The Left’s New Hope

The left always offers up hope for the problems faced by the masses. The problem is always the supposed failures of capitalism, the rich, and inequality. The hope usually comes in the form of some brilliant person who has figured out the cause of our problems and the solution. The solution is always more government, more control, and less liberty.

The hope previously came in the package of President Obama. It appears that the hope of Obama has dwindled over the years. Our new hope appears to be a French economist named, Thomas Piketty. He has been making the rounds in the media with his new book, Capital in the Twenty-First Century. The media is clearly puffing him up as the new hope. Even the left’s golden hack, er, boy, Paul Krugman is on board.

Why are they puffing Piketty and his book up? Piketty’s argument is that capitalism is an inherently flawed system that will result in rapidly increasing income inequality. According to Piketty, “the rate of growth of income from capital is several times larger than the rate of economic growth, meaning a comparatively shrinking share going to income earned from wages.”
In other words, it’s the same socialist nonsense in new wrapping paper.

George Reisman does a great job exposing the underlying fallacies behind the nonsense:

Mr. Erlanger’s article is titled “Taking on Adam Smith (and Karl Marx).” Allow me to suggest a different perspective than Mr. Piketty’s from which these two figures can be taken on. Namely, the fact that both of them make the same profound error.

This is the belief that the original and primary form of labor income is wages, with profits appearing only later, with the emergence of capitalists and their capitals, as an unearned, unjust deduction from wages.

The truth is that the income of workers producing and selling such things as pairs of shoes and loaves of bread in Smith’s “original state of things,” or in Marx’s equivalent “simple circulation,” is not wages. It is sales revenue. And precisely because there are no capitalists and thus no expenditure of money for the purpose of bringing in the sales revenues, there are no money costs to deduct from those sales revenues. Thus, the whole of the sales revenues is profit. Profit is the original and primary form of labor income.

What capitalists and their buying for the sake of selling are responsible for is not the existence of profit, but the existence of wages and the other costs of production, and thus a reduction in the proportion of sales revenues that is profit.

And just as Columbus, and not his crew, is given primary responsibility for the discovery of America, so it is businessmen and capitalists who are the primary producers in modern conditions. Profit is the income of their, mainly intellectual labor.

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 labor and thus of wages. The greater is the capital of the rich, the larger is the supply of products and the demand for labor, 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 labor, or in a society filled with multi-billion dollar corporations producing a corresponding supply of products and competing for your labor?

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 laboring under the ever-growing oppression of government regulation: now 700,000 accumulated pages just at the federal level.

Massive credit expansion entering the stock and real estate markets has created artificial inequality as it drives up the prices of stocks and real estate, which are owned predominantly by the rich. It has also caused massive losses of capital through such things as the construction of millions of homes whose buyers could not afford to pay for them.

Contrary to Mr. Piketty, the fact that the rate of return on capital is higher than the rate of economic progress does not at all imply that the fortunes of the rich will increase more rapidly than the overall size of the economic system.

The fortunes of the rich can grow only to the extent that they save and invest out of their relatively high rate of return. But to the extent that they do so, economic progress tends to increase and the rate of return tends to decrease.

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 labor) 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.