How Piketty’s Bombshell Book Blows Up Libertarian Fantasies

This post first appeared at AlterNet.

Libertarians have always been flummoxed by inequality, tending either to deny that it’s a problem or pretend that the invisible hand of the market will wave a magic wand to cure it. Then everybody gets properly rewarded for what he or she does with brains and effort, and things are peachy keen.

Except that they aren’t, as exhaustively demonstrated by French economist Thomas Piketty, whose 700-page treatise on the long-term trends in inequality, Capital In the Twenty-First Century, has blown up libertarian fantasies one by one.

To understand the libertarian view of inequality, let’s turn to Milton Friedman, one of America’s most famous and influential makers of free market mythology. Friedman decreed that economic policy should focus on freedom, and not equality.

If we could do that, he promised, we’d not only get freedom and efficiency, but more equality as a natural byproduct. Libertarians who took the lessons from his books, like Capitalism and Freedom (1962) and Free to Choose (1980), bought into the notion that capitalism naturally led to less inequality.

Basically, the lessons boiled down to this: Some degree of inequality is both unavoidable and desirable in a free market, and income inequality in the US isn’t very pronounced, anyway. Libertarians starting with these ideas tend to reject any government intervention meant to decrease inequality, claiming that such plans make people lazy and that they don’t work, anyway. Things like progressive income taxes, minimum wage laws and social safety nets make most libertarians very unhappy.

Uncle Milty put it like this:

A society that puts equality — in the sense of equality of outcome — ahead of freedom will end up with neither equality nor freedom.… On the other hand, a society that puts freedom first will, as a happy by-product, end up with both greater freedom and greater equality.

Well, that turns out to be spectacularly, jaw-droppingly, head-scratchingly wrong. The US is now a stunningly unequal society, with wealth piling up at the top so fast that an entire movement, Occupy Wall Street, sprung up to decry it with the catchphrase, “We are the 99 percent.”

How did libertarians get it all so backwards? Well, as Piketty points out, people like Milton Friedman were writing at a time when inequality was indeed less pronounced in the US than it had been in previous eras. But they mistook this happy state of affairs as the magic of capitalism. Actually, it wasn’t the magic of capitalism that reduced inequality during a brief, halcyon period after the New Deal and World War II. It was the forces of various economic shocks plus policies our government put in place to respond to them that changed America from a top-heavy society in the Gilded Age to something more egalitarian in the post-war years.

As you’ll recall, if you watched the movie Titanic, the US had a class of rentiers (rich people who live off property and investments) in the early part of the 20th century who hailed from places like Boston, New York and Philadelphia. They were just as nasty and rapacious as their European counterparts, only there weren’t quite so many of them and their wealth was not quite as concentrated. (The Southern rentiers had been wiped out by the Civil War.)

The fortunes of these rentiers were not shock-proof: If you remember Hockney, the baddie in James Cameron’s film, he survives the Titanic but not the Great Crash of ’29, when he loses his money and offs himself. The Great Depression got rid of some of the extreme wealth concentration in America, and later the wealthy got hit with substantial tax shocks imposed by the federal government in the 1930s and ’40s. The American rentier class wasn’t really vaporized the way it was in Europe, where the effects of the two World Wars were much more pronounced, but it took a hit. That opened up the playing field and gave people more of a chance to rise on the rungs of the economic ladder through talent and work.

After the Great Depression, inequality decreased in America, as New Deal investment and education programs, government intervention in wages, the rise of unions and other factors worked to give many more people a chance for success. Inequality reached its lowest ebb between 1950 and 1980. If you were looking at the US during that time, it seemed like a pretty egalitarian place to be (though blacks, Hispanics and many women would disagree).

As Piketty notes, people like Milton Friedman, an academic economist, were doing rather well in the economy, likely sitting in the top 10 percent income level, and to them, the economy appeared to be doing just fine and rewarding talents and merits very nicely. But the Friedmans weren’t paying enough attention to how the folks on the rungs above them, particularly the 1 percent and even more so the .01 percent, were beginning to climb into the stratosphere. The people doing that climbing were mostly not academic economists or lawyers or doctors. They were managers of large firms who had begun to award themselves very prodigious salaries.

This phenomenon really got going after 1980, when wealth started flowing in vast quantities from the bottom 90 percent of the population to the top 10 percent. By 1987, Ayn Rand acolyte Alan Greenspan had taken over as head of the Federal Reserve, and free market fever was unleashed upon America. People in US business schools started reading Ayn Rand’s kooky novels as if they were serious economic treatises and hailing the free market as the only path to progress. John Galt, the hero of Atlas Shrugged (1957), captured the imaginations of young students like Paul Ryan, who worshiped Galt as a superman who could rise to the top through his vision, merit and heroic efforts. Galt became the prototype of the kind of “supermanager” these business schools were supposed to crank out.

Since the ‘80s, the top salaries and pay packages awarded to executives of the largest companies and financial firms in the US have reached spectacular heights. This, coupled with low growth and stagnation of wages for the vast majority of workers, has meant growing inequality. As income from labor gets more and more unequal, income from capital starts to play a bigger role. By the time you get to the .01 percent, virtually all your income comes from capital — stuff like dividends and capital gains. That’s when wealth (what you have) starts to matter more than income (what you earn).

Wealth gathering at the top creates all sorts of problems. Some of these elites will hoard their wealth and fail to do anything productive with it. Others channel it into harmful activities like speculation, which can throw the economy out of whack. Some increase their wealth by preying on the less well-off. As inequality grows, regular people lose their purchasing power. They go into debt. The economy gets destabilized. (Piketty, and many other economists, count the increase in inequality as one of the reasons the economy blew up in 2007-’08.)

By the time you get to 2010, US inequality, according to Piketty’s data, is quantitatively as extreme as in old Europe in the first decade of the 20th century. He predicts that inherited property is going to start to matter more and more in the US as the supermanagers — the Jamie Dimons and so on — bequeath their gigantic hordes of money to their children.

The ironic twist is this: The reason a person like the fictional John Galt would be able to rise from humble beginnings in the 1950s is because the Gilded Age rentiers lost large chunks of their wealth through the shocks of the Great Depression and the deliberate government policies that came in its wake, thus loosening their stranglehold on the economy and society. Galt is able to make his fortune precisely because he lives in a society that isn’t dominated by extreme concentrated wealth and dynasties. Yet the logical outcome of an economy in which there is no attempt made to limit the size of fortunes and promote greater equality is a place in which the most likely way John Galt can make a fortune is to marry an heiress. So it was in the Gilded Age. So it may be very soon in America.

Which brings us back to Friedman’s view that people naturally get what they deserve, that reward is based on talent. Well, clearly in the case of inherited property, reward is not based on talent, but membership in the Lucky Sperm Club (or marriage into it). That made Uncle Milty a little bit uncomfortable, but he just huffed that life is not fair, and we shouldn’t think it any more unjust that one person is born with mathematical genius as the other is born with a fortune. What’s the difference?

Actually, there is a very big difference. It is the particular rules governing society that determine who amasses a fortune and what part of that fortune is passed on to heirs. The wrong-headed policies promoted by libertarians and their ilk, who hate any form of tax on the rich, such as inheritance taxes, have ensured that big fortunes in America are getting bigger, and they will play a much more prominent role in the direction of our society and economy if we continue on the present path.

What we are headed for, after several decades of free market mania, is superinequality, possibly such as the world has never seen. In this world, more and more wealth will be gained off the backs of the 99 percent, and less and less will be earned through hard work.

Which essentially means freedom for the rich, and no one else.