As complex and difficult as economics can be, I’m always looking for ways to grasp and integrate the principles of the science in simplified and memorable terms. Toward that end, while reading Richard Salsman’s clarifying analysis of Thomas Piketty’s Capital (“Piketty’s Rickety Assault on Capital,” TOS Spring 2015), I began thinking about Piketty’s central argument in terms of a parable. I present the parable below, and I hope it helps you to further integrate the concrete meaning of Piketty’s claims and why they are wrong.
My parable was also substantially inspired by Peter and Andrew Schiff’s illustrative book How an Economy Grows and Why It Crashes (reviewed in TOS Fall 2010).1 However, whereas mine parallels theirs in that it is a story of a man in a fishing community who builds the first fishing net, it differs from theirs in details, and it is nowhere near as elaborate.
Before reading “The Parable of the Fish Capitalist,” it will be helpful to read (or review) Piketty’s own summary of his central claim:
[A] market economy based on private property, if left to itself, . . . contains powerful forces of divergence [increasing inequality], which are potentially threatening to democratic societies and to the values of social justice on which they are based. The principle destabilizing force has to do with the fact that the private rate of return on capital, r, can be significantly higher for long periods of time than the rate of growth of income and output, g. The inequality r > g implies that wealth accumulated in the past grows more rapidly than output and wages. This inequality expresses a fundamental logical contradiction. The entrepreneur inevitably tends to become a rentier [bond holder], more and more dominant over those who own nothing but their labor. Once constituted, capital reproduces itself faster than output increases. The past devours the future. The consequences for the long-term dynamics of the wealth distribution are potentially terrifying. . . . [I]f we are to regain control of capitalism, we must bet everything on democracy . . . [and] develop new forms of governance and shared ownership intermediate between public and private ownership.2
As Salsman shows in great technical detail in his review essay of Capital, it is not true that the “inequality r > g”—even where and when it holds—necessarily leads to ever-increasing inequality, or ever-“reproducing” capital, or the future somehow being “devoured” by the past. Instead, in a market economy, such inequality generally leads to ever-increasing prosperity. Why? Consider the story of Grock.
The Parable of the Fish Capitalist
Once upon a time, on a small island in the middle of a vast ocean, toiled a primitive society of one hundred people who ate only fish. Each person was able, using only his hands, to catch a single fish each day, and each fish provided the catcher with enough nutrition for roughly a day.
Because everyone’s wealth or lack thereof was essentially equal, this was a society of perfect economic equality. Everyone earned the exact same income—one fish per day—and everyone was equally and horrifically poor. The island people went naked or wore garments hastily woven from leaves. They lived in caves, under bushes, or in shabby lean-tos. They did their best to fend off attacking animals, and occasional pirates, with sticks and rocks. They had no technology aside from simple, handmade tools; no transportation except walking and swimming; no entertainment except singing around the campfire or playing rock-toss games or the like; no health care except the local witch doctor’s potions and prayers. But for the lack of fast-food restaurants, tents made from petroleum products, mobile devices, Internet service, nearby emergency clinics, and bongs, the island was an Occupy Wall Streeter’s dream come true.
In Piketty’s terms, the private rate of return on capital in this island society, r, was zero—because there was no capital income and almost zero capital—and the rate of economic growth, g, was likewise zero. It was a society in blissful leftist perfection where r = g, and no one had to worry about the “terrifying” consequences of expanding capital or inequality. Of course, people frequently died from complications in childbirth, infectious diseases, accidental injuries, animal attacks, and countless other normal circumstances and conditions of primitive society. And, consequently, the average life span was thirty years. But never mind that, for this society avoided the “destabilizing” condition in which r > g.
Now one innovative fellow, Grock, got to thinking about a new way to catch fish, and, over the course of much mental effort, he developed an idea for a contraption akin to what we have come to call a net. Inspired by his idea, Grock committed himself to spending some of his rest time working on a physical version of the net. Once in a while he even skipped fishing for a day and went hungry to work on the project. He had no certainty that all this time, effort, and hunger would amount to anything useful, but he took a risk to see his vision through.
When the net was completed, the project had taken Grock a total of eighty hours of work—the equivalent of ten workdays, or the time equivalent of ten hand-caught fish. Excited, but with some trepidation, Grock waded with the net into the cool waters one morning, and . . . joyous day!—by sundown he managed to catch two fish, a feat he soon would learn that he could repeat every day. That night, Grock jubilantly celebrated his invention—the first piece of substantial capital on the island.
Importantly, Grock did not do anything to harm anyone in the process of creating or using the net, nor did anyone help him in the process of producing it. Of course, he incurred considerable pain and expense himself to make it, and he did so with no guarantee that it would work. But the effort was all his. He alone designed and wove the net. Grock was a sole proprietor, and he was perfectly peaceful.
But Grock’s neighbor, Pike, became gravely concerned about Grock’s innovation. Pike confronted Grock the morning after Grock’s first day of catching two fish.
“Think of the terrifying consequences of your fish net,” Pike warned. “Prior to your creation of that device, we lived in blissful utopia in which r = g, but now r > g! Before, both r and g were zero, but now the capital stock—your net—is worth ten fish, and, given that you now catch an extra fish per day, the private rate of return on capital is one fish daily. But total daily output has not grown by the same percentage; instead, it has grown by only one percent on the first day, from one hundred to one hundred one fish (ninety nine the rest of us catch plus your two). And every day hereafter (with existing capital), g returns to zero. Not only is r > g; r is much greater than g! Just think where this could lead: Capital could reproduce itself until the past devours the future!”
Grock started to reply, but Pike continued, raising his voice in a mocking tone: “You’re probably thinking of your extra fish, and that you’re just so smart, and that you worked harder than others to earn your keep. But let me tell you something: there are a lot of smart and hardworking people out there—and they have a hand in your accomplishment. If you were successful in building your net, somebody along the line gave you some help. There was a great teller of tales in your life. Somebody helped beat the path to the waters. If you’ve got a net—you didn’t build that! Somebody else made that happen.”3
Grock again tried to reply, but Pike continued at even greater volume: “Plus, now your income is twice as much as mine, and that kind of pisses me off. I think maybe we island folk need to exercise some democratic control over your net and develop new forms of shared ownership intermediate between public and private ownership. I think I’ll call a meeting to discuss how to handle this.”
Pike drew another breath, but this time Grock quickly spoke up: “First, Pike, it is my net, I did build that, I own it, and I’m not going to let you pretend that your ‘democratic governance’ is anything other than a mob seeking to steal my property.
“Second, Pike, your economics is off. The fact that I now earn a return on my capital investment (i.e., I now get an extra fish per day by using my net) does not by itself imply that my capital stock will continue to grow. Indeed, once in a while I’ll have to spend a day mending my net just to keep it in working order. And every once in a while, I’ll have to replace it altogether, as the hemp will eventually rot. If I do nothing but that, and if no one else produces any capital, then the total capital stock will remain exactly what it is today.
“Of course, it is true that, now that I have my net, I can devote more of my time to developing other forms of capital—I have a fish farm in mind—and I can offer to pay people more than one fish per day to work for me some days. I think the other island people might appreciate the opportunity to improve their lot in life. They might like some better clothes—maybe even some coverings for their feet—better paths, better places to live, better weapons to fight off animals and pirates, better medicines. Now that I’ve produced some capital, some of us can spend some of our time working on productive projects other than fishing. That’s not terrifying, Pike; it’s liberating. With this first piece of capital, we now have the opportunity to expand production and improve the standard of living, not only for ourselves and our children, but also for generations to come.
“Let me point out something that should be obvious, Pike: There’s nothing stopping you from building your own net, especially now that you’ve seen how a net works. If you and everyone else put in the same kind of effort I did to build a net, then the total capital stock would go up a hundred fold (from ten to a thousand), and daily capital income would go up a hundred fold as well (from one to a hundred). But this would not lead to more inequality (not that the degree of inequality is even relevant, so long as no one is stealing other people’s stuff). Instead, all else being equal, it would result in everyone earning the exact same amount, two fish per day. The fact is that the relationship of r and g, by itself, has nothing to do with the degree of inequality. Everyone can be a capitalist; all that is required is to produce or purchase (invest in) capital. And so long as force and fraud are outlawed, everyone can make his own decisions about how he will spend his time.
“Now, it is true that there’s no reason to expect that everyone in such a system will be equally successful. Some likely will work harder than others, some will focus on producing capital whereas others will focus on telling stories or some other less-remunerative occupation, some will start with nothing and build great businesses, others will start with great inheritances and slowly squander them, some will make good investments, others will make poor investments. Therefore, we should expect substantial inequality of wealth, and we should welcome it. Inequality in a free society is a consequence of people’s natural differences and their freely chosen values, efforts, and actions.
“There is one critical sense in which I want equality, and you apparently do not. I want everyone’s rights to be equally protected under the law, such that what a person produces he may keep and do with as he sees fit, and no one else may take it from him by force. You want to destroy equality under the law and replace it with mob rule.
“If everyone’s rights are equally protected under the law, it does not matter, morally speaking, that we do not earn or possess equal wealth. What matters is that everyone is free to live and produce and prosper in accordance with his own choices, efforts, and actions.
“Insofar as people’s rights are not equally protected under the law, certain unjust inequalities (or equalities) of wealth will result. For example, if “the people” forced some people on the island to give others a fish each week, those others would have substantially more fish than others would. Their “income” would be unequal. The fundamental problem in that case would be the fact that they got the extra fish by means of theft. And the fact that they receive more fish than others would be a derivative aspect of a deeper injustice—the fact that other individuals’ property rights were violated. Yes, unequal wealth resulting from theft is immoral. But unequal wealth arising from rights-respecting production is perfectly moral. Production is moral; looting is immoral.
“So, please, let’s not hear any more nonsense about how wealth generated by the formation of capital is somehow terrifying, or how the past will somehow devour the future by people continually improving their standard of living, or about how you want to steal my stuff in the name of democracy.”
Pike looked blankly at Grock and said, “I’m sorry, did you say something?” He then proceeded to call for a meeting of the islanders to discuss the pressing problems of Grok’s net and r > g.
1. Peter D. Schiff and Andrew J. Schiff, How an Economy Grows and Why It Crashes (Hoboken, NJ: Wiley, 2010). See Daniel Wahl’s review at The Objective Standard, Fall 2010, vol. 5, no. 3, https://www.theobjectivestandard.com/issues/2010-fall/peter-schiff-andrew-schiff/.
2. Thomas Piketty, Capital in the Twenty-First Century (Cambridge, MA: Harvard University Press, 2014), translated by Arthur Goldhammer, pp. 571–73.
3. This part of Pike’s tirade is closely based on Barack Obama’s 2012 comments; see Ari Armstrong, “‘You Didn’t Build That’—Obama’s Ode to Envy,” TOS Blog, July 20, 2012, https://www.theobjectivestandard.com/2012/07/you-didnt-build-that-obamas-ode-to-envy/.
- Piketty’s Rickety Assault on Capital
- Glenn Reynolds and the “Problem” of Income Inequality
- Egalitarianism versus Rational Morality on Income Inequality
- The Pope and the Root of Social Evil