Rich with Ideas
For the betterment of mankind, it's the thought that counts.
A casual glance at Bourgeois Equality could convey a mistaken impression that the book is for coffee-table display, for show rather than serious perusal. The volume is large (three pounds, 768 pages) and its dust jacket features a colorful painting by the 16th-century Flemish artist Joachim Beuckelaer—all familiar characteristics of coffee-table fare.
In fact, however, Bourgeois Equality is a serious work that encompasses two serious books within it: The title is a tongue-in-cheek counter to the profusion of current rhetoric about inequality. McCloskey advances, instead, the proposition that bourgeois commerce has often more effectively nurtured equality—think of start-ups, family businesses, mom-and-pop groceries, home-based ventures—than have repetitive exhortations about the evils of inequality.
The first book-within-a-book propounds the theory that ideas—not capital, institutions, innovation, R&D, tax policy, monetary policy, or regulatory policy—are the propelling force behind economic and societal growth. All of the enumerated elements are instruments, means, or mechanisms consequent to the fundamental enabling ideas that underlie them. The second “contained” book is aimed directly at Thomas Piketty's bestseller, Capital in the Twenty-First Century (2013).
Before assessing these component books—shortcomings as well as virtues—a word about their polymathic author. Deirdre McCloskey is an emerita professor of economics and economic history, as well as of communications and English, at the University of Illinois at Chicago. And her book spans a wide range of social science literature—quantitative and qualitative, economics and political science, history and sociology. The prose is laced with humor that eases the journey through innumerable sources, data, references, and citations. (Bourgeois Equality has 52 pages of tightly packed footnotes and 47 pages of cited sources.) Here is an example of the humor: “Laziness from being rich too early is a powerful equalizer....[M]ost rich children don't bother to suffer through, say, a Ph.D. in economics.” And here is another:
The nastiness of the Great Recession of 2008 and its slow-growth aftermath in the rich countries was hailed on the far left as being (at long last) the actual last crisis of capitalism. [But] the Great Recession, nasty though it was, had a half dozen equally nasty cousins...since 1785.
The first, and larger, of the “contained” books seeks to explain what the author refers to as the Great Enrichment, a phenomenon and a period she describes as follows:
The whole world's average income, for example, now approaches that of present-day Brazil, or of the United States in 1941. Since 1800, in other words, and especially since 1900, the goods and services available to the average human being, and the scope for a full human life, have startlingly expanded.
And what explains the phenomenon? McCloskey invokes ideas—more specifically, two sorts of ideas—as the underlying (or overarching?) motivating forces: first, ideas about specific “betterment” inventions, whether machines or methods, hardware or software, analog or digital; and second, ideas about the freedom of individuals (“commoners”) to engage in business, commerce, and trade to test and ensure that the betterments are indeed better.
In McCloskey's view, this bourgeois idea is what makes the process work, and not brick-by-brick accumulation of capital, or development of banks and financial institutions, or universities, or labor unions, or fiscal or monetary policies, or other contrivances advocated in the literature. These are derivative consequences of the primary generative ideas.
Apart from the merits of McCloskey's argument, there is a neatly tautological aspect to it, what the late psychoanalyst Nathan Leites termed “self-sealers.” No matter what a Nobel laureate, political leader, or journalist may adduce from the data or case studies as a competing explanation for the global Great Enrichment, McCloskey can claim that the idea of (or for) that causal mechanism precedes the mechanism.
Turning to the second related (but separate) “contained” book: Its central theme is rebutting Piketty's contention that inequality, here and in Europe, is severe and, inevitably, will become worse. McCloskey focuses on the difference between absolute poverty and poverty relative to the income of others.
For example, suppose in a country, and in a specified time period, the lower fifth of income recipients earn $1,000 while the top fifth garner $5,000. The ratio between the two is 0.2. Now suppose, at a later period, the bottom fifth take in $2,000 but the top fifth's take is $16,000. The ratio between the two has shrunk to one-eighth, or 0.125. So absolute poverty has decreased: The income of the poor has doubled. But relative to the income of the upper fifth, the lower fifth are poorer because the high earners' income has more than tripled. Relative poverty has increased and inequality has risen.
McCloskey doesn't applaud the inequality, but she celebrates the betterment of the poor.
McCloskey doesn't applaud the inequality, but she celebrates the betterment of the poor. Indeed, her direct rebuttal of Piketty addresses what might be called Piketty's Theorem, the reductionist proposition that income inequality has increased and is bound to continue to do so because the rate of interest (r) exceeds, and will continue to exceed, the rate of income growth (g). The beneficiaries of the higher rate are mainly the holders of inherited wealth, the already-rich.
McCloskey's criticism of Piketty's Theorem is multifaceted and complicated. She points out that if the excess of (r) over (g) really predominated, we'd expect the resulting effect on inequality to be consistent and continuous. Instead, what the data show is that, during and preceding the 21st century, periods of greater and lesser income inequality have fluctuated, more or less irrespective of interest rates and growth rates. Moreover, in the period from 2008 through 2016, GDP growth in the United States was indeed slow but interest rates were held at their all-time lows due to the aggressive monetary policies pursued by the Federal Reserve. So, interest rates were even lower than GDP growth, but income inequality rose while interest rates remained at minimal levels—not something that's congruent with Piketty's algebra.
Conclusion: Piketty's Theorem just doesn't square with reality.
Charles Wolf Jr. holds the distinguished chair in international economics at the nonprofit, nonpartisan RAND Corporation and is a senior research fellow at the Hoover Institution. He is the author of Puzzles, Paradoxes, Controversies, and the Global Economy (2015).
This commentary originally appeared on The Weekly Standard on September 30, 2016. Commentary gives RAND researchers a platform to convey insights based on their professional expertise and often on their peer-reviewed research and analysis.