Alternative Measures of the Economy

Gross Output vs. GDP: Which Measure Is Better?

By Steve H. Hanke   •   Thursday, July 10, 2014    |    Topic: Economy     

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The Bureau of Economic Analysis (BEA) recently announced that it would start reporting a new data series as part of the U.S. national income accounts. In addition to gross domestic product (GDP), the BEA will start reporting gross output (GO). This announcement went virtually unnoticed and unreported — an unfortunate but not uncommon oversight on the part of the financial press. Yes, GO represents a significant breakthrough.

A brief review of some history of economic thought will show just why GO is a big deal. The Classical School of economics prevailed roughly from Adam Smith’s Wealth of Nations time (1776) to the mid-19th century. It focused on the supply side of the economy. Production was the wellspring of prosperity.

The French economist J.-B. Say (1767-1832) was a highly regarded member of the Classical School. To this day, he is best known for Say’s Law of markets. In the popular lexicon, courtesy of John Maynard Keynes, this law simply states that “supply creates its own demand.” But, according to Steven Kates, one of the world’s leading experts on Say, Keynes’ rendition of Say’s Law distorts its true meaning and leaves its main message on the cutting room floor.

Say’s message was clear: a demand failure could not cause an economic slump. This message was accepted by virtually every major economist, prior to the publication of Keynes’ General Theory in 1936. So, before the General Theory, even though most economists thought business cycles were in the cards, demand failure was not listed as one of the causes of an economic downturn.

All this was overturned by Keynes. Kates argues convincingly that Keynes had to set Say up as a sort of straw man so that he could remove Say’s ideas from the economists’ discourse and the public’s thinking. Keynes had to do this because his entire theory was based on the analysis of demand failure, and his prescription for putting life back into aggregate demand — namely, a fiscal stimulus.
Consumption is not the big elephant in the room. The elephant is business expenditures.
 
Keynes was wildly successful. With the publication of the General Theory, the supply side of the economy almost entirely vanished. It was replaced by aggregate demand, which was faithfully reported in the national income accounts. In consequence, aggregate demand has dominated economic discourse and policy ever since.

Among other things, Keynes threw economics into the sphere of macro economics. It is here where economic aggregates are treated as homogenous variables for purposes of analysis. But, with such innocent looking aggregates, there lurks a world of danger. Indeed, because of the demand-side aggregates that Keynes’ analysis limited us to, we were left with things like the aggregate size of consumption and government spending. The structure of the economy — the supply side — was nowhere to be found.

Yes, there were various rear-guard actions against this neglect of the supply side. Notable were economists from the Austrian School of Economics, such as Nobelist Friedrich Hayek. There were also devotees of input-out put analysis, like Nobelist Wassily Leontief. He and his followers stayed away from grand macroeconomic aggregates; they focused on the structure of the economy. There were also branches of economics — like agricultural economics — that were focused on production and the supply side of the economy. But, these fields never pretended to be part of macroeconomics.

Then came the supply-side revolution in the 1980s. It was associated with the likes of Nobelist Robert Mundell. This revolution was carried out, in large part, on the pages of The Wall Street Journal, where J.-B.Say reappeared like a phoenix. The Journal’s late-editor Robert Bartley recounts the centrality of Say in his book, The Seven Fat Years: And How to Do It Again (1992) “I remember Art Laffer telling me I had to learn Say’s Law. ‘That’s what I believe in’, he professed. ‘That’s what you believe in.’”

It is worth mentioning that the onslaught by Keynes on Say was largely ignored by many economic practitioners who attempt to anticipate the course of the economy. For them, the supply side of the economy has always received their most careful and anxious attention. For example, the Conference Board’s index of leading indicators for the U.S. economy is predominantly made up of supply-side indicators. Bloomberg’s supply-chain analysis function (SPLC) is yet another tool that indicates what practitioners think about when they conduct economic and financial analyses.

But, when it comes to the public and the debate about public policies, there is nothing quite like official data. So, until now, demand-side GDP data produced by the government has dominated the discourse. With GO, GDP’s monopoly will be broken as the U.S. government will provide official data on the supply side of the economy and its structure. GO data will complement, not replace, traditional GDP data. That said, GO data will improve our understanding of the business cycle and also improve the quality of the economic policy discourse.

So, what makes up the conventional measure of GDP and the new GO measure? And what makes up the gross domestic expenditures (GDE) measure, a more comprehensive, close cousin of GO? The accompanying two tables answer those questions. And for readers who are more visually inclined, bar charts for the two new metrics — GO and GDE — are presented.






Now, it’s official. Supply-side (GO) and demand-side (GDP) data are both provided by the U.S. government. How did this counter revolution come about? There have been many counter revolutionaries, but one stands out: Mark Skousen of Chapman University. Skousen’s book The Structure of Production, which was first published in 1990, backed his advocacy with heavy artillery. Indeed, it is Skousen who is, in part, responsible for the government’s move to provide a clearer, more comprehensive picture of the economy, with GO. And it is Skousen who is solely responsible for calculating GDE.



These changes are big, not only conceptually, but also numerically. Indeed, in 2013 GO was 76.4 percent larger, and GDE was 120.4 percent larger, than GDP. Why? Because GDP only measures the value of all final goods and services in the economy. GDP ignores all the intermediate steps required to produce GDP. GO corrects for most of those omissions. GDE goes even further, and is more comprehensive than GO.

Even though the always clever Keynes temporarily buried J.-B. Say, the great Say is back. With that, the relative importance of consumption and government expenditures withers away (see the accompanying bar charts). And, yes, the alleged importance of fiscal policy withers away, too.



Contrary to what the standard textbooks have taught us and what that pundits repeat ad nauseam, consumption is not the big elephant in the room. The elephant is business expenditures.

original article 

The real magic - common genius

The Marvel of American Resilience

Autocrats can always cultivate prodigies. The question is what to do with the remaining 99%.

By

Bret Stephens

Dec. 22, 2014 7:02 p.m. ET

181 COMMENTS

Imagine an economic historian in the year 2050 talking to her students about the most consequential innovations of the early 21st century—the Model Ts and Wright flyers and Penicillins of our time. What would make her list?

Surely fracking—shorthand for the combination of horizontal drilling and hydraulic fracturing that is making the U.S. the world’s leading oil and gas producer—would be noted. Surely social media—the bane of autocrats like Turkey’s Recep Tayyip Erdogan and of parents like me—would also get a mention. Mobile apps? Check. The emerging science of cancer immunotherapy? Hopefully, with fingers tightly crossed.

After drawing up this list, our historian would then observe that each innovation had “Made in USA” stamped all over it. How strange, she might say, that so many Americans of the day spent so much of their time bellyaching about the wretched state of their schools, the paralyzed nature of their politics, their mounting fiscal burdens and the predictions of impending decline.

Perhaps because I grew up as an American living abroad, I’ve always been struck by the disconnect between American achievement and self-perception. To this day I find it slightly amazing that, in the U.S., I can drink water straight from a tap, that a policeman has never asked me for a “contribution,” that my luggage has never been stolen, that nobody gets kidnapped for ransom, that Mao-esque political purges are conducted only in the editorials of the New York Times .

Try saying the same thing about everyday life in Brazil, Russia, India, China or South Africa—the so-called Brics countries once anointed by a Goldman Sachs guru as the economies of the future.

An oil drilling rig on the Bakken formation, Watford City, N.D. Bloomberg

But back to our future historian. Why, she might ask her students, did the U.S. dominate its peers when it came to all the really big innovations?

Fracking would make a good case study. The revolution happened in the U.S. not because of any great advantage in geology—China, Argentina and Algeria each has larger recoverable shale gas reserves. It didn’t happen because America’s big energy companies are uniquely skilled or smart or deep-pocketed: Take a look at ExxonMobil ’s 2004 Annual Report and you’ll barely find a mention of “fracturing” or “horizontal” drilling.

Nor, finally, did it happen because enlightened mandarins in the federal bureaucracy and national labs were peering around the corners of the future. For the most part, they were obsessing about the possibilities of cellulosic ethanol and other technological nonstarters.

Instead, fracking happened in the U.S. because Americans, almost uniquely in the world, have property rights to the minerals under their yards. And because the federal government wasn’t really paying attention. And because federalism allows states to do their own thing. And because against-the-grain entrepreneurs like George Mitchell and Harold Hamm couldn’t be made to bow to the consensus of experts. And because our deep capital markets were willing to bet against those experts.

“When I talk to foreigners, they’re even more impressed than many Americans by this renaissance,” says my Journal colleague Gregory Zuckerman, author of “The Frackers.” “They understand that it only could have happened in America.”

Fracking has now upended energy markets, pummeled petrodictators, confounded OPEC, forged deeper North American economic ties, slashed U.S. greenhouse-gas emissions to their lowest level since 1995, and sunk a nail into the coffin of most renewable-energy schemes (though there will be no slaying that zombie, as our future historian would also know).

Fracking is one industry. In time, the advantages it has given the U.S. will fade as the technology is more widely disseminated. Then it will be on to the next thing. Which, it is safe to say, will also be of American origin and design.

Here, then, is the larger lesson our future historian will draw for her students: Innovation depends less on developing specific ideas than it does on creating broad spaces. Autocracies can always cultivate their chess champions, piano prodigies and nuclear engineers; they can always mobilize their top 1% to accomplish some task. The autocrats’ quandary is what to do with the remaining 99%. They have no real answer, other than to administer, dictate and repress.

A free society that is willing to place millions of small bets on persons unknown and things unseen doesn’t have this problem. Flexibility, not hardness, is its true test of strength. Success is a result of experiment not design. Failure is tolerable to the extent that adaptation is possible.

This is the American secret, which we often forget because we can’t imagine it any other way. It’s why we are slightly shocked to find ourselves coming out ahead—even, or especially, when our presidents are feckless and our policies foolish.

We are larger than our leaders. We are better than our politics. We are wiser than our culture. We are smarter than our ideas. Enjoy the holiday. 

Write to bstephens@wsj.com

original article 

Piketty - Jonah Goldberg

Mr. Piketty's Big Book of Marxiness

07.01.14 - 12:00 AM | Jonah Goldberg

One: Piketty’s Charge

If politics is a war by other means, then books often serve as the artillery. Take Herbert Croly’s The Promise of American Life, the foundational text of modern American liberalism. Its publication in 1909 was heralded as a revelation, when in fact it was more a synthesis of notions that had been floating around in the political ether for a decade. Theodore Roosevelt loved it. “I do not know when I have read a book which I felt profited me as much,” T.R. wrote to Croly. “I shall use your ideas freely in speeches I intend to make. I know you won’t object to my doing so, because, my dear sir, I can see that your purpose is to do your share in any way for the betterment of our national life.” But what Roosevelt loved most was that Croly was saying exactly what T.R. wanted to hear.

Christopher Lasch noted that “Croly did not so much influence Roosevelt as read into his career an intellectual coherence which Roosevelt then adopted as his own view of things.” Others found Croly similarly useful. Walter Lippmann dubbed him the “first important political philosopher” of the 20th century. Felix Frankfurter hailed The Promise of American Life as the “most powerful single contribution to progressive thinking.” Like Ferris Bueller, leaping in front of the parade and pretending he was leading it, Croly got out in front of an idea whose time had come.

This happens every decade or so. Writers as varied as the economic historians Charles and Mary Beard, the public intellectual Walter Lippmann, the economists Friedrich Hayek and John Kenneth Galbraith, the sociologist David Riesman, the legal scholar Charles A. Reich, the biologist Paul Ehrlich, the philosopher Allan Bloom, the historian of international relations Paul Kennedy, and political scientist Francis Fukuyama all captured sociological lightning in a bottle by publishing bestselling books that imposed some coherence on the national anxieties and ambitions of their moment in time.

Revisiting many of these works can lead to bewilderment. What on earth could all the fuss have been about? Reich’s The Greening of America is a miserable mess, replete with hippy-dippy nonsense and messianic gobbledygook that might have made some sense in 1970 but seems hilariously dated now. Riesman’s The Lonely Crowd divided people into psycho-sociological categories—inner-directed, tradition-directed, other-directed—that almost seem parodic today. Hayek’s The Road to Serfdom (1944) holds up much better, but unlike his other works, its significance is more sociological than analytical. Similarly, the analysis in Galbraith’s The Affluent Society (1958) is more valuable as an insight into the hubris of what would become Great Society liberalism than as a serious empirical guide to political economy. As for The Promise of American Life itself, it is a strange and tedious read, though fortunately for Croly’s reputation, few people actually read it anymore.

It remains to be seen what history will make of Thomas Piketty’s Capital in the Twenty-First Century, which was released in America in April. But it was so perfectly timed that it joined the ranks of those lightning-in-a-bottle books even before its publication. Piketty purports to offer a “general theory of capitalism,” in the words of the economist Tyler Cowen. His theory is that capitalism inherently leads to ever-widening income inequality that can be addressed only through heavy taxes on accumulated wealth. In December 2013, President Obama prepared the intellectual battlefield for Piketty by declaring that income inequality was now “the defining challenge of our time.” As the enormous and dense tome finally settled in at the top of the charts, Hillary Clinton previewed a presidential campaign stump speech of sorts, which largely focused on Piketty’s core theme: inequality. Even the pope got in on the act. Adding a religious dimension to Piketty’s theories on Twitter, he declared in late April that “inequality is the root of social evil” and called for “the legitimate redistribution of economic benefits by the State.”

In short, Capital in the Twenty-First Century provides some coherence to an idea whose time has come. And for those who already agreed with its thesis from reading the introduction, it has become not so much The Promise of American Life but the Democracy in America of our time. Indeed, no doubt because Piketty is French, the comparisons to Alexis de Tocqueville have been ubiquitous. In the words of Yale’s Jacob Hacker and Berkeley’s Paul Piereson: “Like Tocqueville, Piketty has given us a new image of ourselves.” They add: “This time, it’s one we should resist, not welcome.”

According to Boris Kachka of New York magazine, “One hundred and eighty years after Alexis de Tocqueville came back to France with the news that he’d found true égalité in America, his countryman has arrived on our shores to deliver the opposite news.”

Taken literally, the comparison between the two writers is ridiculous. Alexis de Tocqueville spent nine months (May 1831 to February 1832) traveling throughout America, talking to politicians, laborers, clergy, businessmen, jailers, and convicts. His journeys took him through most of the country, from the great population centers of the East to Georgia, Alabama, Tennessee, Louisiana, and the wilderness of Michigan. He sailed down the Mississippi River. Piketty, on the other hand, has seen very little of America. The 43-year-old French economist studied and taught briefly at MIT 20 years ago. (He describes it as a “university near Boston.”) By his own admission, until his book tour, he had barely left Paris since he was 25.¹

There is one way in which the comparison to Tocqueville is revealing. Democracy in America’s lasting popularity derives from the fact that it describes a scrappy, idealistic, energetic America that many wanted and still want to believe in. Similarly, Piketty’s vision of America is one that his admirers very much want to believe is true—even though they say they do not want America to resemble Piketty’s description of it. This is why virtually none of his favorable reviewers has responded to his arguments with depressed and rueful shock at his deeply dystopic conclusions. Instead, they have greeted the publication with a triumphant “I told you so.”² Capital in the Twenty-First Century is the artillery shell his supporters have long been waiting for to begin the war against “economic inequality.”

Two: Piketty’s Claim

Piketty’s overarching argument is that Karl Marx was essentially correct when he identified what might be called the original sin of capitalism: the problem of “infinite accumulation.” This is the idea that the rich get richer and the poor get poorer. According to Piketty, it’s what happened when capitalism was left to its own devices at the end of the 19th century, and it’s what is about to happen in the United States and Europe in the 21st. There was, he says, a brief flattening-out of inequality in the middle of the 20th century, thanks to the devastation of two world wars, which destroyed enormous amounts of wealth and fueled huge spikes in taxation. But otherwise the story has remained the same.

Piketty asks:

Do the dynamics of private capital accumulation inevitably lead to the concentration of wealth in ever fewer hands, as Karl Marx believed in the nineteenth century? Or do the balancing forces of growth, competition, and technological progress lead in later stages of development to reduced inequality and greater harmony among the classes…?

Given this either/or, Piketty essentially sides with Marx. I say “essentially” because there is much bickering about whether it is fair or right to call Piketty a Marxist. Paul Krugman, for instance, finds the idea ridiculous, despite the fact that the very title of the book is an homage to Marx’s Das Kapital and that Piketty says Marx asked the right questions even if some of his answers had “limitations.” Piketty himself rejects the Marxist label, presents his arguments in neoclassical terms, and describes himself as a social democrat.

Others have called Piketty’s approach “soft Marxism.” But with apologies to Stephen Colbert, I’d call it “Marxiness.” Piketty attempts to avoid Marx’s scientistic messianism by proffering caveats like “one should be wary of economic determinism.” Yes, one should. But Piketty has a grating habit of offering seemingly deflating qualifiers and “to be sures” only to proceed—à la an unreconstructed Marxist—to argue as if science and objective truth are unquestionably on his side.

He concludes that the problem with capitalism is that “there is no natural, spontaneous process to prevent destabilizing, inegalitarian forces from prevailing permanently.” Rather, capitalism is structurally (or objectively, as the old Marxists might say) inegalitarian. It is a rigged casino where the winners not only keep winning but don’t deserve their chips in the first place.

His proof comes in the form of r > g, already the most famous mathematical formula since E=MC². R is the rate of return on capital (investments, interest on savings, rent from land). G is the growth rate of the broader economy. The problem, according to Piketty, is that the rate of return on capital is greater than the growth of the broader economy. He postulates that if capital grows faster than national income, specifically income earned through wages, over time the capitalists will come to own everything unless something stops that from happening.

Piketty dismisses the claim that the free market self-corrects. He essentially rejects the belief that the law of diminishing returns applies to capital. Most economists hold that if there’s too much capital chasing too few opportunities for investment, the return on capital will inevitably drop. Such corrections, in his view, are fleeting shifts in the current of an ever-rising tide of inequality. And even when they occur, they don’t amount to much:

Never mind that such adjustments might be unpleasant or complicated; they might also take decades, during which landlords and oil well owners might accumulate claims on the rest of the population so extensive that they could easily own everything that can be owned, including rural real estate and bicycles, once and for all. As always, the worst is never certain to arrive. It is much too soon to warn readers that by 2050 they may be paying rent to the emir of Qatar.

Piketty asserts that the return on capital (the r in r > g) holds steady at about 5 percent over time. This means that once you’re rich, you keep getting richer thanks to the miracle of compound interest. Inherited wealth, or old money, expands forever—or, as Piketty puts it in a memorable line, “the past devours the future.”

Piketty’s occasional concessions to uncertainty about his most dire predictions illustrate one reason he shouldn’t be considered an orthodox Marxist. He has no grand Hegelian theory of the ineluctable progression of History with a capital H. But who needs dialectical materialism when you have algebra?

Indeed, his primary claim to originality comes from a statistical tendency he discerns through masses of data, according to which the free market yields a society in which the rich not only get richer but get richer faster than everyone else and ultimately leave the poor behind. This is, he says, the “central contradiction of capitalism.” He goes on:

Once constituted, capital reproduces itself faster than output increases. The past devours the future. The consequences for the long-term dynamics of the wealth distribution are potentially terrifying, especially when one adds that the divergence in wealth distribution is occurring on a global scale.

According to Piketty, we are not only returning to levels of income inequality not seen since the 19th century. We are also looking at a potentially eternal future where the overclass rules at the expense of the ever-growing underclasses. It’s economic Morlocks versus Eloi all the way down.

Matters would appear to be hopeless. But not to worry. Piketty has hope. What gives him hope, and what excites so many of his fans, is that this central contradiction of capitalism can be overpowered by the state.

His key proposal is what he calls a “global wealth tax” of 5 to 10 percent off the top for billionaires, 2 percent for people worth 5 million euros or more, and 1 percent for millionaires below that. He also advocates a top marginal tax rate of 80 percent. And that ain’t the half of it—literally. It’s more like less than a quarter of it. “If one follows Piketty in assuming a normal return on capital of 4 percent for the 21st century,” Stefan Homburg of the University of Leibnitz has written, “a 10 percent tax on wealth is equivalent to a 250 percent tax on the resulting capital income. Combined with the 80 percent income tax, taxpayers would face effective tax rates of up to 330 percent.”

How and by whom this money would be collected is kept rather vague, in part because even Piketty concedes that this proposal is “utopian.” More interesting, he is not especially concerned about what to do with these revenues. Leveling the gap between the rich and the rest of us is a much larger priority for him than lifting up the poor. “Confiscatory tax rates on incomes deemed to be indecent” are worthwhile in their own right, he says. Such rates, which reached 90 percent in the United States at one point, were an “impressive U.S. innovation of the interwar years.” He says this even though he concedes that a high marginal tax rate on extremely high incomes actually “brings in almost nothing” (because the rich would simply stop taking proceeds in taxable form). He does concede in a wonderful understatement at the end of the book that “before we can learn to efficiently organize public financing equivalent to two-thirds to three-quarters of national income”—what his desired tax rates would amount to—“it would be good to improve the organization and operation of the existing public sector.” There’s a useful insight.

His comfort with punitive taxation is reminiscent of Barack Obama’s response in 2008 when asked if he would support a higher tax on capital gains even if he knew it would bring in less revenue. Obama answered that he would still favor raising such taxes for “purposes of fairness.” In short, some people don’t deserve the money they have, and the government should take it from them.

Is Piketty right about the fundamental contradiction of capitalism? And, if he is, how much should we care?

The first question has long been debated by nearly every major economist in the Western world. The second has received much, much less attention. Let’s focus on the first for now.

Three: Piketty’s Data

The general consensus even from very critical economists—and there are many—is that Piketty and his colleagues (chiefly his frequent writing partner, Berkeley economist Emmanuel Saez) have masterfully collected an amazing amount of data that describe some very interesting trends over the past 300 years. They have made massive databases with information culled from tax returns, estate records, and virtually every other source they could find. They plausibly argue that such records are more valuable and accurate than conventional surveys because the sample size of responses from the wealthiest individuals are simply too small to give a clear picture of inequality. Capital in the Twenty-First Century is largely a repackaging of that work. But for Piketty and his fans, it amounts to nothing less than the spread of the Big Data revolution to economic history. Maybe so. But his analysis of those data is far more controversial.

One reason for the controversy is that Piketty oversimplifies the concept of capital. He depicts it “as a growing, homogeneous blob which, at least under peaceful conditions, ends up overshadowing other economic variables,” in the words of economist Tyler Cowen. But different kinds of capital have different rates of return. Right now Treasury bills yield barely better than a 1 percent return, while equities historically have a return of about 7 percent. As Cowen notes in an essay for Foreign Affairs, this alone reveals a certain blind spot in Piketty’s analysis: the hugely significant role of risk-taking in a free-market economy.

The most common and strongest complaint is that Piketty’s arrangement of the data paints a false picture of rising inequality in the United States. Harvard’s Martin Feldstein noted in the Wall Street Journal that Piketty fails to take into account important—albeit arcane—changes in the tax code that have caused business income to be counted on personal tax returns. “This transformation occurred gradually over many years as taxpayers changed their behavior and their accounting practices to reflect the new rules,” Feldstein writes. As an example, “the business income of Subchapter S corporations alone rose from $500 billion in 1986 to $1.8 trillion by 1992.” This leads Feldstein to conclude that Piketty “creates the false impression of a sharp rise in the incomes of high-income taxpayers even though there was only a change in the legal form of that income.”

Feldstein and Scott Winship, of the Manhattan Institute, identify another methodological problem. By focusing on tax returns (instead of household surveys and the like), Piketty fails to take into account the already sizable redistributive elements of our tax code. One in three Americans receives some means-tested government aid today. And that percentage will only grow as people live longer in retirement than ever before. In other words, social security, housing assistance, food aid, etc. don’t show up in Piketty’s portrait of inequality. Winship also notes that his method lumps together many young workers who might live at home and spouses who work only part time. Perhaps more significant, in Piketty’s data, capital gains are registered as a one-time windfall. In other words, if you buy shares in a mutual fund and you hold onto that asset for 25 years, the gains you realize when you sell are counted as income in a single year. But in fact, they’ve been earned over a quarter century. And by “excluding non-taxable capital gains,” Winship wrote in National Review,“most wealth accruing to the middle and working class, which comes in the form of home sales or 401(k) and IRA investments, is invisible in Piketty’s data.”

Then there is Piketty’s use, or abuse, of r > g. “Pretty much every economics textbook will tell you that r > g,” writes American Enterprise Institute economist Andrew Biggs. “But none of the textbook models take from this that the capital stock will rise endlessly relative to the economy. Most of them hold that it stays pretty constant, and the historical evidence supports that view.”

Indeed, as Homburg notes, historical evidence shows that the divide between wealth and income doesn’t eternally widen simply because r is greater than g. The evidence for this can be found in Piketty’s own book, which shows that for the last two centuries, the wealth-to-income ratio in the United States and Canada has remained fairly stable. This North American exception is important because, unlike Europe and Japan, we were not subjected to the physical devastation of the world wars (a topic I will return to later).

Homburg, the American Enterprise Institute’s Kevin Hassett, and a team at the Sciences Po in Paris, moreover, argue that the recent widening of the wealth-to-income gap in the United States that Piketty reports is largely a function of a housing boom in the past 30 years. This fact complicates the story. The housing boom has benefited rich people, to be sure, but it has also been fueled by a massive expansion of home ownership among not only the wealthy but also the middle and lower classes (though not in proportion to gains by the wealthy). “The largest single component of capital in the United States is owner-occupied housing,” notes the liberal economist Lawrence Summers in his review of the book for Democracy. “Its return comes in the form of the services enjoyed by the owners—what economists call ‘imputed rent’—which are all consumed rather than reinvested since they do not take a financial form.”

Also, housing booms cannot go on forever. If you exclude housing from other forms of wealth or capital (Piketty explicitly uses the terms interchangeably), these economists argue, the return on capital is less robust. “In the U.S.,” the Sciences Po economists write, “the net capital income ratio of housing capital was the same in 1770 as it was in 2010 and there is neither a long run trend nor a recent increase of this ratio.” They add: “This type of situation, where a small share of the population owns most of the housing capital, appears to be far from the current situation of developed countries, where the homeownership rate varies between 40 percent and 70 percent. The diffusion of homeownership is likely to slow or even reverse the rise of inequality regardless of trends in housing prices.”  Ultimately, the Sciences Po economists found that their conclusions about inequality in recent years “are exactly opposite to those found by Thomas Piketty.”

Other critics raise a different objection. According to Saez, the largest portion of rising wealth has been in the growth of pension savings, which is a very good thing by most accounts. This is important for two reasons. First, pensions, while disproportionately held by the wealthy, are nonetheless very widely held (by teachers, policemen, autoworkers, et al.). Second, as Forbes’s Tim Worstall notes, pension wealth is generally not inheritable. Indeed, by design, it is intended to be spent.

But in order for Piketty’s invincible confidence that “the past will devour the future” to hold, wealthy people can’t spend down their money, because then it would circulate through the broader economy, raise the fortunes of others, and reduce their own net wealth. But one needs only to look outside the window to see that they do. The wealthy spend their money on cars, houses, boats, and, of course, their own children. Doing so depletes their own wealth holdings and increases the incomes of the less wealthy who provide these goods. They also spend it on museum wings, hospitals, charities of all kinds (even this magazine, a 501(c)3 to which you should be donating if you’re not already), and even progressive reform efforts of the kind Piketty surely endorses. Whatever the motive, they spend down their capital stock relentlessly—a major reason, in the United States and Canada especially, the wealth-to-income ratio has stayed relatively constant. As Feldstein notes, Piketty’s assumption about the rich might be true if every individual rich person lived forever.

Another controversial critique emerged on May 22, when the Financial Times’s Chris Giles reported that his exhaustive examination of Piketty’s data revealed a host of errors or misjudgments—some minor, some potentially damning. According to Giles, Piketty’s data do not support his conclusions, and Piketty may have tweaked the numbers to make his trend lines go the way he wanted them to. The “combined result of all the problems,” Giles writes, “is to make wealth concentration among the richest in the past 50 years rise artificially.”

As of this writing, Piketty and Giles, as well as their various champions, were trying to adjudicate all the charges and defenses. The debates are extremely difficult to follow, to say the least. But it does seem that Giles overstated the lethality of his critique and that, some sloppiness or misjudgments notwithstanding, there’s little evidence that Piketty operated in anything like bad faith. Piketty has recanted nothing.

Still, if one takes all these critiques into account, one must conclude that what its supporters have hailed as an irrefutable mathematical prophecy might have to be downgraded by everyone else into the well-informed hunch from a left-leaning French economist—a significant drop in confidence level, as the statisticians might say.

And this is hugely inconvenient for those holding aloft Capital in the Twenty-First Century as though it were the Statistical Abstract of the United States—because that would mean all of Piketty’s policy proposals and dire predictions for the future are based on a guess about the future, a guess he has falsely portrayed as an immutable law.

Four: Piketty’s Faith

Appeals to scientific fact are powerful only if the science holds up. The problem is that Piketty’s whole case sits on what could be called a one-legged stool: Remove that leg and there’s nothing left to hold it up but faith. Marxism suffered from a similar weakness. So long as its “scientific” claims remained uncontested and unexamined, Marxism had a huge advantage. Once it became clear that the science in “scientific socialism” was nothing more than clever branding, all that was left was faith.

The radical philosopher Georges Sorel (1847–1922) recognized that Marx’s Das Kapital was next to useless as a work of scientific analysis. That’s why he preferred to look at it as an “apocalyptic text… as a product of the spirit, as an image created for the purpose of molding consciousness.” And for generations of revolutionaries, intellectuals, artists, and activists, it served that purpose well. Marxism lent to its acolytes a certainty they could call “scientific”—an indispensable label amidst a scientific revolution—but, as Sorel understood, that was a kind of psychological marketing, a Platonic “vital lie” or what Sorel called a useful “myth.” Indeed, Lenin’s most significant contribution to Marxism lay in using Sorel’s concept of the myth to galvanize a successful revolutionary political movement.

Marx tapped into the language and concepts of Darwinian evolution and the Industrial Revolution to give his idea of dialectical materialism a plausibility it didn’t deserve. Similarly, Croly drew from the turn-of-the-century vogue for (heavily German-influenced) social science and the cult of the expert (in Croly’s day “social engineer” wasn’t a pejorative term, but an exciting career). In much the same way, Piketty’s argument taps into the current cultural and intellectual fad for “big data.” The idea that all the answers to all our problems can be solved with enough data is deeply seductive and wildly popular among journalists and intellectuals. (Just consider the popularity of the Freakonomics franchise or the cult-like popularity of the self-taught statistician Nate Silver.) Indeed, Piketty himself insists that what sets his work apart from that of Marx, Ricardo, Keynes, and others is that he has the data to settle questions previous generations of economists could only guess at. Data is the Way and the Light to the eternal verities long entombed in cant ideology and darkness. (This reminds me of the philosopher Eric Voegelin’s quip that, under Marxism, “Christ the Redeemer is replaced by the steam engine as the promise of the realm to come.”)

For the lay reader of Capital, this might seem ironic, given Piketty’s own criticisms of the economics profession. He mocks his colleagues’ “childish passion for mathematics and for purely theoretical and often highly ideological speculation” and “their absurd claim to greater scientific legitimacy, despite the fact that they know almost nothing about anything.” He decries the “scientistic illusion” that emerges from statistical lightshows. “The new methods often lead to a neglect of history and of the fact that historical experience remains our principle source of knowledge,” he writes. It is true that the economists he’s talking about don’t deal with real-world data but with abstract mathematical models masquerading as economic theory. Nonetheless, he would be well advised to consider that towering trees of data can blind you to the more complex nature of the forest.

With almost the sole exception of left-wing Salon columnist Thomas Frank, virtually none of his reviewers—positive and critical alike—have commented on the fact that Piketty has a remarkably thumbless grasp of historical context. “Piketty’s command of American political history is, quite simply, abysmal,” Frank correctly declares. Many seem to have missed this because they are suckers for Piketty’s habit of using literary references to lend credence to his mathematical conclusions. In a section titled “the Rastignac’s dilemma,” Piketty highlights the plight of the penniless young noble Eugene Rastignac in Balzac’s Le père Goriot, who must choose between marrying a rich heiress or pursuing a mediocre and underpaid legal career. He then subjects us to long data-dissections showing that the return on inherited wealth outstrips the return on labor income and that we are destined to return to the “patrimonial capitalism” of 19th-century France. (Alain Bertaud of NYU makes a persuasive case that Piketty unfairly distorts the richness of Balzac’s character. His interpretation of Rastignac, Bertaud writes, “is so skewed that it seems that Piketty has been reading Balzac through inequality glasses.”)

Clearly some people go in for this sort of thing, but the weight of endless discursions into mathematical modeling and data collection can be lightened only so much by French Lit CliffsNotes. A spoonful of such sugar helps the medicine go down, but it doesn’t make Balzac’s famous dictum that “behind every great fortune is a great crime” any more valid.
Such techniques can also get an author into trouble. At times, it seems Piketty takes much of his early-20th-century history from the movie director James Cameron. He puts a good deal of stock in the historical value of Cameron’s 1997 blockbuster Titanic. At one point he says one need only note “that the dreadful [Cal] Hockney who sailed in luxury on the Titanic in 1912 existed in real life and not just in the imagination of James Cameron to convince oneself that a society of rentiers existed not only in Paris and London but also in turn-of-the-century Boston, New York, and Philadelphia.”

Well, no. In fact, the Billy Zane character was an entirely fictional creation of James Cameron’s imagination (and the proper spelling of his name is Hockley; Cameron invented Caledon Hockley’s name by joining the names of two towns in Ontario, where he spent some time in his youth). Still, let us concede that there were some rich jerks on the actual Titanic. So what? Many of the richest people on earth were passengers on the Titanic, including Isidor and Ida Strauss (owners of Macy’s), mining heir Benjamin Guggenheim, and John Jacob Astor IV (the wealthiest man on the ship). They, and numerous others, refused to get in lifeboats until all the women and children, including the poor women and children, got on first (Ida Strauss refused to leave her husband, preferring to die in his arms). After helping other passengers escape, Guggenheim and his secretary changed into their evening wear, saying they were “prepared to go down like gentlemen.” Meanwhile the most famous real-life cad on the ship was George Symons, a crewman who refused to let anyone else on his lifeboat even though there were 28 empty seats. Money, it seems, doesn’t tell you everything about a man.

This Titanic business on its own is trivial, but it demonstrates how Piketty sees the super rich as an undifferentiated agglomeration—a single static class bent on protecting its own collective self-interests. But the rich are not a static class, any more than capital can be reduced to a homogenous blob. Fewer than 1 in 10 of the 400 wealthiest Americans on the Forbes list in 1982 were still there in 2012. (Lawrence Summers notes that if Piketty was right about the stable return on capital, they should have all stayed on the list.) Of the 20 biggest fortunes on the Forbes list in 2013, 17 (85 percent) were self-made. Of the three remaining entries, only one—the Mars candy family—goes back three generations. The Koch brothers inherited the business their father created, but they also greatly expanded it through their own entrepreneurial zeal. The Waltons of Walmart fame inherited the family business from Sam Walton, a self-made billionaire from quite humble origins.

Nor are the poor and the middle class static. As a statistical artifice, there will always be a bottom 1 percent, just as there will always be a top 1 percent. But that doesn’t mean that if you are born in the bottom 1 percent, you will stay there. Some of Piketty’s fans seem confused about this, appearing to believe that economic inequality is synonymous with low economic mobility. There may indeed be a link between inequality and low economic mobility. After all, rich people by definition have advantages poor people do not. But there is no iron law that says any individual person must stay in his narrow economic bracket for life; the Morlocks can become Eloi. Indeed, there remains an enormous amount of churn in our economy; 61 percent of households will find themselves in the top quintile of income for at least two years, according to data compiled by economists Mark Rank and Thomas Hirschl. Just under 40 percent will reach the top 10 percent, and 5 percent will be one-percenters, at least for a while.

Piketty himself offers an extensive analysis of the Forbes list of the wealthiest people in the world in an attempt to prove that today’s richest people are much richer than they were in 1987 and that the “largest fortunes grew much more rapidly than average wealth.” He says the data show that wealth grew by an inflation-adjusted 7 percent, even higher than the normal 4-to-5 percent return implicit in r > g. In what seems a generous nod, Piketty even concedes that if you jigger the timespan—starting from, say, 1990 instead of 1987—the rate of return might drop a bit. But one problem remains: Piketty leaves out that the people on the list are almost all different people.³ The economist Stan Veuger, writing for U.S. News & World Report, looked at the same list and found that the top 10 individuals collectively earned about 0.5 percent on their capital during the period Piketty says “the rich” got richer. And, Vueger notes: “If it weren’t for Walmart, the wealthiest people in the world would actually have lost about half of their wealth in the last 25 years.”

Five: Piketty’s Warning

Piketty’s insistence that “historical experience remains our principal source of knowledge” and that economists need to get out of their abstract cocoons becomes all the more tone-deaf when we get to the question he barely addresses at all: Why should we care? So there’s income inequality. So what? For his part, Martin Wolf of the Financial Times raved about Capital, but conceded that the work has “clear weaknesses. The most important is that it does not deal with why soaring inequality…matters. Essentially, Piketty simply assumes that it does.”

The Economist’s Ryan Avent objected to Wolf’s criticism noting that Piketty finds income inequality “unsustainable” because it will either lead to a few (or even a single person) owning everything or to bloody revolution. Piketty does suggest as much—but he makes nothing resembling a sustained philosophical, historical, or ethical case to support his views. Rather, he breezily and unpersuasively assumes and asserts such conclusions as if they are the sorts of things everybody knows. Avent’s ultimate defense of Piketty is revealing in this regard: “Inequality matters because, like it or not, inequality matters.” The examples Piketty gives to explain why he thinks inequality—not poverty, not hunger, not disease, not human rights, not expanding liberty—should be the “defining challenge of our time” don’t make the argument any more convincingly than Avent does.

Piketty makes a great deal out of a platinum-mine strike in South Africa in 2012. That violent labor action was, in a sense, about inequality, since it featured poor workers attacking rich mining interests. The workers, it is true, did want better wages, and justifiably so. But they wanted better wages not because they were indignant about their salaries being too small a fraction of the profits; they felt they deserved better compensation for putting up with undeniably horrible working conditions. Piketty’s glib summation leaves out other important variables outside mere economics. For starters, most of the violence was attributable to a vicious and bloody rivalry between competing labor unions. There’s also what economists might call the legacy costs of this exogenous event called “apartheid.”

This distinction between objective, or absolute, poverty and subjective, or relative, poverty doesn’t matter very much to Piketty. In real life, however, it matters a great deal. There’s a significant difference between not being able to feed your family and not being able to feed your family as well as a wealthier man might. A millionaire might be poor in a world of billionaires, but he would not be a pauper.

Of course, America has poor people, though it has relatively few who go hungry because capitalism has failed them. The average poor person in America, in material terms, lives quite well in comparison with a poor person elsewhere in the world or the average American else-when in time. The “actual living conditions of people counted as living ‘in poverty’ in America today,” Nicholas Eberstadt recently explained in the Weekly Standard, “bear very little resemblance to those of Americans enumerated as poor in the first official government count attempted in 1965.” He continued:

By 2011, for example, average per capita housing space for people in poverty was higher than the U.S. average for 1980, and crowding (more than one person per room) was less common for the 2011 poor than for the nonpoor in 1970. More than three-quarters of the 2011 poor had access to one or more motor vehicles, whereas nearly three-fifths were without an auto in 1972–73. Refrigerators, dishwashers, washers and dryers, and many other appliances were more common in officially impoverished homes in 2011 than in the typical American home of 1980 or earlier. Microwaves were virtually universal in poor homes in 2011, and DVD players, personal computers, and home Internet access are now typical in them—amenities not even the richest U.S. households could avail themselves of at the start of the War on Poverty.  Further, Americans counted as poor today are manifestly healthier, better nourished (or overnourished), and more schooled than their predecessors half a century ago.

That is the sort of historical context one would expect from an economist who claims to be interested in historical context. There’s nothing like that here. Instead, Piketty glibly segues from the South African strikers to the 1886 Haymarket Square riots in Chicago, asking: “Does this kind of violent clash between capital and labor belong to the past, or will it be an integral part of twenty-first century history?”

There’s not sufficient space here to get into the remarkably complex issues that were involved in the Haymarket Square affair. Suffice it to say that neither the initial protest (for an eight-hour work day) nor the bombing (by anarchists) that led to the deaths of seven policemen and four civilians were motivated by dissatisfaction over income inequality. What mattered were the objective conditions under which the protesting workers toiled and lived. They were earning too little to make a proper life for themselves and were forced to labor under intolerable conditions at the same time. As Thomas Frank notes, such conditions were ameliorated largely through the struggle for organized labor—a rich subject that holds almost no interest for Piketty.

Similarly, coal miners in early-20th-century America didn’t march to flatten out the curve of the distribution of income in a textbook’s appendix; they marched to work in safety and security, and for a decent wage. To the extent that coal miners are politically organized today, it is not to fight the alleged evils of income inequality but to keep Piketty’s fans on the left from erasing their jobs by waging the “war on coal.” (By the way, the average wage for coal miners in the United States is just over $81,000 per year.)

Six: Piketty’s Threat

Piketty is convinced that income inequality “inevitably instigates…violent political conflict.” Is that actually true? And if it is, is such violence justified? Skepticism is warranted on both counts, as history suggests.

For example, the French Revolution was about inequality, but not first and foremost economic inequality. Inherited titles, the power of the Church, the unjust rule of what Edmund Burke called “arbitrary power,” and other tangible examples of legal or formal inequality played enormous and mutually reinforcing roles. The American Revolution, likewise, was about political inequality, as were later fights in this country over abolition and civil rights. Economic inequality was a symptom, not the disease—at least according to countless revolutionaries, abolitionists, and civil-rights leaders.

The postwar history of the West actually makes a hash of Piketty’s sweeping presumption. He argues that the years 1950 to 1970 were a “golden age” of economic equality. If so, why did the greatest period of social unrest in Europe and the United States in the 20th century come at the height of this golden age in the 1960s? That unrest spilled over into the 1970s, but the domestic terrorists who roiled Germany and Italy and the crime wave that devastated the United States had an extremely tangential relationship to income inequality at best. Then, pollsters tell us, in the 1980s—when the West took a wrong turn, according to Piketty, thanks to the policies of Margaret Thatcher and Ronald Reagan—social contentment started to rise and continued to rise, with the usual dips, all the way into the 1990s. One small example: In 1979, 84 percent of Americans told Gallup they were dissatisfied with the direction of the country. In 1986, 69 percent were satisfied.

So, just looking at the historical record, the notion that greater income equality by itself yields social peace seems insane.

Seven: Piketty’s Capitalism

“The consequences for the long-term dynamics of the wealth distribution are potentially terrifying,” Piketty writes. For instance, Piketty fears that whenever the return on capital really starts to outstrip national growth, “capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based.” That is open to debate, to put it mildly. Bill Gates, Sam Walton, Larry Ellison, Mark Zuckerberg, Sergey Brin, Fred Smith, and others became billionaires because they created goods and services of real value to consumers; there was nothing “arbitrary” about it. In fact, most of them didn’t achieve their wealth, strictly speaking, from “capital” in the Pikettyesque sense at all. They mostly earned it from technological innovation. Piketty seems to believe, without marshaling much if any evidence, that such accretions of wealth undermine meritocratic values—when in fact, in a very real sense, the wealth creation over the past 30 years collectively constitutes the most extreme example of meritocratic advancement the world has ever seen.

Do the masses resent their wealth? It doesn’t appear so, or if they do, it is not a major concern. As inequality has risen over the last 30 years, the share of the public who think that that the “rich are getting richer and the poor are getting poorer” has stayed fairly constant (80 percent told Harris pollsters they agree with that statement in 2013 compared with 82 percent in 1990). The number dipped a bit in the 1990s when inequality was increasing but wages were rising. But, in May, when Gallup asked voters what they saw as “the most important problem facing this country today,” a mere 3 percent volunteered the gap between rich and poor (which gives you a sense of how out of touch with the concerns of Americans some of Piketty’s biggest fans are and why, for instance, they wildly overestimated the significance of Occupy Wall Street at the time, and even in retrospect). Polls consistently find that Americans are much more concerned about creating jobs and making the economy grow than fighting income inequality or redistributing wealth. A poll in January conducted by McLaughlin & Associates (for the YG Network) found that Americans by a margin of 2:1 (64 percent to 33 percent) prefer expanding economic growth to narrowing the gap between rich and poor. In 1990, Gallup asked Americans whether the country benefits from having a class of rich people. Sixty-two percent said yes. In 2012, 63 percent said yes.

It seems that most Americans simply want a fair shake. They don’t really begrudge the success of others, and to the extent they do, they don’t want to do much about it. It’s hard to see how any of this amounts to an inequality-driven powder keg of social unrest waiting to explode.

A third claim—one can’t call them arguments because they don’t rise to that level—is that the super rich will rig democracy to their advantage. This, too, has a faint Marxist echo, featuring as it does the assumption that capitalist overlords form a homogenous political class bent on exploitation. One must only read the newspaper to know that this is nonsense on stilts. At this very moment, George Soros, Tom Steyer, and other liberal billionaires are in a hammer-and-tongs political battle with Sheldon Adelson, Charles and David Koch, and other conservative or libertarian billionaires. And the evidence that either side has the power to buy elections is discredited almost every November. This is not to say that our democracy couldn’t be healthier or that wealthy special interests do not cause real problems, but America is hardly being run today by characters out of a Thomas Nast cartoon. It’s being run, instead, by the son of a teenage single mother from Hawaii, the son of a barkeep from Ohio who became speaker of the House, and a miner’s son from Nevada who grew up in a shack with no running water before becoming majority leader of the Senate—none of them born into wealth, to put it mildly.

Eight: Piketty’s Choice

Piketty is shockingly unconcerned with the fact (which he acknowledges) that one of the driving forces of U.S. income inequality is rising global equality. The world’s poor are getting much richer, in large part because they are doing a lot of the sometimes backbreaking and manual labor that poor and middle-class people in rich countries once did. This clearly creates significant political and economic challenges for wealthy countries eager to maintain high domestic-living standards, but from the vantage point of someone who believes in universal economic rights, that is a small price to pay, no?

Thanks to capitalism, we have seen the single largest alleviation of poverty in human history. In 1981, 52 percent of humanity lived in “extreme poverty.” They could not provide for themselves and for their families such basic needs as housing and food. According to a recent study by Yale and the Brookings Institution, by the end of 2011, that number had fallen to 15 percent. They credit globalization, capitalism, and better economic governance (i.e., the abandonment of Marxism and similar ideologies). Even for economic nationalists, how is that not a staggering triumph for the ethical superiority of capitalism?

That is also the story of the West in the 19th and 20th centuries. Piketty might be right that whenever capitalism runs amok, the rich get richer faster than the poor get richer. Even so, the poor still get richer. The economic historian Deirdre McCloskey beautifully chronicles how for nearly all of history (and prehistory), the average human lived on the equivalent of $3 per day. What she calls the “great fact” of human advancement is that, thanks to the rise of democratic capitalism, that small figure no longer holds wherever democratic capitalism has been permitted to work its magic.

Even more troubling, Piketty places enormous emphasis on the role of the world wars as a great leveler of inequality and the primary driver of the postwar “golden age.” But ask yourself a question: If you were a remotely sane human in 1900 and you were given the choice of

(a) getting richer, though at a slower rate than the very wealthiest, so that in 1950 there was a lot of economic inequality but you and your kids were still much better off; or
(b) facing two horrendous and cataclysmic global wars in which whole societies were razed and a hundred million people died violently and you (along with the rich) were made poorer for it, and would die at a younger age,

What would you have chosen? It appears Piketty finds Option B awfully tempting. And that is madness.

Nine: Piketty’s Justice

In little more than a few throwaway sentences, Piketty asserts that confiscatory taxes on wealth are morally required as a matter of social justice. That an economist who has ensconced himself in the Parisian velvet of the social-democratic left for nearly all of his adult life believes such things is hardly surprising, particularly given his confidence that extreme wealth is essentially the arbitrary product of an “ideological construct.”
But this does not absolve him of the responsibility of making a case.

Piketty begins Capital in the Twenty-First Century with a quotation from the Declaration of the Rights of Man, the operating document of the French Revolution: “Social distinctions can be based only on common utility.” He concedes elsewhere in the book that the “social distinctions” to which it refers had to do with the hereditary “orders of privileges of the Ancien Regime” and not with economic inequality. Even so, he insists, we must breathe new life into the concept of “common utility”:

One can interpret the phrase more broadly, however. One reasonable interpretation is that social inequalities are acceptable only if they are in the interest of all and in particular of the most disadvantaged social groups. Hence basic rights and material advantages must be extended insofar as possible to everyone, as long as it is in the interest of those who have the fewest rights and opportunities to do so.

The notion that wealth—or, to put it another way, private property—is an arbitrary social distinction that can be erased for the betterment of the have-nots is incredibly radical. One might even call it Marxist (or at least “Marxy”). Given that, an argument on its behalf should be extended and defended. But aside from a perfunctory reference to the philosopher John Rawls’s “difference principle,” which says that justice should be weighted toward the least advantaged people in society, he does not do so. He is more than comfortable letting it sit as largely self-evident.

Where he breaks with Marxism is the means by which he would reward the have-nots: not the seizure of all property but the mere soaking of the rich in order to seize the returns on the means of production. Piketty’s obsession with tax hikes as a cure-all is almost a perfect mirror of how liberals see the supply-side obsessions with tax cuts. It is this idée fixe that allows him to summarily dismiss other proposals that might get us to his preferred destination without confiscating the ill-gotten gains of the well-to-do. For instance, Tyler Cowen and National Review’s Kevin D. Williamson point out that if Piketty’s assumptions about the long-term returns on capital are correct, then we would be crazy not to transform social security into a system of privately held investment accounts. Boldly expanding the Earned Income Tax Credit—which would necessarily increase the tax burden of the wealthy—might also do more to solve the problem, assuming it is a problem. An aggressive tax on consumption instead of income would, according to many economists, boost growth and have the added benefit of taxing the Gilded Age lifestyles of billionaires instead of merely taxing billionaires for the alleged crime of existing. But none of these has the satisfying bang of that 80 percent marginal tax rate—or, even more thrilling, the 10 percent “global tax” on billionaires’ filthy lucre.

And then, of course, there are the countless reforms that lie outside the realm of tax tables. The data are clear that marriage delivers roughly as much bang for the buck as going to college. Raising children in a stable two-parent home is a better guarantor of lifetime economic success than crude interventions by the state. But while Piketty is happy to opine at great length about the Gilded Age matrimonial lifestyles of the rich and famous, drawing deeply on Jane Austen and other sources to paint a vivid picture, he is uninterested in the same issues down the socioeconomic ladder.

Ten: Piketty’s Class

Why does Piketty reject the more romantic path of the classic Marxist? You know—“Let the ruling classes tremble at a Communistic revolution. The proletarians have nothing to lose but their chains. They have a world to win”—that kind of thing?

One answer to this question explains not only Piketty’s thinking but the response to his work as well: Piketty is a member of the ruling class. Piketty’s way puts Piketty and his friends in charge of everything. A one-time adviser to the Socialist politician Ségolène Royal, a star academic and a columnist for Libération, Piketty is a quintessential member of what the economist Joseph Schumpeter identified as the “new class.” Schumpeter’s prediction of capitalism’s demise hinged on his brilliant insight that capitalism breeds anti-capitalist intellectuals. Educators, bureaucrats, lawyers, technocrats, journalists, and artists, often the children of successful capitalists, always raised in the material affluence of capitalism, would organize to form a class whose collective interest lay in seizing economic decisions from the free market. As Deirdre McCloskey writes: “Schumpeter believed that capitalism was raising up its own grave diggers—not in the proletariat, as Marx had expected, but in the sons of daughters of the bourgeoisie itself. Lenin’s father, after all, was a high-ranking educational official, and Lenin himself a lawyer. It wasn’t the children of auto workers who pulled up the paving stones on the Left Bank in 1968.” No, it was actually people like Piketty’s own parents.

There is a reason the most passionate foes of income inequality tend to be very affluent but not super rich, intellectuals like Paul Krugman and other journalists eager to set the threshold for confiscatory tax rates just beyond their own income levels. But this sort of class war—the chattering classes versus the upper classes—is only part of the equation. Power plays a huge part as well. A full-throated endorsement of classic leftist radicalism would set a torch to Piketty’s own tower of privilege. The State, guided by experts, informed by data, must be empowered to decide how the Rawlsian difference principle is applied to society. Piketty’s assurance that inequality “inevitably” leads to violence amounts to an implied threat: “Let us distribute resources as we think best, or the masses will bring the fire next time.” Once again the vanguard of the proletariat takes the most surprising form: bureaucrats (the true “rentiers” of the 21st century!). A revealing sub-argument running throughout Capital is that we need to tax rich people in ever more, new, and creative ways just so we can get better data about rich people! To borrow a phrase from James Scott, author of Seeing Like a State, Piketty is obsessed with making society more “legible.” The first step in empowering technocrats is giving them the information they need to do their job.

This is what places the Piketty phenomenon squarely in the tradition of Croly and, yes, Marx himself. Piketty’s argument, with its scientific veneer and authoritative streams of numbers, is a warrant to empower those who think they are smarter than the market—and who feel superior to those most richly rewarded by it.

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Footnotes

1 As fate would have it, Piketty’s translator, Arthur Goldhammer, is also Tocqueville’s, and he assures us that the comparison is apt. “Because Tocqueville was such an assiduous researcher, who returned from his travels in the U.S. with trunkloads of documents filled with statistical data of all kinds, I have no doubt he would have found the data compiled by Thomas Piketty fascinating.”  That may well be true, but it’s also irrelevant. Tocqueville probably found Plato fascinating, but that doesn’t mean he was a “19th-century Plato.”
2 Chief among them is New York Times columnist Paul Krugman, who has been leading an intellectual jihad on inequality for years and has written dozens of columns and articles explaining why we live in a new “Gilded Age.” Hence the unsurprising title of his lavish review in the New York Review of Books: “Why We Live in a New Gilded Age.”

Around the time he wrote the review, Krugman wrote on his New York Times blog that research showing that both liberals and conservatives suffer from confirmation bias—according to which one tends to believe facts supportive of one’s own worldview—didn’t ring true to him. After all, he mused, he couldn’t think of a major policy issue where he and his liberal friends hadn’t been right about everything.

3 By way of illustration, the super rich of 1987—Yoshiaki Tsutsumi, Taikichiro Mori, Sam Walton, Shigeru Kobayashi, Haruhiko Yoshimoto, Salim Ahmed Bin Mahfouz, Hans and Gad Rausing, Yohachiro Iwasaki, Kenneth Roy Thomson, and Paul, Albert, and Ralph Reichmann—are hardly household names today.

About the Author

Jonah Goldberg is a contributing editor at National Review and a fellow at the American Enterprise Institute.

How Not to Help Black Americans - Riley

How Not to Help Black Americans

Failed poverty programs have tried to do what blacks can only do for themselves.

By

Jason L. Riley

June 16, 2014 7:24 p.m. ET

'The concept of historic reparation grows out of man's need to impose a degree of justice on the world that simply does not exist," writes Shelby Steele in "The Content of Our Character." "Blacks cannot be repaid for the injustice done to the race, but we can be corrupted by society's guilt gestures of repayment."

Mr. Steele's words come to mind after reading a much-discussed argument for slavery reparations in the June issue of the Atlantic magazine. "The consequences of 250 years of enslavement, of war upon black families and black people, were profound," says the essay's author, Ta-Nehisi Coates. No disagreement there. But the enslavers and the enslaved are long gone, and Mr. Coates presents no evidence that what currently ails the black poor will be addressed by allowing them to cash in on the exploitation of dead ancestors.

Ironically, Mr. Coates spends most of the article detailing how previous government efforts to narrow black-white social and economic disparities—from Reconstruction to the New Deal to the Great Society—have largely failed. Yet he concludes that what's needed is more of the same—namely, another grand wealth-redistribution scheme in the guise of slavery reparations.

This year we are marking the 50th anniversary of the 1964 Civil Rights Act, and next year we will do the same for the Voting Rights Act. These landmark pieces of legislation, signed by President Lyndon Johnson, outlawed racial discrimination and ensured the ability of blacks to register and vote. But Johnson wasn't satisfied with these victories. He was convinced that government could and should do more.

"You do not take a person who, for years, has been hobbled by chains and liberate him, bring him up to the starting line of a race and then say, 'you are free to compete with all the others,' and still justly believe that you have been completely fair," Johnson said in 1965 at the start of his Great Society. The "next and the more profound stage of the battle for civil rights" was "not just freedom but opportunity" and "not just equality as a right and a theory but equality as a fact and equality as a result."

Like Johnson, liberals today remain convinced that government has the ability to produce equal outcomes, though history repeatedly shows that intergroup differences are the norm rather than the exception. The reality is that social policy, however well intentioned, has its limits, and when those limits aren't acknowledged the results can be counterproductive.

Nicholas Eberstadt of the American Enterprise Institute reports that since 1964 "the U.S. welfare state has devoted considerable resources to assuring or improving the public's living standards—something like $20 trillion in inflation-adjusted dollars through antipoverty programs alone." Notwithstanding this government largess, the official poverty rate in 2012 was higher than it was in 1966, and the black-white poverty gap has widened over the past decade. The racial disparity in incarceration rates is also larger today than it was in 1960. Black unemployment, on average, has been twice as high as white unemployment for five decades.

One reason that Uncle Sam's altruism has not been successful is because the government is attempting to do for blacks what blacks can only do for themselves. Until those in the black underclass develop the work habits, behaviors and attitudes that proved necessary for other groups to rise, they will continue to struggle. And to the extent that a social program, however well-meaning, interferes with a group's self-development, it does more harm than good.

Upward mobility depends on work and family. Government policies that undermine the work ethic—open-ended welfare benefits, for example—help keep poor people poor. Why study hard in school if you will be held to a lower academic standard? Why change antisocial behavior when people are willing to reward it, make excuses for it, or even change the law to accommodate it, as in the Justice Department's current push for shorter sentences for convicted drug dealers? 

The Obama presidency is evidence that blacks have progressed politically. But if the rise of other racial and ethnic groups is any indication, black social and economic problems are less about politics than about culture. The persistently high black jobless rate is more a consequence of unemployability than of discrimination in hiring. The black-white learning gap stems from a dearth of education choices for ghetto children, not biased tests or a shortage of education funding. And although black civil rights leaders cite a supposedly racist criminal justice system to explain why our prisons house so many black men, it has been obvious for decades that the real culprit is errant black behavior too often celebrated in black culture.

Black leaders today are convinced that they are helping blacks by helping the party of bigger government, Democrats. But a previous generation of black elites understood the perils of such reasoning. 

"Everybody has asked the question, and they learned to ask it early of the abolitionists, 'What should we do with the Negro ?' " said Frederick Douglass in 1865. "I have had but one answer from the beginning. Do nothing with us! Your doing with us has already played the mischief with us. Do nothing with us! If the apples will not remain on the tree of their own strength, if they are worm-eaten at the core, if they are early ripe and disposed to fall, let them fall. . . . And if the Negro cannot stand on his own legs, let him fall also. All I ask is, give him a chance to stand on his own legs!"

Douglass was stressing the primacy of black self-development, a not uncommon sentiment among prominent blacks in the decades following the Civil War. Booker T. Washington, who like Douglass was born a slave, said that "It is important and right that all privileges of the law be ours, but it is vastly more important that we be prepared for the exercise of these privileges."

Douglass and Washington didn't play down the need for the government to secure equal rights for blacks, and both were optimistic that they would get equal rights eventually. But both men also understood the limits of government benevolence. Blacks would have to ready themselves to meet the far bigger challenge of being in a position to take advantage of opportunities, once equal rights had been secured. The history of 1960s liberal social policies is largely a history of ignoring this wisdom.

Mr. Riley is a member of The Wall Street Journal editorial board and author of "Please Stop Helping Us: How Liberals Make It Harder for Blacks to Succeed," just released by Encounter.

George Gilder - Unleash the Mind +

Unleash the Mind

By: George Gilder
National Review
August 13, 2012


Link to Original Article

America’s wealth is not an inventory of goods; it is an organic entity, a fragile pulsing fabric of ideas, expectations, loyalties, moral commitments, visions. To vivisect it for redistribution is to kill it. As President Mitterand’s French technocrats discovered in the 1980s, and President Obama’s quixotic ecocrats are discovering today, government managers of complex systems of wealth soon find they are administering an industrial corpse, a socialized Solyndra.

In the mindscapes of capitalism, all riches must finally fall into the gap between thoughts and things. Governed by mind but caught in matter, assets must afford an income stream that is expected to continue. The expectation may shift as swiftly as thought, but things, alas, are all too solid and slow to change. The kaleidoscope of shifting valuations, flashing gains and losses as it is turned in the hands of time, in the grip of “news,” distributes and redistributes the wealth of the world far more quickly and surely than any scheme of the state.

The belief that wealth consists not chiefly in ideas, attitudes, moral codes, and mental disciplines but in definable static things that can be seized and redistributed—that is the materialist superstition. It stultified the works of Marx and other prophets of violence and envy. It betrays every person who seeks to redistribute wealth by coercion. It balks every socialist revolutionary who imagines that by seizing the so-called means of production he can capture the crucial capital of an economy. It baffles nearly every conglomerateur who believes he can safely enter new industries by buying rather than by learning them. It confounds every bureaucrat of science who imagines he can buy or steal the fruits of research and development.

Even if it wished to, the government could not capture America’s wealth from its one percent of the one percent. As Marxist despots and tribal socialists from Cuba to Greece have discovered to their huge disappointment, governments can neither create wealth nor effectively redistribute it. They can only expropriate and watch it dissipate. If we continue to harass, overtax, and oppressively regulate entrepreneurs, our liberal politicians will be shocked and horrified to discover how swiftly the physical tokens of the means of production dissolve into so much corroded wire, abandoned batteries, scrap metal, and wasteland rot.

Capitalism is the supreme expression of human creativity and freedom, an economy of mind overcoming the constraints of material power. It is not simply a practical success, a “worst of all systems except for the rest of them,” a faute de mieux compromise redeemed by charities and regulators and proverbially “saved by the New Deal.” It is dynamic, a force that pushes human enterprise down spirals of declining costs and greater abundance. The cost of capturing technology is mastery of the underlying science. The means of production of entrepreneurs are not land, labor, or capital but minds and hearts. Enduring are only the contributions of mind and morality.

All progress comes from the creative minority. Under capitalism, wealth is less a stock of goods than a flow of ideas, the defining characteristic of which is surprise. Creativity is the foundation of wealth. As Princeton economist Albert Hirschman has put it, “creativity always comes as a surprise to us.” If it were not surprising, we could plan it, and socialism would work. Schumpeter propounded the basic rule when he declared capitalism “a form of change” that “never can be stationary.” The landscape of capitalism may seem solid and settled and something that can be captured; but capitalism is really a noosphere, a mindscape, as empty in proportion to the nuggets at its nucleus as the expanse of the solar system in relation to the sun.

Entrepreneurship is the launching of surprises. The process of wealth creation is offensive to levelers and planners because it yields mountains of new wealth in ways that could not possibly be planned. But unpredictability is fundamental to free human enterprise. It defies every econometric model and socialist scheme. It makes no sense to most professors, who attain their positions by the systematic acquisition of credentials pleasing to the establishment above them. Creativity cannot be planned because it is defined by information measured as surprise. Leading entrepreneurs—from Sam Walton to Larry Page to Mark Zuckerberg—did not ascend a hierarchy; they created a new one. They did not climb to the top of anything. They were pushed to the top by their own success. They did not capture the pinnacle; they became it.

In the Schumpeterian mindscape of capitalism, entrepreneurial owners are less captors than captives of their wealth. If they try to take it or exploit it, it will tend to evaporate. Bill Gates, for example, already a paper decibillionaire, commented during his entrepreneurial heyday that he was “tied to the mast of Microsoft.”

If Gates had tried to leave or substantially cash out at any time during the early decades, the company would have plummeted in value more rapidly than he could have harvested the funds. When the founders of Bain and Co. attempted to cash out in 1991, taking $200 million with them, Mitt Romney was faced with the likely bankruptcy of the firm. He had to confront a Goldman Sachs effort to close it down. As the once-lucrative company collapsed, Romney cut the share of his departing partners in half in order to save his company and his reputation in business. David Rockefeller devoted a lifetime of sixty-hour weeks to his own enterprises. Younger members of the family wanted to get at the wealth and forced the sale of Rockefeller Center to Mitsubishi. But they will discover that they can keep the wealth only to the extent that they serve it, and thereby serve others, rather than themselves.

Most of America’s leading entrepreneurs are bound to the masts of their fortunes. They are allowed to keep their wealth only as long as they invest it in others. In a real sense, they can keep only what they give away. It has been given to others in the form of investments. It is embodied in a vast web of enterprises that retains its worth only through constant work and sacrifice. Capitalism is a system that begins not with taking but with giving to others.

  

For this reason, wealth is nearly as difficult to maintain as it is to create. Owners are besieged on all sides by aspiring spenders—debauchers of wealth and purveyors of poverty in the name of charity, idealism, envy, or social change. Bureaucrats, politicians, bishops, raiders, robbers, short-sellers, and business writers all think they can invest money better than its owners. In fact, of all the people on the face of the globe, it is usually only the legal owners of businesses who know enough about the sources of their wealth to maintain it. It is usually they who have the clearest interest in building wealth for others rather than spending it on themselves.

Nevertheless, even while dismissing the charge that the “rich” indulge in a carnival of greed, we have not fully explained the reasons for their great wealth, much less justified it. Some apologists will say that Mark Zuckerberg’s Facebook billions, for example, are a reward for his brilliant entrepreneurship and software coding, while penury is just the outcome of alcoholism and improvidence. The saintly social worker and even the president of the United States, for that matter, earn modest salaries by comparison, and they are neither improvident nor necessarily less brilliant than Mark.

But that whole line of argumentation is beside the point. The distributions of capitalism make sense, but not because of the virtue or greed of entrepreneurs, nor as inevitable by-products of the invisible hand. The reason capitalism works is that the creators of wealth are granted the right and the burden of reinvesting it. They join the knowledge acquired in building wealth with the power to perpetuate and expand it.

Entrepreneurial knowledge has little to do with certified expertise, advanced degrees, or the learning of establishment schools. The fashionably educated and cultivated spurn the kind of fanatically focused learning commanded by the innovators. Wealth all too often comes from doing what other people consider insufferably boring or unendurably hard.

The treacherous intricacies of software languages or garbage routes, the mechanics of frying and freezing potatoes, the mazes of high-yield bonds and low-collateral companies, the murky lore of petroleum leases or housing deeds or Far Eastern electronics supplies, the multiple scientific disciplines entailed by fracking for natural gas or contriving the ultimate search engine—all are considered tedious and trivial by the established powers.

Most people consider themselves above the gritty and relentless details of life that allow the creation of great wealth. They leave it to the experts. But in general you join the one percent of the one percent not by leaving it to the experts but by creating new expertise, not by knowing what the experts know but by learning what they think is beneath them.

The competitive pursuit of knowledge is not a dog-eat-dog Darwinian struggle. In capitalism, the winners do not eat the losers but teach them how to win through the spread of information. Far from being a zero-sum game, where the successes of some come at the expense of others, free economies climb spirals of mutual gain and learning. Far from being a system of greed, capitalism depends on a golden rule of enterprise: The good fortune of others is also your own. Applied to both domestic and international trade and commerce, this golden rule is the moral center of the system. Not only does capitalism excel all other systems in the creation of wealth and transcendence of poverty, it also favors and empowers a moral order.

Richard Posner, now an eminent judge, was one of my inspirational sources for the idea that capitalism is inherently favorable to altruism. “The market economy,” he wrote, “fosters empathy and benevolence, yet without destroying individuality,” because for an individual to prosper in a market economy he must understand and appeal to the needs and wants of others. As a result of my seizing the verboten flag of “altruism” from his hands and waving it at the head of the supply-side parade, Ayn Rand devoted much of her last public lecture to a case against my ideas. I hugely admired Rand, who flung her moral defense of capitalism in the face of Soviet terror and socialist intellectual tyranny. But toward Christian altruism she indulged an implacable hostility, stemming in part from her own simplistic atheism and in part from her disdain for the leveler babble of sanctimonious clerics.

Most of the world, then as now, was engaged in one of its periodic revulsions against capitalist
“greed” and waste. Lester Thurow of MIT was proclaiming a “zero sum society,” where henceforth any gains for the rich must be extracted from the poor and middle classes. William Sloane Coffin, the formidable Yale chaplain, was inveighing against capitalist orgies of greed and environmental devastation. Howard Zinn and Noam Chomsky were denouncing Western capitalism for displacing American Indians and condemning Israelis for displacing Palestinians (rather than praising the settlers in both countries for reclaiming and redeeming wastelands and hugely enlarging the populations they could support). Edward Said was conducting his Columbia classes (fatefully introducing the works of Frantz Fanon to future president Barack Obama) on Western psychological colonization and hegemonic evisceration of the entire Third World.

Here we go again, deep in the New Millennium. The themes of exploitation and zero-sum equality continue to preoccupy the media. Congress remains enthralled with static accounting rules that assume tax-rate reductions will not alter economic behavior. In this model, the only way to expand tax receipts is to raise rates on the “rich.”

For their part, some conservative leaders imply that our national crisis is merely some budgeting blunder remediable through a balanced-budget amendment to the Constitution. The focus on budgetary issues becoming acute a decade or so from now implies that liberal policies are not already infecting our economy with a multiple sclerosis of tax and regulatory curbs, destroying jobs and families with webs of rules and pettifoggery, skewed social policies, and litigation. A preoccupation with national liabilities diverts attention from the massive political devaluation of the nation’s assets.

“Starve the beast” is the new mantra of conservative economics. “Shrink the budget” is the new mandate for prosperity. “Keep what you earn” is seen as the moral foundation for lower taxes. All these formulations bear some truth, but they focus on accounting tautologies rather than on the dynamics of creative enterprise. Conservatives still urge lower taxes, but many no longer know how to defend them, distracted as they are by an economics of austerity that obsesses on the downside of deficits in a way inimical to the supply-side vision of abundance and unpredictability.

The first edition of Wealth and Poverty (1981)  sprang from a period of essentially balanced budgets and trade surplus under Jimmy Carter and helped launch a siege of deficits and trade gaps under Ronald Reagan. During the Carter years, the government was mostly in the black while everyone else was in the red. Under Reagan, though, the trillion-dollar rise in government liabilities was dwarfed by a $17 trillion expansion of private-sector assets thanks to creative entrepreneurs. Over the decades following the Reagan revolution, government liabilities continued to expand, but once again private-sector asset values increased, by 60 trillion dollars more. It is only over the past ten years or so that liabilities have been rising faster than assets, which have crashed. Improvements in policy and tax rates can instantly upgrade the value of all the assets in the economy without any physical change in their material composition.

Opposed to the reality of capitalism as a function of knowledge and creativity is the behavioral dream—implicitly accepted even among some supply-siders—of a “Skinner box” economics of stimulus and response, wherein lower tax rates impart a stimulus of reward for more work and risk-taking and thereby yield more revenues for the government. The implication is that the mere desire for wealth has something to do with the ability to create it. But as Steve Forbes observes in How Capitalism Will Save Us, explaining capitalism by self-interest or greed is like explaining airplane crashes by the force of gravity. Greed and gravity are general and ubiquitous in regimes of all sorts and therefore irrelevant to the extraordinary results of capitalist creativity.

Taxes do yield massively increased revenues as the rates are reduced. A successful economy, however, is driven less by the sharp edges of incentives than by the unimpeded flow of information and its conversion into knowledge and wealth through falsifiable experiments of enterprise. Increasing revenues come not from a mere scheme of carrots and sticks but from the development and application of productive knowledge.

The equation of lower tax rates and higher revenues remains perhaps the most thoroughly documented and widely denied proposition in the history of economic thought. It has been abandoned even by some former supply-siders who ignore the global tax revolution beyond our shores while obsessively analyzing ambiguous data from the Clinton era.

At a generation’s distance, however, it is clear to me that we, the original supply-siders, bear some responsibility for the failure to persuade. All these years later, it has become evident to me that we were not radical enough—that we allowed our own arguments to be ensnared by the mechanical economics of Adam Smith and his heirs. Even Arthur Laffer’s original and brilliant sketch, after all, functioned almost entirely in the realm of rational expectations, stimulus and response applied to poor passive Homo economicus. Let him keep more of the fruits of his labor and he will labor harder, we proclaimed; increase the after-tax rewards of investment and more investment there will be.

By focusing on incentives rather than on information and creativity, free-market economists have encouraged the idea that capitalism is based on greed, although, as we have seen, entrepreneurs cannot in general revel in their wealth, because most of it is not liquid. Greed, in fact, only motivates capitalists to seek government guarantees and subsidies that denature and stultify the works of entrepreneurs. The financial crash of 2007 and beyond reflected orgies of greed among crony capitalists awash in government guarantees and subsidies, sitting on their Fannies and Freddies, feeding in the troughs of Treasury privileges and government insurance scams. Greed leads as by an invisible hand to an ever-growing welfare and plutocratic state—to socialism and near-fascist corporatism (see Jonah Goldberg’s Liberal Fascism for details).

The secret of supply-side economics is not merely to incentivize people to work harder or accept more risk in order to gain a greater reward. That could be done under socialism. The reason lower marginal tax rates produce more revenues than higher ones is that the lower rates release the creativity of employers, allowing them to garner more information. They can move more rapidly down the curves of learning and experience. They can learn more because they command more capital to use in their trade. With more capital they can attract more highly skilled labor from around the globe. They reduce time and effort devoted to avoiding taxes and interpreting regulations and consulting lawyers and accountants. With fewer resources diverted to government bureaucracy, they can conduct more undetermined experiments, test more falsifiable hypotheses, try more business plans, generate more productive knowledge.

It is not the enlargement of incentives and rewards that generates growth and progress, profits and capital gains for the entrepreneur and revenues for the government, but the combination of new knowledge with the power to test and extend it. Volatile and shifting ideas, not heavy and entrenched establishments, constitute the source of wealth. There is no bureaucratic net or tax web that can catch the fleeting thoughts of Eric Schmitt of Google, Jules Urbach of Otoy, or Chris Cooper of Seldon Technologies.

The key issue in economics is not aligning incentives with some putative public good but aligning power with knowledge. Business investments bring both a financial and an epistemic yield. Capitalism catalytically joins the two. Capitalist economies grow because they award wealth to its creators, who have already proven that they can increase it. Their proof was always the service of others rather than themselves.

As Peter Drucker has written, within companies there are no profit centers, only cost centers. Whether a particular cost yields a profit is determined voluntarily by customers and investors. Capitalism feeds on information that is outside of the company itself and therefore under the control of others. Only an altruistic orientation can tap the outside incandescence of information and learning that determine the success of capitalism’s gifts.

Mr. Gilder is the author of fifteen books, venture investor, and a co-founder of the Discovery Institute.

 see also: The Essential George Gilder Explains How Economies Work.