deal.

It gets worse. This chart showing US data is an example:

Remember, the whole thrust of Piketty’s book is that there is inexorable income and destructive income inequality under capitalism, and his book has the data and theory to prove it. But, well, you see the blue line above, which is Piketty’s line purporting to show the “wealth share” of the “top 10% over the last two century’s? Turns out  that for 90 of those years, between 1870 and 1960, the data doesn’t even exist. (That’s the gap in the red lines, above.)

So how did he produce his continuous blue line?

According to Giles, Piketty literally just made that blue line up (presumably guided by the trends in the other countries, and in the US 1%, for which there were better data).

Giles describes several categories of issues that he found with Piketty’s data:

a) Fat fingers
Prof. Piketty helpfully provides sources for the data he uses in his work. Frequently, however, the source material is not the same as the numbers he publishes. …
b) Tweaks
On a number of occasions, Prof. Piketty modifies the figures in his sources. This might not be a problem if these changes were explained in the technical appendix. But, with a few exceptions, they are not, raising questions about the validity of these tweaks. …
c) Averaging
Prof. Piketty constructs time-series of wealth inequality relative for three European countries: France, Sweden and the UK. He then combines them to obtain a single European estimate. To do so, he uses a simple average. This decision (shown in the screen grab below) is questionable, as it gives every Swedish person roughly seven times the weight of every French or British person. …
d) Constructed data
Because the sources are sketchy, Prof. Piketty often constructs his own data. One example is the data for the top 10 per cent wealth share in the US between 1910 and 1950. None of the sources Prof. Piketty uses contain these numbers, hence he assumes the top 10 per cent wealth share is his estimate for the top 1 per cent share plus 36 percentage points. However, there is no explanation for this number, nor why it should stay constant over time.
There are more such examples. …
e) Picking the wrong year for comparison
There is no doubt that Prof Piketty’s source data is sketchy. It is difficult to find data that relates to the start of each decade as his graphs demand. So it is only natural that he might say 1908 is a reasonable data point for 1910 on the graph.
It becomes less reasonable when, for example, Prof. Piketty uses data from 1935 Sweden for his 1930 datapoint, when 1930 data exists in his original source material. …
f) Problems with definitions
There are different ways to compute wealth data ranging from estimates based on records at death to surveys of the living. These methods are not always comparable.
In the source notes to his spreadsheets, Prof. Piketty says that the wealth data for the countries included in his study are all obtained using the same method. …
But this does not seem to be true.
g) Cherry-picking data sources
There is little consistency in the way that Prof. Piketty combines different data sources.
Sometimes, as in the US, he appears to favour cross-sectional surveys of living households rather than estate tax records. For the UK, he tends to avoid cross sectional surveys of living people.
Prof Piketty’s choices are not always the best possible ones. A glaring example is his decision relative to the UK in 2010. The estate tax data Prof. Piketty favours comes with the following health warning.

“[The data] is not a suitable data source for estimating total wealth in the UK, or wealth inequality across the whole of the wealth population; the Wealth and Asset survey is more suitable for those purposes”.

These choices matter: in both the UK and US cases, his decision of which type of data to use has the effect of showing wealth inequality rising, rather than staying constant (US) or falling (UK).

This appears to be the key chart, says John Hinderaker at Powerline, “particularly the two graphs on the bottom. It is apparent that the superficial plausibility of Piketty’s account derives from his own ‘tweaks’ and misrepresentations, not from the underlying data”:

Unbelievably, there is still worse, leaving Piketty’s defenders to face

the awkward fact that Giles has arguably just shown that when you correct Piketty’s factual mistakes, then the trend in both the UK and the US is the exact opposite of what everyone took away from the book.

And while these countries represent two of the major sources for his argument, his data for the rest of Europe looks equally dodgy.

Nick Sorrentino at Against Crony Capitalism reckons that the fudging of data is actually unnecessary.

He didn’t have to fudge the data however, Piketty is fundamentally wrong about how capital snowballs and why the wealthiest have increased their share of wealth in the USA since about 1970. In a nutshell it is because of the financialization of the economy enabled by a truly fiat currency… Easy money benefits the bankers and the politically connected first, the 1%.

But Piketty has failed to even notice this valid point, leaving him, as Bob Murphy argues, wrong in data and wrong in theory.

The book contains foundational theoretical problems, a misreading of the empirical literature that blows up his whole case, sloppy and absurd factual errors concerning tax rates and minimum wage hikes, and shocking quotations that reveal he has no desire to actually raise government revenue with his massive soak-the-super-rich schemes, but instead merely wants to prevent the formation of fortunes in the first place.

Because even on its face, Piketty’s theoryas stated doesn’t hold water.

You have to be ignorant as the day is long not to know that capitalism has made us wealthy beyond all possible expectation, even going back thirty years never mind three hundred. We now have a vast number of people who do not work because we produce at such a prodigious rate that it just doesn’t require more than about a quarter of the working population to produce enough for us to maintain a 1950s and better lifestyle for those who choose not to bother actually earning an income. In our society who hasn’t got a phone, a car, a colour TV, enough to eat, clothes to wear and a place to live. There are always people on the fringe who circumstances have dealt a bad card, but really we are beyond any issue of deprivation that had existed for the entire course of human history up until say around that same 1950s mark.
    So Piketty lied. The people who line up behind the book will care about that as much as they did about Climategate. It is about power and wealth, with the facts of the case as close to a non-issue as it is possible to be. The only interesting question about wealth distribution to these people is that they would like more of our wealth distributed to themselves.

As Steve Horvitz observes, “Piketty has a potential problem here and we need to see what his response is.  His first round reply in the Financial Times was a whole bunch of nothing.” And it’s not enough to respond on his behalf, as many have already done, saying “but look, he’s so honest he’s put all his data on line. Because as Tyler Cowen points out, the question is not whether or not Monsieuer Piketty is a nice guy (he may be, but it’s irrelevant), nor whether he’s more honest than Michael “Hide the Decline”Mann (which wouldn’t be hard): the real question at stake is whether or not he’s right. Because if he is, or can be made to appear that way, then politicians the world over are ready and willing to swing a global wealth tax your way.

So this matters.

LINKS REFERRED TO:

• Data problems with Capital in the 21st Century – Chris Giles, FINANCIAL TIMES
• Piketty findings undercut by errors – Chris Giles, FINANCIAL TIMES
• Piketty response to FT data concerns – Thomas Piketty, FINANCIAL TIMES
• Is Thomas Piketty a Fraud? – John Hinderaker, POWERLINE
• Piketty Tricketty & Historical US Wealth Data – PHILIP W. MAGNESS
• Phil Magness on Piketty's U.S. Wealth Data – David Henderson, ECON LOG
• Are You Kidding Me? Now Allegations That Piketty Fudged His Wealth Data – Bob Murphy, MISES CANADA
• Piketty and scientific fraud – Steven Kates, CATALLAXY FILES
• What do the Piketty data problems really mean? – Tyler Cowen, MARGINAL REVOLUTION
• Piketty’s Data, Krugman’s Shame – Perry Metzger, SAMIZDATA
• The Piketty Controversy – Steve Horwitz, COORDINATION PROBLEM
• More Picking on  Piketty – POWERLINE
• Piketty and the Shoe Event Horizon – Perry Metzger, SAMIZDATA
• Criticisms of Piketty – James Hamilton, ECONBROWSER

[Hat tip for cartoon to Steven Kates]

QUOTE OF THE DAY: On “Old Money”

“[Working with new money is] much more interesting than old. People with old money are nearly always having to be adjusted downwards.”
- Prince Rupert zu Loewenstein,  banker, Bavarian aristocrat, and financier for the Rolling Stones, quoted in his Telegraph obituary today.

Inequality Myths

Guest post by  Michael D. Tanner

From President Obama to Paul Krugman, Thomas Piketty to Elizabeth Warren, the American Left has adopted “inequality” as the cause of the day. Post- Piketty, they now paint a picture of a new Gilded Age in which a hereditary gentry becomes ever richer, while the vast majority toil away in near-Dickensian poverty. It’s a compelling political narrative, one that can be used to advance any number of policy proposals, from higher taxes to capital gains taxes to increases in the minimum wage.

Unfortunately, bad facts make for bad policy. Let’s look at just some of the ways they get it wrong.

MYTH: Inequality has never been worse. 
TRUTH: “…the evidence shows that wealth distribution has been relatively stable over the past several decades.”
Let’s not even discuss the fact that for large swaths of human history inequality was the norm (kings vs. serfs, anyone?). More significantly, to take American figures, inequality isn’t even at the highest level in recent American history.

Most of those discussing the rise in inequality, including Piketty, look at “market income,” which does not take into account either taxes or social-welfare transfer payments. I’ve fallen into this trap myself on occasion. But, obviously, both of those factors have a significant impact on net income. If those factors are taken into account, income inequality actually decreased in the U.S. over the decade from 2000 to 2010, according to Gary Burtless from the liberal Brookings Institution.

Looking at the issue from another direction, a study by Kevin Hassett of the American Enterprise Institute finds that consumption (that is, spending) for both the highest quintile and the lowest has been relatively flat over the last decades, weakening the argument that there has been increasing inequality.

Of course, I’ve been talking about income, and Piketty and others are more concerned about the disparity in accumulated wealth. The highest quintile, after all, may be saving their increased wealth rather than spending it. Over time, this can lead to increasing disparity. But even here, the evidence shows that wealth distribution has been relatively stable over the past several decades. According to research using the Federal Reserve’s Survey of Consumer Finances, the wealthiest 1 percent of Americans held 34.4 percent of the country’s wealth in 1965. By 2010, the last year for which data are available, that proportion had barely risen, to 35.4 percent.

MYTH: The rich don’t earn their money, they inherit it. 
TRUTH: “…the plain fact is that most of the rich earn their wealth.”
Piketty worries that inheritance will lead to much more inequality in the future. But, at least currently, inheritance plays a very small role. About 80 percent of American millionaires are the first generation of their family to attain that status. Only 19 percent receive any significant income or wealth from a trust fund or an estate, and fewer than 20 percent inherited 10 percent or more of their wealth. As National Review’s Kevin Williamson has pointed out, for the richest 1 percent of Americans, inheritance accounts for just 15 percent of their wealth. No doubt that’s still a lot of money, but the plain fact is that most of the rich earn their wealth.

In fact, wage income is responsible for a majority of net worth for wealthy Americans. Among the top 10 percent in terms of wealth, wages accounted for 55.8 percent of their net worth in 2010. This actually represented an increase from 46.2 percent in 2007; it is likely that stock-market losses during the recession increased the role of wages and lowered the contribution of capital gains. Interest and dividends even among this most affluent cohort accounted for less than 10 percent of net worth. Nearly half of high-net-worth households do not have the kind of capital investments in properties, businesses, or stocks that Piketty fears will lead to inherited fortunes and ever-increasing inequality.

America hardly seems about to turn into a nation of non-working landed gentry or rentiers. Most of the wealthy continue to be professionals who earn most of their wealth through their occupations.

MYTH: The rich stay rich; the poor stay poor. 
TRUTH: “…wealth is often dissipated over generations; research shows that the wealth accumulated by some intrepid entrepreneur or businessman rarely survives long.”
Sure, some families stay wealthy for generation after generation. The Kennedys, Rothschilds, du Ponts, and Rockefellers all spring easily to mind. Yet it is also true that wealth is often dissipated over generations; research shows that the wealth accumulated by some intrepid entrepreneur or businessman rarely survives long. In many cases, as much as 70 percent has evaporated by the end of the second generation and as much as 90 percent by the end of the third.

Even over the shorter term, the composition of the top 1 percent often changes dramatically. If history is any guide, roughly 56 percent of those in the top income quintile can expect to drop out of it within 20 years. Of course, they may retain accumulated wealth, but even by this measure shifts can occur rapidly. Indeed, just as rises in capital markets can make some people rich, declines can wipe out their wealth just as quickly. During the nadir of the recession, declining stock-market returns resulted in a 39 percent decline in the number of American millionaires.

At the same time, it remains possible for the poor to become rich, or, if not rich, at least not poor. Studies show that roughly half of those who begin in the bottom quintile move up to a higher quintile within ten years. And their children can expect to rise even further. Better than one out of every eleven children born to parents in the bottom quintile of incomes will reach the top quintile of incomes over the course of their lifetime.

MYTH: Greater inequality necessarily means greater poverty. 
TRUTH: “…there is little correlation between poverty rates and inequality. Poverty rates have sometimes risen during periods of relatively stable levels of inequality and declined during times of rising inequality.”
Although it is a virtual matter of faith on the Left that the poor are poor because the rich are rich, there is little correlation between poverty rates and inequality. Poverty rates have sometimes risen during periods of relatively stable levels of inequality and declined during times of rising inequality. The idea that gains by one person necessarily mean losses by another reflects a zero-sum view of the economy that is simply untethered to history or economics. The economy is not fixed in size, with the only question being one of distribution. Rather, the entire pie can grow, with more resources available to all.

Moreover, this argument ignores the degree to which poverty is attributable to the choices and actions of the poor themselves. High-school dropouts are roughly three and a half times as likely to end up in poverty as those who complete at least a high-school education, while few college graduates are poor for any extended period of time. Children growing up in single-parent families are almost five times as likely to be poor as children growing up in married-couple families. Less than 3 percent of full-time workers live in poverty. The link between income inequality and poverty is tenuous at best.

* * *

There is good reason for this country to have a debate over issues such as how best to reduce poverty and increase middle-class incomes. But beating the inequality drum will do little to contribute to that debate.

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Michael Tanner is a senior fellow at the Cato Institute and the author of Leviathan on the Right: How Big-Government Conservatism Brought Down the Republican Revolution.

This post has been reproduced from the Cato at Liberty blog. It has been lightly edited for local context.

“Credit Expansion, Economic Inequality, and Stagnant Wages”

My favourite living economist George Reisman responded briefly last week to Thomas Piketty’s much-discussed  tract on inequality, and substantively (back in 2008) to the primary cause of unearned inequality that Monsieur Piketty overlooks.

Capital, he points out, is not the source of poverty but instead is both the source of all production, and the very means by which labour is paid.

The wealth of the rich is not the cause of the poverty of the poor, but rather of making the poor less poor, indeed, rich. The wealth of the rich is invested in means of production, which are the foundation of the supply of products available to everyone through purchase. Their wealth—their capital—is also the source of the demand for labour and thus of wages. The greater is the capital of the rich, the larger is the supply of products and the demand for labour, i.e., the higher are real wages and the general standard of living. Where would you rather live and work? In a society whose means of production were a few goat farms, accompanied by a correspondingly small demand for labour, or in a society filled with multi-billion dollar corporations producing a corresponding supply of products and competing for your labour?
    Over the last generation or more, economic progress has greatly slowed, and many people are economically worse off than they used to be. Why should that be a surprise? Producers are labouring under the ever-growing oppression of government regulation: now 700,000 accumulated pages just at the federal level…
    Economic progress tends to increase insofar as the savings result in a larger supply of capital goods, which serves to increase production, including the further production of capital goods. The rate of return on capital tends to fall because the larger expenditure for capital goods (and labour) shows up both as larger accumulations of capital and as an increase in the aggregate amount of costs of production in the economic system, which serves to reduce the aggregate amount of profit.
    Our problems today result largely from government policies that serve to hold down saving and the demand for capital goods. Among these policies are the corporate and progressive personal income taxes, the estate tax, chronic budget deficits, the social security system, and inflation of the money supply. To the extent that these policies can be reduced, the demand for and production and supply of capital goods will increase, thereby restoring economic progress, and the aggregate amount and average rate of profit will fall.

Further, it is impossible to discuss inequality in today’s context without discussing the massive credit expansion undertaken by the world’s central banks in recent decades.

The truth is that credit expansion is responsible not only for the boom-bust cycle but also for another major negative phenomenon for which public opinion mistakenly blames capitalism: namely, sharply increased economic inequality, in which the wealthier strata of the population appear to increase their wealth dramatically relative to the rest of the population and for no good reason.
    It is not accidental that the two leading periods of credit expansion in history — the 1920s and the period since the mid-1990s — have been characterized by a major increase in economic inequality. Both in the 1920s and in the more recent period, a major cause of the increased economic inequality is that the new and additional funds created in credit expansion show up very soon in the financial markets, where they drive up the prices of securities, above all, common stocks. The owners of common stock are preponderantly wealthy individuals, who now find themselves the beneficiaries of substantial capital gains. These gains are the greater the larger and more prolonged the credit expansion is and the higher it drives the prices of shares. In the process of new and additional money pouring into the financial markets, investment bankers and stock speculators are in a position to reap especially great gains.
    Since it's so important, the main point just made needs to be repeated: credit expansion creates an artificial economic inequality by showing up in the stock market and driving up stock prices. Since the stocks are owned mainly by wealthy people, they are the main beneficiaries of the process. The more substantial and the more prolonged the credit expansion is, the larger are the gains enjoyed by wealthy people more than anyone else.

Since it's so important, let’s repeat that main point again:

Credit expansion is responsible not only for the boom-bust business cycle … but also … is a major source of artificial economic inequality and sharply increases profits relative to wages. These are processes that come to an end and are actually thrown into reverse as soon as credit expansion stops and the recession/depression that is its ultimate consequence begins...
     In the last two episodes of major credit expansion … and over the last several decades as a whole, real wages have largely stagnated. This stagnation is the result of massive government intervention into the economic system that undermines capital accumulation and both the demand for labour and the productivity of labour. It is not the result of economic inequality, the profit motive, or any other aspect of the capitalist system.

LINKS:

• Credit Expansion, Economic Inequality, and Stagnant Wages – George Reisman, 2008
• Smith, Marx, and Piketty: Reisman’s New York Times Comments on Steven Erlanger’s Article “Taking on Adam Smith (and Karl Marx)" – George Reisman, 2014