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How Piketty's Bombshell Book Blows Up Libertarian Fantasies

Sorry, Ayn Rand. Your fiction has been exposed as, well, fiction.
 
 
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Libertarians have always been flummoxed by inequality, tending either to deny that it’s a problem or pretend that the invisible hand of the market will wave a magic wand to cure it. Then everybody gets properly rewarded for what he or she does with brains and effort, and things are peachy keen.

Except that they aren’t, as exhaustively demonstrated by French economist Thomas Piketty, whose 700-page treatise on the long-term trends in inequality, Capital In the 21st Century, has blown up libertarian fantasies one by one.

To understand the libertarian view of inequality, let’s turn to Milton Friedman, one of America's most famous and influential makers of free market mythology. Friedman decreed that economic policy should focus on freedom, and not equality.

If we could do that, he promised, we’d not only get freedom and efficiency, but more equality as a natural byproduct. Libertarians who took the lessons from his books, like Capitalism and Freedom (1962) and Free to Choose (1980), bought into the notion that capitalism naturally led to less inequality.

Basically, the lessons boiled down to this: Some degree of inequality is both unavoidable and desirable in a free market, and income inequality in the U.S. isn’t very pronounced, anyway. Libertarians starting with these ideas tend to reject any government intervention meant to decrease inequality, claiming that such plans make people lazy and that they don’t work, anyway. Things like progressive income taxes, minimum wage laws and social safety nets make most libertarians very unhappy.

Uncle Milty put it like this:

“A society that puts equality—in the sense of equality of outcome—ahead of freedom will end up with neither equality nor freedom.… On the other hand, a society that puts freedom first will, as a happy by-product, end up with both greater freedom and greater equality.”

Well, that turns out to be spectacularly, jaw-droppingly, head-scratchingly wrong. The U.S. is now a stunningly unequal society, with wealth piling up at the top so fast that an entire movement, Occupy Wall Street, sprung up to decry it with the catchphrase “We are the 99%.”

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 U.S. 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 WWII. 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.

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As you’ll recall, if you watched the movie Titanic, the U.S. had a class of rentiers (rich people who live off property and investments) in the early part of the 20th century who hailed from places like Boston, New York and Philadelphia. They were just as nasty and rapacious as their European counterparts, only there weren’t quite so many of them and their wealth was not quite as concentrated (the Southern rentiers had been wiped out by the Civil War). 

The fortunes of these rentiers were not shock-proof: If you remember Hockney, the baddie in James Cameron’s film, he survives the Titanic but not the Great Crash of ’29, when he loses his money and offs himself. The Great Depression got rid of some of the extreme wealth concentration in America, and later the wealthy got hit with substantial tax shocks imposed by the federal government in the 1930s and '40s. The American rentier class wasn’t really vaporized the way it was in Europe, where the effects of the two world wars were much more pronounced, but it took a hit. That opened up the playing field and gave people more of a chance to rise on the rungs of the economic ladder through talent and work.