Piketty Misses the Mark: Inequality Isn’t the Problem, Poverty Is

EspañolEconomist Thomas Piketty’s book Capital in the Twenty-First Century has been getting a lot of attention lately. It focuses on income inequality and policies he believes governments should pursue to solve the issue.

Capital in the Twenty-First Century

Piketty’s main thesis is exemplified in the equation r > g, meaning that the rate of return on capital outpaces economic growth. In plain English, people who control and own capital investments earn more than overall growth in the economy, creating massive amounts of income inequality.

Despite Piketty’s findings, however, many economists still contend that alleviating poverty should be a primary policy concern, not inequality. After all, when people see a multi-millionaire living next door to a multi-billionaire, they usually don’t feel a sense of disgust and outcry for the poor millionaire. They don’t expect or demand the billionaire to pay money to the millionaire so they can be more equal. That would be ludicrous. It doesn’t matter if the billionaire has five, 10, or a 100 times the wealth of the millionaire. What matters is that both individuals are secure, healthy, and make enough to bring their families comfort and happiness.

Thus, inequality is not an issue if all parties have a standard of living and sufficient means to survive and prosper. In this manner, redistributionists like Piketty confuse the problem of poverty with inequality.

In this regard, free-market capitalism has dramatically increased the standard of living of society’s poorest individuals. Ironically, the very system that so many decry as abusing and taking advantage of the poor is helping them more than any government program ever has or ever could.

Thanks to a relatively more capitalist economy, the United States’ poorest citizens have a higher standard of living than the world’s top 1 percent enjoyed just 60 years ago. The fact is that the poor today in the United States are still better off than the majority of the rest of humanity.

Thomas Piketty
Thomas Piketty. (Paris School of Economics)

If we truly care about the poor and want to increase their standards of living and happiness, we need to allow genuine capitalism to flourish. That will provide the poor with opportunities to gain new jobs and experience, and to build their own businesses to help lift them out of poverty with dignity. Piketty’s proposal of stealing from the rich to give to the poor does not give the latter dignity or long-term help, only a short term bandage.

Piketty makes flawed assumptions as well. The most notable is that wealthy capital investors — perhaps due to lineage or privilege — automatically make large returns on investment that outpace economic growth. He ignores the fact that being able to invest and earn a return on that investment is a skill. It’s a balance of risk, mathematics, and a good sense of judgement.

There is no barrier to entry to hinder capital investments. Anyone with access to a phone or internet can participate on the stock market and be able to take advantage of a plethora of financial tools and opportunities.

In fact, there isn’t even an educational barrier anymore. Programs like Buffets Books and Khan Academy offer free and effective financial education to anyone and everyone who wants to learn about finance and investing. Individuals don’t need a spare million dollars to get involved in capital investing. With the low barrier of entry to investing, it’s easier than ever in history for the poor to invest what small amount of savings they might have, and to turn that into larger savings — much larger than if they kept their limited savings in a bank account.

The real issue in life is not financial inequality but financial fairness — found in an open and dynamic economy. Make no mistake, a society cannot have fairness and equality, simply because the latter negates the former. Fairness and equality might sound similar, but they are near opposites. US Americans should not be eager to steal from one class of citizens and give to another, but instead empower the poor with opportunity to get out of poverty.

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