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photo Pierre Whalon

“To help the poor, study economics”: income inequality, justice, and economic theory

Part 2

In Part 1, I described the unstinting growth of income inequality, its injustice and contribution to climate threats. Is there a economic theory that can offer real, practical advice to leaders and other people to make a definitive difference, both financially in terms of lifting people out of poverty and in terms of climate change?

There are arguments that economics is purely mechanistic, and moral considerations do not enter, indeed, should not enter into the conduct of business. Milton Friedman posited that the only purpose of any business is to maximize its profits, for example. Moral considerations are mere “ethical customs.” [1]

Much more recently, the popular French philosopher André Comte-Sponville presented a philosophical argument to buttress this perspective, in his bestseller entitled Is Capitalism Moral?[2] He considers that a capitalist economy belongs in the scientific and technical fields of human endeavor. Therefore, it cannot be moral or immoral, but amoral — exempt from the moral spheres of human activity.

An argument to the contrary was championed by Frederick Hayek, whose contention that a free market is a moral necessity, and government interference in its functioning is immoral. Reviving the theories of Frédéric Bastiat, a French 19th-century economist, Hayek’s best-known book, The Road to Serfdom[3], is the credo of the political economy of Reaganomics and other programs to dismantle the welfare state.[4]

There is the radical remedy for income inequality, which would make all workers equal in income. Karl Marx himself pointed out the injustice of such an arrangement in his Critique of the Gotha Program:

However, this is not enough to measure the justice of different income levels in a given economy. The biblical materials point the way (see Part 1). But while the agrarian economy of ancient Israel continues in some parts of the world, this writer is part of a post-industrial, finance-driven economy, characterized by wild differences in income.

21st century Das Kapital

No recent work has documented the reality of constant income inequality in modern economies as convincingly as Thomas Piketty’s Le capital au XXIe siècle.[6] Relying on the power of data mining instruments, Piketty has compiled and analyzed enormous amounts of statistics principally from France, Britain, and America, dating from the 18th century to recent years. His conclusion is bleak: while income inequality is a general fact, the rate of income inequality today is greater as it has ever been in recorded history and rising. Moreover, the rate of reinvestment of capital in productive activities is lower than before, on average. Instead investors seek fresh income from rents, i.e., non-productive investments, which merely give a return. He concludes that only a global system of taxation of non-productive rent investments can avoid a global economic crash.[7]

Piketty himself does not hold out much hope that fellow economists will be of much help. As long as economists refuse to give up their “infantile passion for mathematics and speculations that are always theoretical and very often ideological, to the detriment of historical studies and joining the other social sciences,” he writes, they will continue to play with “little mathematical problems of interest only to themselves, which allows them to have an appearance of being scientific while avoiding having to give answers to the more complicated issues of the world which surrounds them.” [8]

The most recent proof of this failure is the 2008 crash, which caught most economists completely off guard. So did the 2000 “internet bubble burst”, the 1987 stock market crash and the savings and loan collapse. In fact, major macroeconomic crises historically have surprised most theorists.

The probability of a catastrophic event occurring again, perhaps through a “black swan”[9] development, should motivate all reasonable people to work to develop scientific economic tools that, if properly applied, could mitigate its effects, if not ward it off completely.

And inequality?

Besides the specter of future collapse, with the loss of incalculable numbers of lives, flora and fauna, remains the present stubborn reality of growing, severe income inequality.

There are the differentials that Marx described. Among these are access to natural resources and production, producers and consumers, and the fruits of labor, namely, revenue to producers, and of course, access to capital and credit. What Piketty has shown is that income derived from rents and income derived from production are different in their effects on an economy, not to mention their social effects. In the long run, he posits, pressing the economy for rents that further enrich a small number of wealthy people ends up destroying that economy for all.

But he does not propose an alternative other than his tax on capital, which he himself calls “utopique”.[10] Piketty’s incisive criticism of his own discipline is however one of many calls for a truly scientific economics, one that can steer humanity away from short-term injustice and long-term self-destruction, both economic and environmental.[11]

In Part 3, I will introduce a little-known macroeconomic theory by the man who taught his students that “To help the poor, study economics.” Unlike the discipline described by Piketty, whose adherents continue to create the equivalent of almanacs (predictions based upon past events), this theory is scientific. Unlike many who contest economic realities in the name of justice, this theory claims that when an economy operates correctly, it provides for all.

Go to Part 3.

[1] See “The Social Responsibility of Business is to Increase its Profits” The New York Times Magazine September 13, 1970. For more on the supposed amorality of capitalism, see also my own articles on capitalism, here and here.

[2] Le capitalisme est-il moral ? (Paris: Albin Michel, 2004).

[3] London: Routledge, 1944; Chicago: University of Chicago Press, also 1944.

[4] Bastiat’s major work, The Law, can be accessed here, in English translation.

[5] See here at paragraph 3.

[6] Paris: Seuil, 2013. English translation by Arthur Goldhammer, Capital in the 21st Century (Cambridge, MA: Harvard University Press, 2014).

[7] See commentary here.

[8] Piketty, 63. My translation.

[9] A reference to The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb, (New York: Random House, 2010). A “black swan event” is one that no one can predict, for it has never happened before. See also Antifragile: Things That Gain from Disorder, (New York: Random House, 2012), by the same author.

[10] Piketty, Le capital, 836.

[11] However, Piketty himself discounts the possibility of a science of economics. See pp. 945ff.

Written by

Bishop in charge, Convocation of Episcopal Churches in Europe, 2001–2019. French-American. Musician, composer, author, happily married.

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