Piketty’s cause might be noble but his cure is ignoble

And here’s why - the poor are not poor because the

rich are rich

OCK-STAR” economist Thomas Piketty recently visited South Africa and was received with much fanfare. His bestselling book on wealth inequality Capital in the Twenty-First Century has become the focus of a worldwide debate over income inequality. His central premise of taxing the wealthy and redistributing the proceeds holds resonance among many South Africans grappling to understand why after 20 years of democracy income inequality remains stubbornly high.

South Africans are not alone. Globally, lacklustre growth and reduced government revenue have renewed calls for all governments to increase taxes on the rich and to redistribute some of this wealth to the poor. This would be a mistake based on the false idea that the poor are poor because the rich are rich.

Scapegoating the rich and focusing on income inequality misdiagnoses the problem and shifts attention away from the real reason why millions remain poor.

It is true that the income gap has widened within many developing and developed countries in recent years, but it is also true that despite recent economic woes, global income inequality has decreased. Rapid growth in developing countries with big populations, such as India and China, has lifted millions out of extreme poverty, reducing the global gap between rich and poor.

According to the UN’s Millennium Development Goals Report, in 1990 about 47 percent of people lived on less than $1.25 a day. By 2010, this figure had plummeted to 22 percent.

This remarkable achievement has been thanks to the wider adoption of more open trade and free market capitalism. The Fraser Institute’s Economic Freedom of the World report demonstrates that the amount of income earned by the poorest 10 percent in economically free societies is over sixfold greater than the average GDP per capita of people living in the least free nations.

In simple terms, if you are poor, the best place to live is in economically free societies where government intervention is kept to a minimum. It is for this reason that we see millions of people trying to escape despotic nations that are controlled by overbearing states to seek refuge in the most economically free nations on Earth. People flee Cuba and North Korea for the US and South Korea, not the other way around.

Economic growth is the key to reducing poverty and inequality and expanding opportunities for the unemployed.

Politicians may win votes with promises of imposing punishingly high taxes on the wealthy and corporations but history has shown that this does untold harm by reducing incentives to produce goods and services.

Deirdre McCloskey, professor of economic history at the University of Illinois in Chicago, says: “What permanently helps the poor is what we have done in the past two centuries – make the global wealth pie bigger. How much bigger? A factor of anywhere from 30 to 100 times.

“The poor – your ancestors and mine, for example – got better off, radically so, not by redistribution or trade unions or regulation but by economic growth on a unique and immense scale.”

Focusing on the inequality in income between groups of people who have jobs makes a mockery of the millions of people who are unemployed, and have been unemployed for a very long time, with no idea why. Inequality will be reduced more by creating a low-wage job for someone from a poor household, even if that job pays only R2 000 a month, than it is by paying someone who already has a job an extra R2 000 a month.

To compound matters, the government is considering introducing a national minimum wage. Raising the price of goods reduces demand. This is as true of labour as it is of anything. Minimum wage laws might raise the incomes of low-skilled workers who have jobs but they obliterate the incomes of equally productive workers who are made unemployed because these laws price them out of the market.

Those concerned about income inequality are surely motivated by a desire to help the poor but obsessing over the gap between rich and poor does little to lift the poor out of poverty and might even keep them there.

If the government cares about the poor, it should stop focusing on reducing the incomes of top earners. It should concentrate rather on removing the artificial barriers it imposes on the functioning of the market and open up the economy to give the poor greater opportunities.

As has been shown by the reduction in poverty worldwide, astonishing things can and will result for all, but especially the poor, should the government choose to unleash the productive power of the free market.