In my last post, I discussed how the nature of innovation in our time raises questions for Thomas Piketty’s forecast of increasing inequality in his new book, Capital in the Twenty-First Century. In this post, I argue that his policy proposals also leave out consideration of innovation and thus risk great social harm.
Piketty does not recognize how crucial extraordinary individuals are to innovation and distribution. As Robert Solow notes in his review. Piketty seems skeptical that today’s highly paid “supermanagers” add much value for their very high salaries. Solow endorses this skepticism, agreeing that agency costs are responsible for these high salaries. On this theory, boards of public companies are cozy with these managers who often appoint them to their positions and the result is sky high compensation. But if agency costs were the cause, we should observe closely held companies paying supermanagers less, but as Greg Mankiw points out, they do not.
A much better explanation is that innovations in the structure of corporations– faster telecommunications and the availability of data that represent the details of companies’ operations—have enabled managers at the very top to make a huge difference throughout their organization. A business today is the shadow of one or a few individuals who can take the key decisions.
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.
Comes now Joel Alicea opining in this month's Forum on Richard Epstein's essay "In Defense of the Classical Liberal Constitution." Hank Clark of the BB&T Center for the Study of Capitalism at Clemson provides our feature Books essay this week on George Smith's The System of Liberty: Themes in the History of Classical Liberalism. David Henderson @ Econ Lib catches noted inequality czar Thomas Piketty dodging a straight-forward question on inequality in America. In an interview with New York Times columnist Eduardo Porter Piketty was asked: Might inequality in the United States be less damaging than it is in Europe because the very…