Ellsworth Toohey Lives

In Ayn Rand’s novel The Fountainhead, Dominque Francon and Ellsworth Toohey are in a high rise apartment, looking out at the evening lights of New York City. Toohey speaks:

Look at it. A sublime achievement, isn’t it? A heroic achievement. Think of the thousands who worked to create it and of the millions who profit by it. And it is said that but for the spirit of a dozen men, here and there down the ages, but for a dozen men — less, perhaps — none of this would have been possible. And that might be true. If so, there are — again — two possible attitudes to take. We can say that these twelve were great benefactors, that we are all fed by the overflow of the magnificent wealth of their spirit, and that we are glad to accept it in gratitude and brotherhood. Or, we can say that by the splendour of their achievement which we can neither equal nor keep, these twelve have shown us what we are, that we do not want the free gifts of their grandeur, that a cave by an oozing swamp and a fire of sticks rubbed together are preferable to skyscrapers and neon lights — if the cave and the sticks are the limit of our own creative capacities. Of the two attitudes, Dominique, which would you call the truly humanitarian one? Because, you see, I’m a humanitarian.

Until recently, I thought that the latter attitude had become completely disreputable. The idea that we should tear down the good just because they are good or the successful just because they are successful is bad economics, bad ethics and an embarrassingly childish form of envy.

But it has recently re-emerged in large part because of Thomas Piketty’s new book, Capital in the Twenty First Century. Piketty argues that we have been experiencing and will continue to experience growing inequality of income and wealth. To prevent this he argues for punitive taxes on high incomes and a worldwide tax on wealth.

Piketty’s book has created near ecstasy on the political left, where it is taken as an unquestioned article of faith that inequality of income and wealth is bad. See gushing praise from Paul Krugman here and gloating over the right’s ineffectual response to the book here. Among other economists, Robert Solo praises the book in The New Republic (“Piketty is Right”), but Greg Mankiw has a more measured response.

What is more interesting than the book itself is that the left now seems free to say things they previously would have been embarrassed to say.

Taxing the rich just for the spite of it. Until now, the main focus of reducing inequality has been to lift up those at the bottom. The new focus is on pushing down those at the top. As Daniel Shuchman explains:

Mr. Piketty urges an 80% tax rate on incomes starting at “$500,000 or $1 million.” This is not to raise money for education or to increase unemployment benefits. Quite the contrary, he does not expect such a tax to bring in much revenue, because its purpose is simply “to put an end to such incomes.”

Matt Yglesias is more than willing to pile on:

…[I]n an era of surging inequality…Maybe at least some taxes should be really high. Maybe even really really high. So high as to [be] useless for revenue-raising purposes — but powerful for achieving other ends.

What he has in mind is a 90% tax on large inheritances and a 90% tax on incomes in excess of $10 million a year. Not to raise revenue mind you, but to discourage their existence in the first place:

Very high taxation of inheritances would mean fewer big inheritances, not more tax revenue. Very high taxation of labor income would mean fewer huge compensation packages, not more revenue. Precisely as Laffer pointed out decades ago, imposing a 90 percent tax rate on something is not really a way to tax it at all — it’s a way to make sure it doesn’t happen.

As I wrote previously, people may care about inequality, but it isn’t obvious that income inequality is what they care most about. Would you rather have more income or more social status? Or a higher IQ? Or better looks? Or a longer life expectancy?

If we applied the Piketty/Yglesias approach to reducing inequality along these other dimensions, we would try to reduce the life expectancy of women in order to make it more equal to men — or at least we would tax women so that they couldn’t enjoy their longer lives as much. In order to create more equality of intelligence, we would try to lower the average IQ of the Mensa Society — or, again, at least tax them so they would get less enjoyment from their higher IQs.

If these ideas appeal to you, you are not in the mainstream.

Does it matter who owns capital? For those of us who haven’t bought into the religion, it’s fair to ask: what’s wrong with inequality? There are lots of economic studies showing that capital is good. More capital means higher wages and higher incomes for everybody. There are plenty of studies showing it’s important for capital to be owned. Unowned capital can lead to the tragedy of the commons. But I don’t know of any studies that show who owns capital is important.

So why does Piketty think the distribution of ownership of capital matters?  Apparently he views the world through the lens of Victorian novels. As a review in The New Yorker explains:

Eventually, Piketty says, we could see the reemergence of a world familiar to nineteenth-century Europeans; he cites the novels of Austen and Balzac. In this “patrimonial society,” a small group of wealthy rentiers lives lavishly on the fruits of its inherited wealth, and the rest struggle to keep up. For the United States, in particular, this would be a cruel and ironic fate. “The egalitarian pioneer ideal has faded into oblivion,” Piketty writes, “and the New World may be on the verge of becoming the Old Europe of the twenty-first century’s globalized economy.”

This is a strange way for an economist to talk. If you have to make your case by pointing to novels is your bottom line based on fiction? The likelihood of our living in an Upstairs/Downstairs future world is somewhere between zero and none. Capital in the modern world is invested in the capital market. Since the way it is invested is usually determined by investment managers, what happens to capital is largely independent of who owns it.

Someone who takes an active role in the investment of his own capital is Warren Buffet. The last time I checked, Forbes said he was worth almost $70 billion. Is anyone seriously going to argue that society would be much worse off if Buffet were worth $100 billion? Or that we would all be better off if he were worth only $10 billion?

Among other major holders of capital, we would have to count Harvard University, the Catholic Church, the Ford Foundation and public and private sector pension funds. Would any of us be better off or worse off if we gave Harvard’s wealth to Buffet? Or Buffet’s wealth to a pension fund? Or if the Catholic Church’s wealth were given to some other nonprofit organization? Ok, Buffett would care. Harvard would care. The beneficiaries of the pension fund would care. The Church would care. But there is no reason for anyone else to care.

What we should be concerned about is any proposal to redistribute capital to those who are likely to consume it rather than hold it. For example, if we redistribute income from investors to Food Stamp recipients, we are likely to get more consumption and less saving and investment. That would mean a smaller capital stock and that would make all the rest of us worse off. Similarly, because politicians are present oriented rather than future oriented, any proposal to tax wealth and give the government discretion over what to do with the new revenue would probably lead to a smaller capital stock and more entitlement spending.

Inequality of wealth vs. inequality of consumption.As it turns out Warren Buffet agrees with Thomas Piketty to a point. Buffett thinks he should pay higher taxes. But as I pointed out before:

You and I should not be indifferent about the taxes Warren Buffett pays. How he is taxed and how much he pays affects our own economic future…

Consider that when Warren Buffett is consuming, he’s benefiting himself. When he’s saving and investing, he’s benefiting you and me. Every time Buffett forgoes personal consumption (a pricey dinner, a larger house, a huge yacht) and puts his money in the capital market instead, he’s doing an enormous favor for everyone else. A larger capital stock means higher productivity and that means everyone can have more income for the same amount of work.

So it’s in our self-interest to have very low taxes on Buffett’s capital. In fact, capital taxes should be zero. That means no capital gains tax, no tax on dividends and profits — so long as the income is recycled back into the capital market. We should instead tax Buffett’s consumption. Tax him on what he takes out of the system, not what he puts into it. Tax him when he is benefiting himself, not when he is benefiting you and me.

Scott Sumner is about the only commenter who has made this point with respect to the Piketty book. His is the best commentary I have seen.

Why it is foolish to tax capital.The idea that if you want to help workers, the best tax rate on capital is zero has been long known in the economics profession. Garrett Jones explains:

Market-oriented economies that learn to live with inequality will reap the rewards: More domestic capital for workers to use on their jobs, more foreign capital flowing in to a country perceived as a safe investment, and a political and cultural system that can spend its time on topics other than the 1 percent. Market-oriented economies that instead follow Piketty’s preferred path — taxing capital heavily, preferably through international consortiums so the taxes are harder to evade — will end up with less domestic and foreign capital, fewer lenders willing to fund new housing projects, fewer new office buildings, and a cultural system focused on who has more and who has less.

…The Boston University economist Christophe Chamley and the Stanford economist Kenneth Judd came up independently with what we might call the Chamley-Judd Redistribution Impossibility Theorem: Any tax on capital is a bad idea in the long run, and that the overwhelming effect of a capital tax is to lower wages. A capital tax is such a bad idea that even if workers and capitalists really were two entirely separate groups of people — if workers could only eat their wages and capitalists just lived off of their interest like a bunch of trust-funders — it would still be impossible to permanently tax capitalists, hand the tax revenues to workers, and make the workers better off.

In defense of inequality. Would you rather live beside the millionaire next door or someone who has the same amount of wealth that you have? Some time back I wrote this:

I know I would much rather live around billionaires than people who earn what I do. People with a lot of money create business opportunities, employment opportunities and even social opportunities that I would otherwise miss out on. If there were no rich people around, I would never have been able to sit in a box at Cowboy Stadium, or sail in a yacht, or drive an Aston Martin. In fact, if there were no rich people, there wouldn’t be any sports boxes or yachts or Aston Martins.

For almost any skill or attribute, think of a bell curve distribution. Most people are near the middle of the distribution, while the most accomplished 2% are way out on the right tail. Now think about how your life is richer and more fulfilling and enjoyable because of the 2%. If you could take a magic wand and remove the 2% who are the best football payers, how enjoyable would Sunday’s TV football games be? Would you watch at all if the players on the field were all of “average” ability?

…The most important inequality, however, is intelligence. What we loosely call “genius” is a person…in the top 2% of the IQ distribution. Have you ever thought what would have happened if some freak accident of nature prevented the top 2% from ever being born. If nature’s distribution of IQ were only slightly narrower than the one we experience, we never would have had a Euclid, a Galileo, a Newton or an Einstein. In the business world, we never would have had a Thomas Edison, a Steve Jobs or a Bill Gates.

Not everyone with a high IQ is a high flyer. In fact the vast majority are not. But all the great scientific discoveries and all the great innovations came from people out there on the right tail. Without them, life for you and me today would be little different than it was in medieval times.

So the next time you say a prayer of thanks be sure to thank whatever gods may be for the fact that we are not all the same.

The psychology of the Ellsworth Toohey types. When I first read The Fountainhead, I wondered whether there really were such people as Ellsworth Toohey. What accident of evolution could have produced such an aberration?

It seems there are the producers and those who comment on the producers. David Brooks explains how the latter think:

You [the commenters] go to fund-raisers or school functions and there are always hedge fund managers and private equity people around. You get more attention than them at parties, but your whole apartment could fit in their dining room. You struggle with tuition, but their kids go off on ski weekends. You wait in line at the post office, but they have staff to do it for them.

You see firsthand the explosion of wealth at the tippy-top. It really doesn’t help that you have to spend your days kissing up to the oligarchs and their foundations to finance your research, exhibition or favorite cause.

The situation is ripe for the sort of class conflict the French sociologist Pierre Bourdieu used to describe: pitting those who are rich in cultural capital against those who are rich in financial capital.

Brooks goes on to tie this phenomenon to Piketty:

The reaction to Piketty is an amazing cultural phenomenon. But it says more about class rivalry within the educated classes than it does about how to really expand opportunity.

Postscript. Even though the Piketty book is being treated by almost everyone as a breakthrough in understanding income and wealth inequality, it turns out that a decade ago another paper was able to explain the distribution of income and wealth in the United States quite well without any reference to the theoretical constructs proposed by Piketty. Furthermore this paper was completely ignored by Piketty and has been ignored by just about everyone else who has been commenting on his book.

For the reference, I thank Tyler Cowen, who writes:

So much of the current Piketty debate is simply forgetting that…science exists and has already offered a wide range of insights on these topics, as well as having rendered some of the more extreme claims unlikely.

Comments (25)

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  1. Joe S. says:

    Long, but good.

  2. Ken says:

    I think Krugman is Toohey.

  3. Perry says:

    I’m sure the promise of equality is how Lenin convinced the proletariat to overthrow the bourgeois
    in early 20th century Russia. Well, first off, not everyone was equal after the revolution of course. And we see how well that turned out after a century.

  4. Yancey Ward says:

    Rand understood what few truly get- material progress is initiated by an amazingly small fraction of the human population who pull the rest of us along.

    One of Piketty’s theses is that the inequality causes a backlash that is destructive. What he misses, however, is that he and his policy prescriptions are part and parcel of the destructive backlash.

    There is a lot of rentseeking at the nexus of government and business that we would do well as a society to trim back, but increasing the power of the government isn’t the way to do this.

  5. Tom N. says:

    When I read about works such as Thomas Piketty’s, it does drive me back to the cause and effect fictionally evidenced in Atlas Shrugged.

    After all, aren’t the French the polestar as a dynamic econony and productivity in the workplace? LOL. There are always going to be those who choose egality over equality of opportunity. They are usually the ones who are least suited to compete and with the weakest constitution for competition.

    Saw a quote this morning that kinda sizes it up: In nature there are neither rewards nor punishments — there are consequences.”
    — Robert Ingersoll,
    American orator and political leader

  6. Buster says:

    The U.S. Constitution guarantees all U.S. citizens the right to life, liberty and the pursuit of happiness (so long as liberty and happiness doesn’t involve amassing substantial wealth).

    Moreover, recent Marxist economists (many from non-American origins) have re-defined liberty and happiness as the freedom to live in a country without wealthy people.

    • Frank J says:

      But they are making a compelling argument, persuading us to believe that the root of all our issues is those wealthy individuals. We should believe them; they have our best interest in mind.

      • Studebaker says:

        Indeed, the reason I cannot afford a Ferrari is because all those rich people out there are willing to cough up $200,000 to $300,000 for one. If there were fewer rich people, then maybe the demand for a Ferrari would fall such that I could afford one!

        P.S. my logic is about as ill-conceived as Piketty’s logic.

  7. Paul G says:

    If everybody earned the same amount of money, why would someone work harder than others? The problem with our society is that because some have more than others, many assume they are taking advantage of the system. We have forgotten that the American Dream is to seek the improvement of your status quo. If we want to limit the upside, why would we give more than the bare minimum?

    • Erik says:

      You are assuming all wealth comes from labor. Ayn Rand (who was a welfare queen)is happy you think that way. The wealthy use capital to gain their income, not their labor. Labor and Capital should be taxed at the same rate and we should reinstate the death tax to some degree. hording is not a viable economic use for capital as capital must pass hand to hand to have the greatest effect.

      • mike hunt says:

        Who made this guy god? Why is it his business what anybody does with his own property? If he wants property let him work for it. Let him trade his talents for rewards, or let him beg, but to allow him to presume that he has the right to dispose of other people’s property is the height of arrogance. Such people should be punished by mutilation to discourage them from such activity.

  8. Richard Bensinger says:

    I have no problem with CEO salaries and the fortunes amassed by those who found and develop great companies. I have a great problem with inherited wealth. Rockefeller type families with charitable instincts are rare birds. More likely we inheritors doling out money to allow them to maintain and amass more wealth. These inherited wealthy are not “job creators, etc.”. I think T. Roosevelt noted this in his time and we are headed for serious problems when people of ignoble instincts and vast wealth become the dominant players in the political fabric.

    • Yancey Ward says:

      Rockefeller type families with charitable instincts are rare birds.

      Actually, they are the rule, not the exception. Pretty much every peer Rockefeller had endowed their own charitable trusts.

      And, let’s suppose that you were even correct- not a single heir of Rockefeller would have had a higher relative wealth than John himself regardless of how he disposed of his wealth unless he had given it solely to a single heir. People left and right make a similar mistake here- assuming the heirs of a wealthy scion = the scion himself.

      • Studebaker says:

        I would argue that in many cases it’s preferable for the super wealthy to leave huge fortunes to family members — to squander — rather than leaving it to a foundation. I often see foundations depart from the founder’s mission and become advocates for higher taxation and socialism. Look at the Robert Wood Johnson foundation or Kaiser Family Foundation. Those two are the result of entrepreneurs. Yet, they are also two of the biggest advocates for a government take-over in the health care market.

    • Gitmoray says:

      I have to agree with Richard here. While great individuals occasionally beget even greater ones (think Phillip and Alexander the Great) the norm tends to be to beget hordes of Paris Hiltons.

      I am very conservative when it comes to income taxation and capital taxation, but turn decidedly liberal when it comes to inheritance taxation. Lots of foundations end up being controlled by the less than capable offspring of the great men and women founders…perhaps that is why we get the Kaisers.

      I doubt very much that those raped by the great robber barons felt better knowing that their pains would ultimately lead to much nicer opera houses and ballet companies.

  9. John Seater says:

    Piketty is one of those economists who is a disgrace to his profession. Why do I say that? Because he almost certainly is lying about the nature of income inequality dynamics. Lying, not merely mistaken.

    Piketty argues that because the interest rate r is larger than the growth rate g, we necessarily will see the wealth of capital owners growing faster than the economy in general and thus faster than the wealth of the average Joe. That statement is embarrassingly wrong. If I were still teaching rather than retired, I would use it on a 1st-year exam question by quoting and then requiring the students to “Discuss.” Any answer other than a dismissal accompanied by a simple explanation would get a low grade. Let me explain briefly.

    According to virtually every theory of economic growth, r is bigger than g. Yet in those same theories, we see “balanced growth,” which means that everybody’s incomes grow at the same rate. Indeed, the simplest theory of growth that has well-defined prices (including the interest rate) is called the Cass Model. Every grad student is taught that model. Piketty knows it well, I guarantee you. According to the Cass Model, in the economy’s steady state (the stable solution to which the economy tends over time), r exceeds g and everyone’s income grows at the same rate: g. The more sophisticated models of “endogenous” growth theory have the same property.

    Any competent 1st-year grad student know all that. Piketty *knows* it, too, I guarantee you. He ignores it because he prefers to sensationalize his presentation to support his prior opinions about economic policy. In short, he’s lying.

    Even Paul Krugman, in his very positive review of the book in the NY Times, had to mention (as quietly as possible) that Piketty got that part of the story wrong. Krugman then brushed aside the logical conclusion to be drawn from that truth because Krugman also likes to put his political preferences ahead of his economics, and his political preferences generally line up with Piketty’s.

    Dismissing Piketty’s ridiculous argument about the implication of r bigger than g is critical because that argument is necessary for him to draw the political conclusions he does. (Note that I said necessary, not sufficient.) Without it, he has no argument. Inequality will not march ever upward. Poof. There goes the lynchpin of his argument.

    Right now, inequality is increasing. It has been doing so for 30 or 40 years. Before that, it fell for about 60 or 70 years. Furthermore, its behavior has been the same all over the world, in all developed countries, for the last 100 years. That tells us that something fundamental has been driving the long swings in inequality. Almost certainly that underlying force is technical change that alters the relative value of various skills. If that’s what it is, then who is to say whether the old levels of inequality were better or worse than the current levels? Indeed, if labor markets are competitive (and they mostly are in the developed world), then workers are paid their marginal product, which is exactly what they should be paid. If that is true, you have to work a lot harder than Piketty does to justify government policies that change the market allocation of income.

    Piketty isn’t interested in any of that. All he is interested in doing is misrepresenting the economics of what is going on so he can further his political agenda. I hold such economists in contempt.

    • Hernan A says:

      Great comment. Pointing out the economic flaws of their arguments is the only way to be counter their rant. The problem is that they are so drunk in power (given by the media they don’t have any actual power) that they will defy any argument and insult all those who oppose them. They have taken away the scholarly of their arguments and have made it a child’s discussion.

  10. Gonzalo M says:

    In one of his most important pieces, Marx stated that for communism to exist a society had to undergo long periods of capitalism. He stated that capitalism will make workers realize the unfairness of the system and will seek to make some changes through a revolution. Ideologists claim that the Soviet Union failed because they never endured capitalism. Some of these economists, who reviewed and supported Piketty’s book, believe Marx’s claims and are leading our society to a Social-Market system which they believe best suits America. They believe capitalism cannot be supported much longer, thus they are trying to change the system before a revolution breaks.

  11. Rituparna Basu says:

    Great post, John. I think what motivates egalitarians like Piketty, Obama, etc. is not just envy–Obama has wealth, power, and everything else…what does he have to be envious of? These guys are, as you illustrated, nihilists who want to destroy for the sake of destruction.

  12. John Fembup says:

    Leftist economist to his son: See that rich guy driving his fancy car? Someday my son you will take it away from him.

    Conservative economist to his son: See that rich guy driving his car? Someday my son you will drive a car like that, too.

  13. Michael Neibel says:

    It is hatred of the good for being the good, the desire to cut down all tall poppies because they are tall. It’s what the progressive movement has always been about and now dominates our universities, the Democratic Party and a large chunk of the Republican Party. It is a hatred that free trade is not sacrifice, sacrifice being held as moral and free trade as immoral i.e. self interested, therefore selfish therefore evil. This last is the notion that needs to be challenged.

  14. Piedfifer says:

    And the 2% would have been able to accomplish very little without the Two: Aristotle and Locke from whom the One- Ayn Rand herself- has advanced their philosophical achievements into a single integrated, hierachical philosophy which she calls Objectivism. Piketty and such are the last graspings of the dying hatred called altruism. Piketty dies the instant I reject self-sacrifice.

  15. Dennis McCuistion says:

    Great article, John.

  16. Rod Nichols says:

    Thanks. I love the commentary.

  17. Gordon Johnson says:

    John — Very well done! Particularly your point that taxing consumption is more “fair” than taxing income received, whether from labor or capital. But gov’t deciding what’s saving and investment and what’s consumption is still fertile ground for lawyers and accountants.
    We also should note that much “inequality” is self-induced. Those who regularly save even a small part of their income will become richer than those who regularly spend more than they earn, i.e., those who accumulate high credit card payments to support a lifestyle they cannot afford on their own will become less and less equal to those who save.