Skip Piketty; Read Easterly

Here’s all you need to know about the most popular, least read, business book of the year. In his ponderous, repetitive, tedious, tortuous, tendentious, repetitive tome on the evils of inequality, Capital in the Twenty-First Century, Thomas Piketty, in the process of advocating for redistributive policies that—as I predicted two years ago—have failed spectacularly in his native France, unwittingly makes a great case for privatizing Social Security in the United States.

Piketty claims rising inequality is inevitable because investors’ return on capital exceeds the growth rate of GDP and workers’ incomes. If he is right, the best way to reduce inequality is to encourage workers to invest in stocks and bonds. Social Security prevents this by confiscating wages that workers could have saved and invested on their own account, creating middle class wealth that can be passed on to their kids. If you believe Piketty, reforming Social Security to permit this process of middle class fortune building is a no-brainer. In addition to reforming Social Security, Republicans should propose other reforms–such as creating 401K plans for all adults—that encourage workers to invest in stocks and bonds.

Easterly’s The Tyranny of Experts – a Brilliant, Iconoclastic Assault on Econo-Conventional Wisdom

William Easterly, an economics professor at NYU, is an expert on international development who takes a properly jaundiced view of his own profession. Years of seeing pompous, know-it-all development “planners” like Bill Gates and Jeffrey Sachs formulate costly schemes that fail to reduce poverty have given him a fresh perspective on the whole topic of economic growth, in both developed and developing nations. Here are a few insights:

  • The World Bank, IMF, Ford Foundation, etc. practice “authoritarian development.” Planners routinely ignore the rights of individuals in favor of the state. Easterly prefers “spontaneous cooperation” of individuals via markets, as opposed to “conscious design” by out-of-touch experts.
  • Top-down planning fails because planners simply do not have the necessary knowledge of on-the-ground local conditions, nor do they have an incentive to maximize the utility of the local population. For example, Thomas Jefferson thought the Erie Canal, the most successful infrastructure project in American history, was a really, really dumb idea; it had to be planned and financed by local politicians in the State of New York. One thinks immediately of Obamacare, where Ivy League professors and Congressional staffers force small businesses to use insurance policies the planners refuse to use for their own families. (Ivy League health insurance plans all brag about the “choice” and “flexibility” they offer participants; Jane and Joe Doe get no such choice.)
  • Planners place excessive emphasis on the performance of nations, when in fact patterns of development are regional—the countries in Latin America or sub-Saharan Africa tend to share similar problems.
  • Markets are “associations of problem solvers” using the price system to equilibrate the utility of consumers and the income of producers. Bureaucracies (think the Veterans Administration or the IRS) don’t answer to consumers; they answer to other bureaucrats and so have no incentive to maximize the utility of consumers.
  • One of the best ways to reduce poverty is immigration—whether from West Virginia to Ohio, or from Haiti to Florida. Plus, successful immigrants often send money back home to relatives, alleviating poverty in their home country. Liberal pundits (such as Alan Blinder in a recent WSJ column) routinely ignore how rising immigration necessarily increased “inequality” in the U.S. since 1980, even as it alleviated the poverty of immigrants and their relatives in the home country to whom remittances were sent. By the way, measured inequality in the U.S. is lower than it appears precisely because immigrants send money home, making the American residents appear poorer than they actually are.
  • Breakthrough technologies, such as the horse-drawn cart or the railroad, are often constructed from prior technological innovations. (In the case of the railroad, rails were originally used in mines, and steam engines were first used in factories and steamboats.)
  • Clueless development experts often operate with a “blank slate” – they have zero knowledge of the historical circumstances of particular countries. You might find an expert on Asia writing a detailed plan for how Brazil should be developed. We are now seeing the results of “blank slate” thinking in foreign policy; I doubt folks in the Bush Administration understood the significance of the Sunni / Shia schism before they invaded Iraq.
  • Here’s an insight from one of Easterly’s colleagues in the anti “development” fraternity, Dambisa Moyo: Development aid tends to undermine the political and economic power of a nation’s indigenous business community, because corrupt rulers can take a cut of the aid dollars while ignoring the needs of business community. Result: the rulers get rich but the economy remains under-developed. I suspect something similar has happened in the U.S. African-American community, where politicians and “community leaders” spending government money have more influence than black entrepreneurs and professionals.

Copyright Thomas Doerflinger 2014. All Rights Reserved.

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About tomdoerflinger

Thomas Doerflinger, PhD is a prominent observer of American capitalism – past, present and future. http://www.wallstreetandkstreet.com/?page_id=8
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