Free Money and the Defence of Wealth

The conservative counterattack against Thomas Piketty's Capital in the Twenty-First Century has predictably ranged from the ad hominem ("his work lacks integrity ... he is a careerist"), through the snippy ("a bizarre ideological screed [that] ... revives Marx"), to denials that capital accumulation is an issue ("it won't matter as much as whether and how quickly wages and living standards rise"). A better class of critique has come from those of a more libertarian bent, such as Tyler Cowen. His appearance in the uber-conservative Foreign Affairs magazine, and his choice of review title ("Capital Punishment: Why a Global Tax on Wealth Won't End Inequality"), shows that he knows his audience. Some of his misgivings are just nit-picking (summarised here), but he hones in on two important points: the persistence of capital across generations, and the spur to innovation provided by wealth.

Cowen's critique is consistent with his earlier work, such as The Great Stagnation, which sees capital accumulation as the product of technology and entrepreneurship, rather than the more traditional factors of production such as land and labour: "Friedrich Hayek and the other thinkers who belonged to the so-called Austrian School, understood that it is almost impossible to predict which factors of production will provide the most robust returns, since future economic outcomes will depend on the dynamic and essentially unforeseeable opportunities created by future entrepreneurs". Cowen is not afraid to predict greater inequality, as he did in Average is Over, but he believes that this is the unavoidable result of the increasing redundancy of most labour and the growing returns to the highly skilled, the causes of which lie in technology and related globalisation.

This makes him sceptical of the idea that capital once accumulated will stay accumulated. Old money will decline as new money comes to the fore: "Today, the Rockefeller, Carnegie, and Ford family fortunes are quite dispersed, and the benefactors of those estates hardly run the United States, or even rival Bill Gates or Warren Buffett in the financial rankings. Gates’ heirs will probably inherit billions, but in all likelihood, their fortunes will also be surpassed by those of future innovators and tycoons, most of whom will not come from millionaire families". In other words, the creative destruction of capitalism will produce churn among the elite. His frank acceptance of inequality depends on a belief in a degree of social mobility that has never existed in recorded history.

The suggestions that fortunes made in the Gilded Age have now been "dispersed" is easily disproved, notably (and amusingly) by the coincidental news that the White House has been hosting the "next generation" of the young and rich, including various Rockefellers and Hiltons, to discuss "impact investing" (the perfect mix of high rates of return, tax breaks and social kudos). The valorisation of philanthropy (and conspicuous consumption) and the whittling-away of inheritance and wealth taxes since the 1970s are of a piece. Wealth management is always first and foremost about wealth preservation. New money does arise, and it can create new elite structures and values, but old money is tenacious and absorption is the rule.

Cowen then tries a different tack by suggesting that the possession of a fortune may have some moral worth: "Piketty fears the stasis and sluggishness of the rentier, but what might appear to be static blocks of wealth have done a great deal to boost dynamic productivity ... Stocks of wealth stimulated invention by liberating creators from the immediate demands of the marketplace and allowing them to explore their fancies, enriching generations to come". It's not quite the dilletante defence, as wealth may be the sponsor of talent rather than the subsidy of amateurism, but it's not far off.

Cowen is on record as an advocate of a guaranteed income, partly in homage to the similar ideas of Milton Friedman (who saw it as a way of shrinking government and inculcating self-reliance), and partly because of the logic of his thesis of technology-induced unemployment. What he does not do is join the dots and suggest that freeing the many from wage slavery would actually stimulate far greater innovation and dynamism than indulging the fortunes of the few. Corey Robin correctly sources this hesitancy to Hayek's "theory of the wealthy and the well-born as an avant-garde of taste, as makers of new horizons of value from which the rest of humanity took its bearings". Cowen is here rehearsing an argument that originates in the reaction to the French Revolution, which is a backhanded compliment to the historical resonance of Piketty's work.

Ultimately, Cowen's critique boils down to a case against wealth taxes: "The simple fact is that large wealth taxes do not mesh well with the norms and practices required by a successful and prosperous capitalist democracy"; this despite Piketty proving that it is precisely what happened in the 1945-80 period. Cowen's practical arguments are a mixture of the fatalistic ("if capital is so mobile and dynamic that it can avoid diminishing returns, as Piketty claims, then it will probably also avoid being taxed"), the shibboleth of "crowding out" ("in the long run, taxes of that level would surely lower investments in human capital and the creation of new businesses"), and a visceral belief in the inability of the state to manage a confiscatory tax system without inefficiency and corruption. You can imagine the readers of Foreign Affairs nodding sagely.

If Piketty's proposal for a global wealth tax is "utopian", not least because it depends on a politically unacceptable levelling-down, then a carefully controlled levelling-up would make more sense, particularly if you wish to defend accumulated capital. On the right, the idea of a "basic income" quickly morphs into a "minimum income to supplement the earnings of the poor up to a given level", with the added advantage that it shrinks the state by allowing the abolition of the bureaucracy of welfare. In other words, the same mechanism that could eradicate poverty can be used to entrench it.

The groundwork for a form of guaranteed income has been laid for some years now, in the guise of working tax credits and the normalisation of in-work benefits and zero-hour contracts, not to mention the raising of the tax-free allowance. You can even see economically illiterate nonsense such as "jobs protection" and scares about "benefit tourism" as ideological preparation for a "citizens' rights" agenda (as a Roman citizen, I demand my bread and circuses). I suspect the centre-left will continue with the archaic notion of a jobs guarantee, but the right is likely to push for a guaranteed income sooner or later. Though they perhaps lack the wit to make it a selling point, UKIP have flirted with a non means-tested "basic cash benefit" for low earners and the unemployed. Don't be surprised if the Tories steal their clothes.