Last Friday, Edmund Phelps ,Nobel Laureate in economics and professor at Columbia, wrote an op-ed column in the Financial Times that addresses the topic of the day since the publication of Thomas Piketty’s Capital in the Twenty-first Century–namely, inequality.
Professor Piketty’s argument (see my earlier post on Piketty) is as follows:
–empirical evidence shows (although the FT has subsequently written a front-page article alleging serious errors in Piketty’s data) that over the past fifty years the percentage of total wealth in developed countries that’s in the hands of the super-rich has increased
–this is a straightforward result of capitalism at work,
–it’s unfair, and
–the best (only?) way to fix the problem is to tax the wealthy heavily and redistribute the proceeds to the rest of us.
Professor Phelps, who got his Nobel Prize for his work on entrepreneurship, begs to differ. His points:
–strong increases in productivity, e=leading to robust economic growth, have been a hallmark of capitalism since its inception
–the innovative spirit of entrepreneurs has waned since WWII, causing the low-growth environment we’re in now–and the consequent concentration of economic gains in the hands of the wealthy. It’s harder today to become wealthy.
–this is not the result of capitalism, but of corporatism. As Phelps puts it, in the name of solidarity, security and stability, “Politicians have introduced regulation that has stifled competition; patronized interest groups through pork-barrel contracts; and lent direction to the economy through industrial policy. In the process, they have impeded those who would innovate, or reduced their incentive to try.”
–in addition, in an attempt to secure their own personal fortunes, corporate CEOs have become obsessed with short-term results, eschewing innovation in favor of immediate stock price rises. The obsession with wealth for its own sake is a sickness, which is doing grave damage to overall growth prospects.
In Phelps” view, egalitarians like Piketty have fundamentally misassessed the malady affecting mature western economies. More than that, their policies are actually causing what’s wrong. Raising tax rates on the income of entrepreneurs who are lucky enough to become very wealthy won’t restore dynamism to the US or EU economies. Quite the opposite. And increased dynamism is what the west needs to restore lost productivity growth.
Personally, I’m skeptical of analyses that boil down to following a single principle, whether it be “leave entrepreneurs alone” or “redistribute the wealth.”
I also think that in order to survive in French academics you have to end up with the kind of conclusion Piketty does–that France is the high point of modern economies and that it can only be improved by having more of the same. I also don’t have a great deal of faith that the extra taxes would end up being put to productive use. And the exodus of entrepreneurs from France since the Hollande administration took office gives a hint of what effect higher taxes will actually have.
So, although I think there are serious issues with hereditary wealth and I don’t think nineteenth-century capitalism is the way to go, I’m with Phelps on this one.