Marx vs. Ayn Rand

A new book by French economist Thomas Piketty, "Capital in the Twenty-First Century", has created a sensation and incited renewed debate over Ayn Rand's philosophy of radical capitalism, which is the prevailing economic philosophy in the U.S. Radical capitalism rejects any sort of social or economic engineering by government, preferring to leave such matters entirely in the hands of private corporations. In Ayn Rand's most famous work, the novel "Atlas Shrugged", the wealthy, the "job creators", are depicted as so overburdened by government that they "drop out", resulting in economic collapse.  Piketty's view, on the other hand, is essentially Marxist, which holds that unregulated capitalism leads inevitably to extreme wealth inequality, social instability and war.

Both Marxism and radical capitalism seem to be gross oversimplifications. In "The Communist Manifesto", Marx and Engels argue convincingly that unrestrained capitalism cannot but lead to universal misery, then conclude that communism is the only solution. Communism of course is not the only solution, and was in fact very nearly the worst possible solution, as the utter failure of that grand experiment in state ownership of industry has proven very convincingly. But radical capitalism seems to suffer from the inverse error--the assumption that the uber-wealthy are so important to the world economy and so over-sensitive that the only solution is to coddle and pander to them to prevent them from running away and leaving the rest of us to suffer the consequences of our supposed laziness and stupidity.

The first question that comes to mind is this: run away to where? The wealthy depend for their happiness as much as the rest of us on the efficient functioning of the world as a whole. There is simply no castle on a mountaintop anywhere on the planet that a wealthy person can escape to and live in blissful isolation from the consequences of economic apocalypse. But consider the other question: what would happen if the wealthy did stop managing their assets? In the U.S., the wealthiest 1% (some 3 million people) own about one-third of all U.S. assets. Mostly they are passive investors, leaving others to make the day-to-day management decisions. Let's say that they all got fed up, sold those assets and went to live on mountaintops. Would the economy really collapse? Of course not. It's giving the wealthy much too much credit to say that global disaster would be the inevitable consequence of losing their supposed business acumen. They don't make many business decisions themselves. They have professionals who decide what to invest in. So to accept Ayn Rand's view of radical capitalism, you have to believe that the global economy depends on the top 1% making good decisions about which investment advisers to trust. The idea that these people are in some sense "running a business" is a romantic myth. Almost none of them run businesses in the sense that most of us understand it--deciding what to do and how to do it. Who does run the business of America? The answer: most of the rest of us.

The real crime of rising wealth inequality, though, is that it's inefficient, which means that there is less total wealth than there should be. This is a double whammy for the rest of us. Not only are the wealthy taking more and more, but the pie is actually getting smaller, leaving ever smaller crumbs for everyone else. A rising tide would indeed lift all boats, but as a result of rising inequality, the tide is going out.

Wealth inequality leads to inefficient allocation of capital because the wealthy are irrationally conservative when deciding how to invest. If you have a billion dollars, rationally speaking you ought to be willing to invest some of that in risky ventures, because if things go badly and you end up with just 500 million left, you can probably still get by OK on that. In fact, the wealthy are very much more afraid of losing their money than most of us and so are extremely conservative about investing it. (The one exception I can think of is Elon Musk, but he's very much the exception.) The riskiest investments, which are also the ones that produce the greatest growth and employment, are mostly made by people with quite ordinary levels of wealth, people who are not yet wealthy but want to be. Because growing income inequality squeezes out these upper-middle-class investors, that powerful engine of growth gets stalled. Add to that the fact that, relatively speaking, the wealthy save more and spend less of their wealth than the rest of us, and the result is low rates of growth.

Don't drink the Kool-Aid. Whether you are in the top 1%, the bottom 1%, or anywhere in between, extreme wealth inequality is hazardous to your health.