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Cassidy on Piketty on Income Inequality

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Here’s a letter to the New Yorker:

John Cassidy’s review of Thomas Piketty’s Capital in the Twenty-first Century [2] is insufficiently critical (“Forces of Divergence [3],” March 31).  Here are two examples.

First, by repeatedly describing the incomes of the rich as being “taken” and “took,” Mr. Cassidy misleadingly suggests that income is a fixed-size pie.  Why not, instead, describe incomes more accurately, as being “produced” and “earned”?  (It’s true that some high incomes are gotten illegitimately, but surely no society can be as prosperous as ours if the typical high-income earner in our midst is an economic predator rather than a producer.)

Second and relatedly, Mr. Cassidy accepts Mr. Piketty’s explanation that a major cause of today’s rising incomes of the rich is corporate-oligarchs’ alleged habit of simply giving each other high salaries and lucrative stock options.  But if such payments serve no purpose other than to perpetuate the oligarchy, it’s very difficult to explain the rising market value of the capital that Mr. Piketty believes to play such a central role in driving increasing inequality.  A more likely explanation for patterns of executive compensation is that these salaries, bonuses, and stock options are designed, generally successfully, to incent corporate managers to improve their firms’ efficiencies and to keep their firms innovative.  One result, in turn, is a growing economic pie and greater prosperity for nearly everyone.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030​