Thomas Piketty’s book Capital in the Twenty-First Century has gotten a better reception from left-liberals than any book since Limits to Growth. The books have important similarities. Both posit societies in the grip of a doomsday pincer. Limits foresaw a future of poverty and hunger, as inevitably declining resources outrun inevitably increasing population. Piketty sees a future of increasing inequality, as capitalists enjoy an ever-greater share of global income than workers. Both books are also used to justify government intervention. Limits to Growth was the basis of attempts to slow down population growth and require conservation of resources. Capital in the Twenty-First Century expressly calls for a global wealth tax.
Most importantly, both books share a similar, fundamental flaw, although Piketty’s book is far more interesting and sophisticated. They do not take sufficient account of innovation– of the manner in which human ingenuity again and again benefits us all. The mistake in Limits of Growth has already become clear, as Matt Ridley reminded us in the Wall Street Journal last week. We are not running out of energy, for instance. We have more usable oil than ever as we have learned to exploit shale. Innovators are creating wide variety of energy sources that were either not well understood or even imagined in 1972, when Limits to Growth was first published.
Piketty’s book has the same flaw. In his lucid and favorable review, Robert Solow shows that Piketty’s claim of increasing inequality is based partly on his belief that the rate of return on capital will stay constant, even as economic growth slows. In Piketty’s view, a sluggish economy means that people who own capital will gain a greater share of income than people who earn wages. This projection depends on a technological slowdown . But with the relentless increase in computational power, there are more reasons to believe in technological acceleration than stasis. One important point I have previously discussed is that lower economic growth rates in recent decades (from which Piketty extrapolates) are in large measure an illusion. Because of radical improvements in computation, telecommunications and healthcare, centralized government statistics have more and more trouble comparing the costs of bundle of goods from year to year. As a consequence, these statistics overstate inflation and understate growth.
But even more fundamentally, Piketty mistakes the nature of innovation in the twenty-first century. As I have observed:
Economic value is thus increasingly created not by material things but by the information that arranges the material. And information can be shared equally in ways that material goods simply cannot. As Thomas Jefferson famously put it, “He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me.” In the information age, we enjoy ever-greater access to a common pool of ideas that generates more value and consumption for all, substantially tempering the effect of technology’s differential boost to incomes.
Thus, even if we have different incomes from capital, we all share in common a continuing stream of value from intangible ideas that have become free. As a result, we are more, not less equal than before. We can feel this concretely in a variety of ways. For instance, people get faster access to innovations than ever before. 56 percent of Americans have a smartphone although this technology first appeared less than a decade ago. But it took decades for ownership of refrigerators to reach similar levels. And the middle class and the very rich alike spend a huge amount of time on the internet where their experience converges. And perhaps most importantly the great innovations in health care are rapidly enjoyed by the middle class. Most of us enjoy more equal experiences of the world than in past centuries. As the new innovations occur, we will become more equal, because these innovations will rapidly become very low priced and even free.
In my next post, I will discuss how Piketty’s proposals to address inequality also fail to account for the nature of innovation in our time.