Economy & Business

A Peruvian Economist Challenges the Socialist Consensus on Inequality

(Siphiwe Sibeko/Reuters)
Hernando de Soto Polar has cast doubts on the economic conclusions and radical solutions pushed by Thomas Piketty and other progressive wonks.

Socialism is an oversimplification of a problem and an overestimation of the state’s capacity to correct it. Yet its popularity seems inextinguishable.

The Economist has spoken of “millennial socialists” who are “fizzing with ideas” and hope to “put them into practice, whether under President Bernie Sanders or Prime Minister Jeremy Corbyn.” The ideas in question should by now be familiar to those who’ve been paying attention to politics for the last few years:

First, [millennial socialists] want vastly more government spending to provide, among other things, free universal health care, a much more generous social safety net and a “Green New Deal” to slash carbon-dioxide emissions. Second, many argue for looser monetary policy, to reduce the cost of funding these plans.

The third plank of their thinking is the most radical. The underlying idea is that capitalism does not just produce poverty and inequality (though it does), but that, by forcing people to compete with each other, it also robs them of dignity and freedom.

It is certainly true that such activists take a “radical” view of capitalist systems across the globe. It is also true that poverty is a problem such systems have long striven to address, for obvious reasons: A society whose members do not have enough to function or flourish is a society in trouble. But the existential economic debate that has accompanied the current resurgence of socialism is generally framed in terms of inequality, not scarcity — and when it comes to inequality, the facts may well not be on the socialists’ side.

The catalyst for the current debate about inequality was the widely celebrated 2013 book Capital in the Twenty-First Century, by the French economist Thomas Piketty. Piketty’s best-seller examined wealth and income inequality in Europe and the U.S. since 1700. It argued that unequal distribution of wealth is a “mechanical” feature of capitalism and predicted that inequality would only continue to rise, leading to inevitable misery, violence, and war. Other progressive researchers built on Piketty’s findings. The World Inequality Lab, for instance, has argued that the gap between the world’s richest and poorest citizens has significantly widened over the past decade.

Unfortunately for Piketty and his acolytes, research conducted in developing countries by other economists has highlighted the flaws in their assumptions and proposed solutions. The Peruvian economist Hernando de Soto Polar, the president of the Lima-based Institute for Liberty and Democracy, mounted a strong early challenge to Piketty’s basic factual assumptions and apocalyptic conclusion in a much-discussed 2015 article. Piketty has suggested his pronouncements were based on centuries of global economic trends. But reliable historic data on income and wealth are hard to come by in the developing and former Soviet-bloc countries that account for roughly 90 percent of the world’s population. De Soto criticized Piketty for extrapolating European indicators onto developing countries in an apparent effort to paper over this problem. The results, he argued, had been misleading, because in such countries people often produce and hold their capital informally, preventing it from being recorded in official statistics.

Unlike Piketty, de Soto has lots of experience conducting economic research on the ground in the developing world. ILD has conducted research in countries where misery, violence, and war are rampant. For example, in 2004, an ILD team went door to door in Egypt collecting income and wealth data. It discovered that almost 22.5 million workers in Egypt earned not only $20 billion in salary and $18 billion in returns on their unrecorded capital, and that Egyptian workers owned an estimated $360 billion in unrecorded real estate. According to de Soto, Piketty, looking only at official and extrapolated statistics, had missed all of this.

A more recent article, in the latest edition of The Economist, outlines new research that further challenges the assumptions underlying Piketty’s work. “A recent working paper by Gerald Auten and David Splinter, economists at the Treasury and Congress’s Joint Committee on Taxation, respectively, reaches a striking new conclusion,” the article says. “It finds that, after adjusting for taxes and transfers, the income share of America’s top 1 percent has barely changed since the 1960s.” Later on, the editors warn of “enormous variation in the long-term growth of middle incomes” and sensibly suggest that policymakers “proceed cautiously” when handling “a problem that is only partially understood.”

That’s wise advice. And while it may swim against the tide of socialist activists urging a radical transformation of the global capitalist order, it may also better comport with the desires of those the socialists claim to want to help. In his rebuttal to Piketty, De Soto, citing ILD research on the Middle East and North Africa, concluded that recent uprisings in those regions were not directed against capital but in the service of demands for more of it. De Soto cites the self-immolation of Tunisian citizen Mohamed Bouazizi, which set off the Arab Spring in 2010, as the quintessential example of these pro-market rebellions. Bouazizi was not an unemployed laborer as many European commentators claimed; he was a business owner whose grievance was that he had been banned from trading by corrupt officials. ILD interviewed other self-immolators who’d survived. All had been driven to attempt suicide by the expropriation of what little capital they had. For de Soto, then, at the root of misery and violence is not capital but the lack of it. What holds back development in poor countries is the inability to build and protect wealth.

De Soto’s solution to this problem is modest: He proposes a publicly accessible system of property records. Piketty’s solution is, predictably, much grander: In the book that first brought him to public attention, he advocates a global wealth tax of up to 2 percent along with a progressive income tax of up to 80 percent. In his most recent book, Capital and Ideology — currently available only in French — he recommends a 90 percent tax on wealth in order to stall the ever-growing inequality crisis, and complains about “propertarianism,” which is to say, the “absolute respect for private property” that is still engrained in most social democracies.

Perhaps the key contrast between Piketty and de Soto lies in their analysis of wealth itself. Piketty treats wealth as essentially material. For de Soto it’s more about mind than matter. He believes that given the right conditions, total wealth will grow, lifting more and more people out of poverty — and, he hopes, consigning Piketty’s theories to history’s ash heap.

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