I have a professor who likes to send me a lot of opinion pieces from outlets such as Huffington Post, Salon, Upworthy, and MoveOn. A recent one was from Bill Moyers’ website, originally published at Alternet, called, “How Piketty’s Bombshell Book Blows Up Libertarian Fantasies.”
The author, Lynn Parramore, really doesn’t have much to say about Picketty’s arguments, but seems to have a lot to say about how mistaken Milton Friedman (whom she calls “Uncle Milty”) and libertarians are about inequality. I’ll try to be as civil as possible when describing it, but I hope you can appreciate the difficulty considering how incredibly arrogant Ms. Parramore is, being essentially an economic illiterate and having the gall to belittle someone who won the Nobel Prize in economics. To be clear, I’m not saying that Nobel Prize winning economists are beyond question, but do we really have to treat our intellectual opponents as if we are ten years old?
I’m not sure why “fantasies” is used in the plural, as Parramore focuses exclusively on inequality, which she says libertarians either deny as a problem or pretend that the market will wave an invisible wand and cure it. Milton Friedman, she says, claims that free markets will lead to less inequality. However, all of this has been proven wrong by experience and Picketty’s book.
How did libertarians get it all so backwards? Well, as Piketty points out, people like Milton Friedman were writing at a time when inequality was indeed less pronounced in the US than it had been in previous eras. But they mistook this happy state of affairs as the magic of capitalism. Actually, it wasn’t the magic of capitalism that reduced inequality during a brief, halcyon period after the New Deal and World War II. It was the forces of various economic shocks plus policies our government put in place to respond to them that changed America from a top-heavy society in the Gilded Age to something more egalitarian in the post-war years.
One of the most frustrating things about having conversations regarding “capitalism” and “socialism” is how different people define them differently and then how they will label countries such as Denmark as socialist and the US as capitalist, even though Denmark rates higher on the Index of Economic Freedom. As Roderick Long has pointed out, these terms obfuscate understanding rather than facilitate it. Indeed, when left-libertarians claim that in a “freed market” inequality would be less, they are contrasting it to the present state of affairs where gigantic banks get bailed out, corporations are given legal privileges, saving money is discouraged through inflation, occupational licensure makes entrepreneurship for many illegal, etc.. When Parramore said that libertarians think free markets would lead to less inequality, what did she think they were comparing it to?
As Piketty notes, people like Milton Friedman, an academic economist, were doing rather well in the economy, likely sitting in the top 10 percent income level, and to them, the economy appeared to be doing just fine and rewarding talents and merits very nicely. But the Friedmans weren’t paying enough attention to how the folks on the rungs above them, particularly the 1 percent and even more so the .01 percent, were beginning to climb into the stratosphere. The people doing that climbing were mostly not academic economists or lawyers or doctors. They were managers of large firms who had begun to award themselves very prodigious salaries.
I have my doubts that Parramore has even bothered to read Friedman before criticizing him. Why, obviously, he was in good shape so he thought everyone must have been! And I’ve always been suspicious that most people who support measures such as the minimum wage have absolutely no idea how wages are determined, that they think employers simply have a pile of money from which they decide how much to pay themselves and how much to pay their employees, and thus a minimum wage will increase the proportion that goes to employees. Parramore’s last sentence seems to confirm this suspicion. Does she really think that managers simply award themselves salaries, and, if so, they just all of a sudden got greedy and decided to give themselves more? It’s reminiscent of the people who blame oil companies for being greedy when gas prices rise. Newsflash: oil companies are always greedy and always trying to charge the profit-maximizing price. Price is independent of their greed.
Wealth gathering at the top creates all sorts of problems. Some of these elites will hoard their wealth and fail to do anything productive with it. Others channel it into harmful activities like speculation, which can throw the economy out of whack. Some increase their wealth by preying on the less well-off. As inequality grows, regular people lose their purchasing power. They go into debt. The economy gets destabilized. (Piketty, and many other economists, count the increase in inequality as one of the reasons the economy blew up in 2007-’08.)
Where to begin? Maybe if Parramore had read Friedman, she would realize that he addressed this very problem of the wealthy hording their wealth and failing to do anything productive with it in Capitalism and Freedom. Part of the reason is the tax code, which encourages the wealthy to treat their wealth more conservatively than they otherwise would. As well, it’s a pretty good chance you’re talking to an economic illiterate when they regard speculation as a necessarily harmful activity “which can throw the economy out of whack.” They have no idea of the actual, useful role that speculation can play. For example, a speculator in agricultural futures can purchase wheat futures from a wheat farmer, guaranteeing the wheat farmer a certain price, no matter what the price of wheat is at harvest time. If the farmer finds this arrangement agreeable, he is benefited in that he shoulders less risk. The speculator shoulders this risk in exchange for the possibility that the price of wheat might be greater at harvest time than what he paid the farmer for it, thus giving him a gain. Of course, he might lose money, but the farmer is still benefited from the decreased risk. Parramore probably doesn’t see this as beneficial because she doesn’t understand what speculation is. Again, it’s pretty similar to when gas prices rise and news pundits blame speculators; they have no idea what they’re talking about. As for “throwing the economy out of whack,” speculation alone doesn’t do this unless fueled by artificial expansions of credit. But Parramore would have no idea about that, since she thinks Alan Greenspan unleashed the era of the free market (!).
Parramore also commits what is possibly the most basic fallacy in economics: the zero-sum fallacy. Just because someone becomes more wealthy does not cause someone else to become less wealthy. As a corollary, it is not the case that increasing inequality causes people to lose purchasing power. Furthermore, decreased purchasing power does not cause people to go into debt. It’s not as if all the people who went into large amounts of debt to buy houses prior to the crash did so because they couldn’t afford another dwelling.
Lastly, I would love to hear the theory by which inequality caused the economy to blow up (according to Don Boudreax, Picketty also thinks trade deficits contributed to the crash. My goodness, what didn’t contribute to the crash?). Extreme wealth inequality has existed throughout all of history, but the business cycle is a rather modern phenomenon. Claims like these seem to suggest that “Pickety and many other economists” have really no idea what caused the crash.
The ironic twist is this: The reason a person like the fictional John Galt would be able to rise from humble beginnings in the 1950s is because the Gilded Age rentiers lost large chunks of their wealth through the shocks of the Great Depression and the deliberate government policies that came in its wake, thus loosening their stranglehold on the economy and society. Galt is able to make his fortune precisely because he lives in a society that isn’t dominated by extreme concentrated wealth and dynasties. Yet the logical outcome of an economy in which there is no attempt made to limit the size of fortunes and promote greater equality is a place in which the most likely way John Galt can make a fortune is to marry an heiress. So it was in the Gilded Age. So it may be very soon in America.
Here again, Parramore demonstrates that she hasn’t the foggiest on how an economy works or how wealth is created. She seems to sincerely believe that one person’s gain is another person’s loss, and so there is no way for anyone to become wealthy without others becoming less wealthy.
I’m about finished, but before I let you go, I want to simply address the matter of inequality itself. As pointed out by Rothbard in Egalitarianism as a Revolt Against Nature, in current public discourse, equality is so highly touted without most people ever feeling a need to justify it in and of itself. I will give Ms. Parramore credit in that she did actually come up with a justification for desiring more wealth equality, even though it was based on a fundamental misunderstanding of economics. I would like to challenge readers of AlterNet and Bill Moyers and other progressive websites to think critically about what they are reading and also learn some economics. Don’t be like Ms. Parramore and think, “Oh, some economist wrote a book confirming my views about the world and now I’m qualified to say how dumb Milton Friedman was.”