Why Capitalism is Worth Defending against Marx Madness

By Mark Skousen

Saturday, May 17, 2014

“Capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine democratic societies.”

–Thomas Piketty, “Capital in the 21st Century” (2014)

The Economist magazine rightly calls French professor Thomas Piketty the new Marx, although a watered-down version. Piketty’s bestseller (rated #1 on Amazon) is a thick volume with the same title as Karl Marx’s 1867 magnum opus, “Kapital.” The publisher, Harvard University Press, appropriately designed the book cover in red, the color of the socialist workers party.

Piketty cites Karl Marx more than any other economist, even more than Keynes. The professor barely mentions Adam Smith. Instead of the modern scientific name “economics,” he prefers the old term “political economy,” a favorite of radical professors.

And most importantly, Piketty’s focus is on the distribution of income and capital, not the creation of wealth. He’s not so much concerned with the size of the economic pie, but how it’s cut up.

His main thesis is that inequality grows under capitalism, that unfettered free markets make the rich richer and the poor poorer — a standard Marxist position — and that the only solution is to tax the dirty, filthy, stickin’ rich with highly progressive taxes on their income and wealth.

I don’t want to be picky, but Piketty often ignores data that contradicts his theory of growing inequality. For instance, he selectively chooses members of the Forbes magazine billionaires’ list to show that wealth always grows automatically faster than the average income earner. He repeatedly refers to the growing fortunes of Bill Gates in the United States and Liliane Bettencourt, heiress of L’Oreal, the cosmetics firm. “Once a fortune is established,” he claims, “the capital grows according to a dynamic of its own, and it can continue to grow at a rapid pace for decades simply because of its size.”

Come again?

I guess he hasn’t heard of the dozens of millionaires and billionaires who lost their fortunes, like the Vanderbilts, or to use a recent example, Eike Batista, the Brazilian businessman who just two years ago was the seventh-wealthiest man in the world, worth $30 billion, and now is practically bankrupt.

Piketty conveniently ignores the fact that most high-performing mutual funds eventually stop beating the market and even underperform. Take a look at the Forbes “Honor Roll” of outstanding mutual funds. Today’s list is almost entirely different from the list of 15 or 20 years ago. In our business, we call it “reversion to the mean,” and it happens all the time.

The professor seems to have forgotten a major theme of Marx, and later Joseph Schumpeter, that capitalism is a dynamic model of creative destruction. Today’s winners are not necessarily next year’s winners. IBM used to dominate the computer business; now Apple does. Citibank used to be the country’s largest bank. Now it is Chase. Sears Roebuck used to be the largest retail store. Now it is Wal-Mart. GM used to be the biggest car manufacturer. Now it is Toyota. And the Rockefellers used to be the wealthiest family. Now it is the Walton family, who a generation ago were dirt poor.

Piketty is no communist and is certainly not as radical as Marx in his predictions or policy recommendations. Many call Piketty “Marx Lite.” He doesn’t advocate abolishing money and the traditional family, confiscating all private property or nationalizing all of the industries. But he’s plenty radical in his soak-the-rich schemes, a punitive 80% tax on incomes above $500,000 or so, and a progressive global tax on capital with an annual levy between 0.1% and 10% on the greatest fortunes.

Why assess a tax of even 0.1% on wealth? It destroys a fundamental sacred right of mankind — financial privacy and the right to be left alone. An income tax is bad enough. But a wealth tax is worse. A wealth tax is Big Brother at his worst. Such a tax would require every citizen to list all his or her assets. The intent is to prevent any secret stash of gold and silver coins, diamonds, artwork or bearer bonds. Suddenly, the privacy guaranteed to Americans by the Fourth Amendment would be denied and produce an illegal and underground black market.

Equally important, a wealth tax is a tax on capital — the key to economic growth. The worst crime of Piketty’s vulgar capitalism is his failure to understand the positive role of capital in advancing the standard of living in the world. As Andrew Carnegie simply said, “Capitalism is about turning luxuries into necessities.” The latest example is the smartphone. It’s the great equalizer. Virtually everyone rich and poor has one, thanks to the ingenuity of entrepreneurs like Steve Jobs. This is democratic capitalism at its best. Income inequality may be growing, but when it comes to goods and services, inequality may be shrinking.

To create new products and services and raise economic performance, a nation need capital, lots of it. Contrary to Piketty’s claim, it is good that capital grows faster than income, because it means people are increasing their savings rate. The only time capital declines is during war and depression, when capital is destroyed.

Piketty blames the increase in inequality on low growth rates. He says return on capital tends to be higher than the economic growth rate. Good, let’s increase economic growth with tax cuts, sensible deregulation, better training/education, productivity and opening trade.

Even Keynes understood the value of capital investment and the need to keep it growing. In his “Economic Consequences of the Peace,” Keynes compared capital to a cake that should never be eaten. “The virtue of the cake was that it was never to be consumed, neither by you nor by your children after you.”

If the capital “cake” is the source of economic growth and a higher standard of living, we want to do everything we can to encourage capital accumulation. Make the cake bigger, and there will be plenty to go around for everyone. This is why increasing corporate profits is good — it means more money to pay workers. Studies show that companies with higher profit margins tend to pay their workers more. Remember the Henry Ford $5-a-day story of 1914? (In honor of its centennial, I’m telling this story again at FreedomFest this July 9.)

If anything, we should reduce taxes on capital gains, interest and dividends, and encourage people to save more and thus increase the pool of available capital and entrepreneurial activity. A progressive tax on high-income earners is a tax on capital. An inheritance tax is a tax on capital. A tax on interest, dividends and capital gains is a tax on capital. By over-taxing capital, estates and the income of our wealthiest people, including heirs to fortunes, we are selling our country and our nation short. You can never have too much capital.

What country has advanced the most since World War II? Hong Kong, which has no tax on interest, dividends or capital.

The great Scottish economist Adam Smith once said, “Little else is required to carry a state from the lowest barbarism to the highest degree of opulence but peace, easy taxes and a tolerable administration of justice.” Moreover, his system of easy taxes and natural liberty would reduce inequality and result in “universal opulence, which extends itself to the lowest ranks of the people.”

My hope is that Professor Piketty will see the error of his ways and write a sequel called “The Wealth of Nations for the 21st Century,” which will quote Adam Smith instead of Karl Marx. Perhaps he will quote this passage: “To prohibit a great people… from making all that they can of every part of their own produce, or from employing their stock and industry in the way that they judge most advantageous to themselves, is a manifest violation of the most sacred rights of mankind.”