Author Archive for Peter G. Klein

Jean Tirole Wins Nobel Prize

JEAN TIROLEThe Nobel committee has chosen Jean Tirole, a leader in game-theoretic industrial organization analysis, for the 2014 economics prize. As I discuss in more detail here, Tirole’s approach to IO is probably an improvement over the old structure-conduct-performance literature of the 1950s, but it still rests on the naive concepts of “monopoly” and “competition” that the Austrians have attacked since the 1940s. Monopoly is defined as “market power,” i.e., the ability to set price over marginal cost, and it taken for granted that the government’s job is to reduce market power to “maximize social welfare.” The Austrian notion of competition as process of dynamic rivalry over time does not figure prominently in this style of analysis, and government regulators are treated as benevolent, fully competent (if not always perfectly informed) agents who run around correcting for market failures.

Many of my Austrian friends are disappointed that Israel Kirzner did not win but, as I noted last week, he never really stood a chance. Game theory has become the dominant language not only for IO but also for public-sector economics, corporate finance, and other fields and it was inevitable that the Nobel committee pick Tirole or someone like him. My guess is that Oliver Williamson will be the last Austrian-friendly Nobel laureate, at least for a while.

Small Business Administration Loans Reduce Economic Growth

140px-US-SmallBusinessAdmin-Seal.svgThat’s the conclusion of a new NBER paper by Andy Young, Matthew Higgins, Don Lacombe, and Briana Sell, “The Direct and Indirect Effects of Small Business Administration Lending on Growth: Evidence from U.S. County-Level Data” (ungated version here). “We find evidence that a county’s SBA lending per capita is associated with direct negative effects on its income growth. We also find evidence of indirect negative effects on the growth rates of neighboring counties. Overall, a 10% increase in SBA loans per capita is associated with a cumulative decrease in income growth rates of about 2%.” As the authors point out, SBA loans represent funds that also have alternative uses, and SBA-sponsored clients may not be the most worthy recipients (in terms of generating economic growth).

The results are largely robust and, perhaps more importantly, we never find any evidence of positive growth effects associated with SBA lending. Even when the estimated effects are statistically insignificant, the point estimates are always negative. Our findings suggest that SBA lending to small businesses comes at the cost of loans that would have otherwise been made to more profitable and/or innovative firms. Furthermore, SBA lending in a given county results in negative spillover effects on income growth in neighboring counties. Given the popularity of pro-small business policies, our findings should give reason for policymakers and their constituents to reevaluate their priors.

Highest-Earning College Majors

A new report on career earnings by college major is making the rounds. Engineering majors make the most, with economics the highest of the social sciences, and even ahead of business. However, as a Slate report points out, if you look at the upper tail of the distribution, economics majors do even better than engineering majors — the highest-earning economics majors do much better than the highest-earning engineering majors. The result holds even when you consider the fact that many economics majors go on to law or business school or enter other graduate programs. Slate thinks the answer is that “the finance and consulting industries like recruiting [economics majors], not necessarily for their specific skills, but because they consider the major a basic intelligence test.”

Of course, the data don’t distinguish between students of Austrian, Keynesian, Marxian, and neoclassical economics, but I know what I’d choose as an intelligence test!

An economics major.

An economics major.



Greenspan on Gold (again)

alan_greenspan22Alan Greenspan once vigorously defended the gold standard, before taking command of the world’s largest printing press. Now back in civilian life, and lacking any opportunity to put his professed principles into action, Alan is again friendly to gold:

The broader issue — a return to the gold standard in any form — is nowhere on anybody’s horizon. It has few supporters in today’s virtually universal embrace of fiat currencies and floating exchange rates. Yet gold has special properties that no other currency, with the possible exception of silver, can claim. For more than two millennia, gold has had virtually unquestioned acceptance as payment. It has never required the credit guarantee of a third party. No questions are raised when gold or direct claims to gold are offered in payment of an obligation; it was the only form of payment, for example, that exporters to Germany would accept as World War II was drawing to a close. Today, the acceptance of fiat money — currency not backed by an asset of intrinsic value — rests on the credit guarantee of sovereign nations endowed with effective taxing power, a guarantee that in crisis conditions has not always matched the universal acceptability of gold.

Israel Kirzner for the Nobel Prize!

KirznerThomson Reuters has been predicting Nobel Prizes for the last dozen years, with modest success, and this year names Israel Kirzner as a potential economics winner, in a hypothetical joint prize with William Baumol for research in entrepreneurship. (This is one of three scenarios imagined by Thomson Reuters, the others being Philippe Aghion and Peter Howitt for growth theory and Mark Granovetter for economic sociology.)

Like most Austrians, I will be delighted if Kirzner wins the prize, not only as recognition of Kirzner’s work and the general field of entrepreneurship, but also for the attention it would bring to the Austrian school itself. Kirzner’s accomplishments are many, not only in entrepreneurship theory but also in economic methodology, capital theory, and the history of economic thought. I will also be surprised — as I have argued (e.g., here and here), Kirzner’s influence on the specialized field of entrepreneurship is vast, but his influence on economic theory has been modest. Kirzner’s theory of entrepreneurship is not, after all, a theory of entrepreneurship per se, but a theory of what he calls the entrepreneurial market process. “My work has explored, not the nature of the talents needed for entrepreneurial success, not any guidelines to be followed by would-be successful entrepreneurs, but, instead, the nature of the market process set in motion by the entrepreneurial decisions.” As I put it in a 2008 article: “Kirzner’s aim is not to characterize entrepreneurship per se, but to explain the tendency for markets to clear. In the Kirznerian system, opportunities are (exogenous) arbitrage opportunities and nothing more.Entrepreneurship itself serves a purely instrumental function; it is the means by which Kirzner explains market clearing.”

The irony is that while management scholars interested in entrepreneurship and innovation have embraced Kirzner’s concept of entrepreneurial opportunities, neoclassical economists have continued to embrace Walrasian equilibrium, with little interest in the processes of adjustment and coordination highlighted in Kirzner’s work. (The influence of Kirzner’s work on both groups of scholars is easily demonstrated with citation data, which I provide in the links above.) This is not a criticism of Kirzner, of course, but a comment on the state of neoclassical economics. To be sure, the Nobel committee has previously recognized economists whose contributions have not been fully incorporated into the mainstream (Simon, Coase, North, Schelling, Williamson, Ostrom, and of course Hayek). And Baumol’s contributions, which focus on the economics of innovation and technical change, are far more “mainstream” than Kirzner’s. Still, I will be pleasantly surprised if Kirzner gets the early morning phone call!

“Why Managers Still Matter”

BxrnIo-CQAA8lk7Some Austrians and libertarians think that managerial hierarchies, even within fully private companies, are inherently inefficient (or, worse, the indirect result of government intervention). I think this view is mistaken, for a variety of reasons (see these links for some discussion). There is nothing inherently inefficient (or illegitimate) about managerial authority. Decentralized forms of organization offer many advantages — effective use of Hayekian “tacit knowledge,” strong performance incentives, the development of esprit de corps — but there are drawbacks too. Under certain conditions, the appropriate use of managerial authority fosters better coordination, more timely responses, stronger incentive alignment, and better use of shared resources. (I need hardly mention that there is nothing “coercive” about voluntary agreements between employers and employees.)

Nicolai Foss and I have an article in the current edition of the MIT Sloan Management Review, “Why Managers Still Matter,” arguing that managerial authority still plays an important and valuable role, even in our knowledge-based, networked, Wikipedia-style, peer-to-peer economy. (The piece is firewalled but you can read it with free registration.) We write:

“Wikifying” the modern business has become a call to arms for some management scholars and pundits. As Tim Kastelle, a leading scholar on innovation management at the University of Queensland Business School in Australia, wrote: “It’s time to start reimagining management. Making everyone a chief is a good place to start.”

Companies, some of which operate in very traditional market sectors, have been crowing for years about their systems for “managing without managers” and how market forces and well-designed incentives can help decentralize management and motivate employees to take the initiative. . . .

From our perspective, the view that executive authority is increasingly passé is wrong. Indeed, we have found that it is essential in situations where (1) decisions are time-sensitive; (2) key knowledge is concentrated within the management team; and (3) there is need for internal coordination. . . . Such conditions are hallmarks of our networked, knowledge-intensive and hypercompetitive economy.

The article builds on earlier writings such as Nicolai’s “Misesian Ownership and Coasian Authority in Hayekian Settings” (QJAE, 2001), my Capitalist and the Entrepreneur (2010, e.g., pp. 20-21), and our “Original and Derived Judgment” (Organization Studies, 2007). As we point out, all forms of organization have benefits and costs, and most firms feature a blend of “market” and “hierarchy,” the exact mix varying with firm and market conditions. A vigorous embrace of free-market principles within the economy does not imply that private organizations must always be as decentralized, or “market-like,” as possible.

The Incremental Adoption of Electronic Currencies

Bitcoin-coinsElectronic currencies are typically viewed as “disruptive” innovations that will upset the existing structure of the banking industry (and even the economy and society at large), rather than “sustaining” innovations that generate incremental changes within the existing structure (here I’m borrowing Clayton Christensen’s famous terms). But people sometimes forget that technologies such as Bitcoin are both currencies and payments systems, and in the latter capacity they are integrated into the existing network of payment providers. As Charlotte Bowyer puts it, “the ‘Bitcoin revolution’ (if it is to happen at all) could be less explosive, more incremental, and far more reliant on existing processes than many might believe.” Bowyer argues that existing financial institutions and payments systems and Bitcoin are at least partly complements, not substitutes.

It . . . looks like Bitcoin’s success will be increasingly related to its integration with established payment, merchant and finance companies such as PayPal, Amazon, Apple and Visa. Bitcoin is a disruptive technology with the capacity to bring about huge changes, even within the confines of today’s regulated industries. However, these changes look likely to come with the help and blessing of today’s commercial giants, rather than by a process of immediate disintermediation.

For instance, Bitcoin is much more than the new PayPal, for it’s simultaneously both a currency and a payment processor. Despite this, Bitcoin’s price rallied significantly after a long period  of decline following the PayPal announcement. Whilst the Bitcoin protocol has absolutely no need for an Apple Pay or a debit card to transmit it (in fact Bitcoin was developed to render such third parties obsolete), there’s no denying that it would also work wonders for user adoption. As the Bitcoin ecosystem grows and seeks increasing legitimacy, integration with established companies is a very realistic route to long-term success. In addition these companies have much to gain from embracing Bitcoin early, rather than risk competing with it later.

Academics and Social Media

8539048913_3328e8545c_bAt this week’s Strategic Management Conference in Madrid I participated in an interesting session on Media Innovations, along with Will Mitchell and Wiley’s Caroline McCarley. My remarks focused on academics and their use of social media. How (if at all) can professors use blogs, videos, wikis, and other social media products to disseminate their research, to improve their teaching, and even to discover new ideas? Are social media and “serious” activities like research and class preparation substitutes or complements? Should untenured faculty avoid such distractions?

I began my remarks — where else? — with Kim Kardashian. Biologist Neil Hall made a bit of a splash a few months back by introducing the Kardashian Index, basically the ratio of an academic researcher’s Twitter followers to citations in peer-reviewed journals. (For a rough approximation, just divide Twitter followers by Google Scholar cites.) Someone with a very high K-index, the story goes, has a large popular following, but hasn’t made any important scientific contributions — in other words, like Kim, famous for being famous.

Science published a rejoinder suggesting that the K-index gets it wrong by implying, incorrectly, that popular and scholarly influence are inversely related. Indeed, among the top 20 natural scientists, by Twitter followers, are some scientific lightweights like Neil deGrasse Tyson (2.4 million Twitter followers and 151 citations), but also serious thinkers like Tim Berners-Lee (179,000 followers and 51,204 cites) and Steven Pinker (142,000 and 49,933). I haven’t run the numbers for economists and management scholars but I think you’ll find the same general pattern. E.g., among the biggies on the LDRLB Top Professors on Twitter list you find a mix of practitioner-oriented writers with modest academic influence (Bill George, Richard Florida, Stew Friedman, Gary Hamel) and scholars with huge citation counts (Mike Porter, Clay Christensen, Adam Grant).

I went on to emphasize (as usual) that, for the most part, these issues are nothing new. Scholars and thinkers throughout history have used whatever media are available to disseminate their ideas to wider audiences. In the 17th-19th centuries there were pamphlets, handbills, newspapers, and lecture halls; in the 20th century radio, magazines, TV, and other outlets. Classical economists like John Stuart Mill published anti-slavery tracts; the Verein für Socialpolitik took positions on important social issues of the day; the American Economic Association was founded to combat lassiez-faire; Mises and Hayek advised governments and wrote popular books; C. S. Lewis gave his famous wartime radio lectures; Paul Samuelson and Milton Friedman dueled in the pages of Newsweek, and Friedman took to the airwaves for the PBS series “Free to Choose”; Rothbard wrote countless newspaper, magazine, and newsletter articles, and popular books, and spoke to lay and professional audiences. So academic bloggers, Tweeters, Facebookers, YouTubers, LinkedInners, and Instagrammers are following in a grand tradition. Of course, what’s new today is the scale; without a contract for a newspaper column or TV show, any of us can set up shop, and have the potential to reach a very wide audience. Read More→

Peter Thiel on Monopoly and Competition

220px-Peter_Thiel_TechCrunch50Entrepreneur and venture capitalist Peter Thiel has an interesting Wall Street Journal piece on innovation, firm growth, and market structure, misleadingly titled “Competition Is for Losers.” Thiel’s essay is ostensibly about the defense of “monopoly” — the large market shares achieved by successful firms — over “competition,” by which he means perfect competition, the neoclassical economist’s fantasy world in which tiny, identical firms exist in a kind of stasis, not doing anything and not earning any economic profits.

Actually, without meaning to, Thiel gives us a thorough and persuasive critique of mainstream monopoly theory and its bizarre, counterintuitive, and misleading concepts of “monopoly” and “competition.” The business behaviors Thiel praises — innovating, creating economic value, out-competing rivals, and increasing sales and profits — are thoroughly competitive, in the Austrian (and common-sense) notion of of competition. If Thiel had followed the Austrians in defining competition as the absence of legal restraints on entry and exit, he could framed his essay as an explanation of how innovation and entrepreneurship benefit society, rather than making it look like a critique of competition per se. A better title: “Perfect Competition Theory Is for Losers.”

The Endangered Species Act and the Double Coincidence of Wants

9063391401_65324bf5e5_k-e4401aa96f3946385507ca36fddb5e5956ec2ca0-s4-c85This year’s silly Copenhagen Zoo controversy reminded us that, when it comes to animal care, people have difficulty thinking clearly. NPR’s Planet Money ran an interesting piece this morning about animal barter among zoos. The US Endangered Species Act and  global treaties such as the Convention on International Trade of Endangered Species of Wild Fauna and Flora make it a crime to buy and sell zoo animals like other commodities. This makes it difficult for zoos not only to obtain new animals, but also to get rid of existing, unwanted ones. (Hence the fate of poor Marius the giraffe.)

To get around these rules, zoos have adopted a complex and cumbersome barter system. Zoos are, under the law, allowed to make animal-for-animal swaps. But, as economists such as Carl Menger explained more than a century ago, barter is hampered by the double coincidence of wants: to trade with you, it’s not enough that I want what you have; you also have to want what I have. Money eliminates the double coincidence of wants by introducing a third commodity that serves as a generally accepted medium of exchange. Unfortunately for the zoos, money is off the table. And hence: 

The New England Aquarium in Boston was recently in the market for some lookdown fish, and they knew of an aquarium in North Carolina that was willing to trade some.

The folks in North Carolina wanted jellyfish and snipe fish. The New England aquarium had plenty of jellyfish — but no snipe fish.

Steve Bailey, the curator of fish at the New England Aquarium, wound up making a deal to get snipe fish from an aquarium in Japan, in exchange for lumpfish. Then he sent the snipe fish and some jellyfish to North Carolina. In exchange, he finally got his lookdown fish.

Allowing zoos to buy and sell animals using money, rather than complex and inefficient barter arrangements — why, that’s inhumane!

New Essays on Kirzner

KirznerThe newest issue of the Review of Austrian Economics features a symposium on Israel Kirzner’s contributions to the Austrian school. My own essay with Per Bylund, “The Place of Austrian Economics in Contemporary Entrepreneurship Research,” appears in the symposium, along with essays by Peter Boettke, Mario Rizzo, and Henry Manne. Kirzner himself also offers some reflections on his career.

Re: Mises University

David, I liked this Facebook post from another student, on opening night: “I had the opportunity to listen to a very insightful discussion between an Israeli journalist and a Muslim business owner. They were discussing the challenges of extremists in both their cultures and how government intervention only exacerbates those extreme views. Only at Mises. I love it here already!”

Intolerant US Professors Call Out China for Intolerance

91729433_8b0420c6da_oOne of the least tolerant places around is the US university campus, with its speech codes, disdain for dissenting social and cultural opinions, voluntary self-censorship, and slavish devotion to political correctness. “Diversity” is the mantra, but diversity of opinion on economics, history, and politics is generally unacceptable. So, what are US professors worried about? China, of course. The Association of American University Professors recently issued an official statement of concern about Confucius Institutes, Chinese government-affiliated nonprofits that promote Chinese culture on US university campuses such as Stanford, Chicago, Texas A&M, UCLA, Michigan, and many others. “Confucius Institutes function as an arm of the Chinese state and are allowed to ignore academic freedom,” says the AAUP, most of whose members work for state universities or are paid from government grants and other funds. “North American universities permit Confucius Institutes to advance a state agenda in the recruitment and control of academic staff, in the choice of curriculum, and in the restriction of debate.” Perhaps they learned from the CIA, which has many years of experience advancing US state interests in the guise of educational and cultural programs. In any case, the irony of the largely intolerant US professoriate calling out the Chinese for intolerance has been lost on most observers.

Rebuilding Detroit

Detroit,_USA_Taken_From_Windsor,_CanadaEverything valuable that economics textbooks describe as a “public good” has, at one time or another, been provided on the market by individuals and private firms. Even today, capitalists and entrepreneurs are rebuilding public spaces in Detroit, positive externalitites be damned:

Whether or not they’re expecting to profit, Gilbert and other capitalists — large and small — are trying to rebuild the city, even stepping in and picking up some duties that were once handled by the public sector. Shop owners around the city are cleaning up the blighted storefronts and public spaces around them. Only 35,000 of Detroit’s 88,000 streetlights actually work, so some owners are buying and installing their own. In Gilbert’s downtown, a Rock Ventures security force patrols the city center 24 hours a day, monitoring 300 surveillance cameras from a control center. Gilbert is proposing to pay $50 million for the land beneath the county courthouse and a partly built jail near his center-city casino, with the intention of moving the municipal buildings to a far-off neighborhood; his goal is to clear the way for an entertainment district that flows south, without interruption, from the sports arenas past his casino and into downtown. Detroit’s new mayor, Mike Duggan, told me he had no problem with the private sector doing so much to shape his city: Other metropolises had their entrepreneurs and deep-pocketed magnates who built and bought and financed things. With a state-appointed emergency manager overseeing various aspects of Detroit’s operations, with many civic services inoperable for years and with a dire need for investment, Duggan said he felt lucky that his town was getting its turn.

Thanks to Craig Newmark for the pointer.

The True Purpose of “Competition” Policy

Ad_apple_1984“Competition policy” is one of those great Orwellian terms that means the opposite of what it seems to mean. In most countries, antitrust policy is designed not to enhance competition, but to stifle it, by protecting privileged incumbents from upstarts or from their established rivals. A great example of the latter comes from today’s headlines: “Apple Invites FTC To Probe Google.” Having recently settled a case brought by the FTC about in-app purchases on iOS, Apple is now urging the FTC to investigate Google’s policies on in-app purchases on Android. All in the name of “leveling the playing field,” of course. In the tech sector in particular, many of the most important antitrust and regulatory actions against leading firms are initiated by rivals, using whatever means necessary to bash competing firms.

Does War Promote Innovation?

Silver_into_bulletsThe belief that war, and government spending more generally, fosters economic growth by spurring innovation is one of those fallacies that won’t die, no matter how often it is challenged and refuted. Today’s New York Times gives us the usual spiel:

Fundamental innovations such as nuclear power, the computer and the modern aircraft were all pushed along by an American government eager to defeat the Axis powers or, later, to win the Cold War. The Internet was initially designed to help this country withstand a nuclear exchange, and Silicon Valley had its origins with military contracting, not today’s entrepreneurial social media start-ups. The Soviet launch of the Sputnik satellite spurred American interest in science and technology, to the benefit of later economic growth.

As I noted in a recent Mises View, this sort of argument is devoid of any economic analysis. First, it confuses technological innovation (impressive to engineers) and economic innovation (valuable to consumers). Second, it confuses gross and net benefit — of course, when government does X, we get more X, but is that more valuable than the Y we could otherwise have had? (Frédéric Bastiat, call your office.) Third, it confuses treatment and selection effects of government spending — government typically funds scientific projects that would have been undertaken anyway, such that a main benefit of government spending on science and technology is to increase the wages of science and technology workers. Fourth, as writers like Terence Kealey have pointed out, if you look carefully at the details of the sorts of programs lauded by the Times, you find they were grossly inefficient, ineffective, and potentially harmful.

I addressed these claims in more detail in Free Market article from last year (and also in this talk, starting around 1:37). The Times writer’s claims are simply ex cathedra pronouncements, not arguments backed by evidence.

Rothbard the Quant

8483100875_a11b4496e7_zMurray Rothbard was a foremost defender of apriorism in economics and a critic of positivism, empiricism, and scientism (1, 2, 3). But he was not opposed to quantification, particularly in the study of economic history. In fact, he strongly supported the use of statistics in doing applied economics. I was reminded of Rothbard’s view of data when rereading Strictly Confidential for this week’s Rothbard Graduate Seminar. Consider this passage from his lengthy and detailed review (1961) of George B. DeHuszar and Thomas Hulbert Stevenson’s History of the American Republic:

[A] critical defect is the almost complete absence of any quantitative or numerical data. It is often difficult to find the dates at which happenings occur, so vague and imprecise is the narrative. Apart from a few references to population figures, there are virtually no statistics of any kind in the work.

Now, I am an open and long-time condemner of the overuse of statistics, and I deplore as much as anyone the new trend in “scientific” economic history to hurl vast quantities of processed statistics at the reader, and conclude that one has captured the “feel” and essence of the past. But some statistics, surely, are necessary; and it becomes annoying to read constant references to “increases” in steel production, or living standards, or whatnot, when not the foggiest quantitative notion is presented to the reader of how large these increases and movements are. There is also an almost desperate need to present government budget statistics, so that the reader will know how large government in relation to the private economy has been in any given era; but neither in this nor in any other area does DeHuszar give a shred of quantitative data.

Rothbard is equally critical of the authors’ conceptual framework (more precisely, their lack of a consistent conceptual framework) and their failure to bring to life the grand sweep of American history. But this emphasis on the need for quantification may surprise some of Rothbard’s critics, and some of his defenders too.

Splitting the Pizza

pizzaApple underwent a 7-1 stock split last night, such that shares that traded at $645 yesterday opened this morning at $92. Much of the media coverage took a playful tone, e.g., “Don’t freak out. Here’s why Apple’s stock is below $100.” I was particularly intrigued by the brief story on today’s NPR Morning Edition. As the host explained, it’s not that Apple is worth less, just that Apple’s total market capitalization is being divided into a larger number of shares. “It’s like a pizza. If you cut it into 8 slices instead of 6, you don’t get a larger pizza, just smaller slices.”

How ironic, coming from a news outlet that embraces fully the naive, sophomoric, “vulgar Keynesianism” that dominates today’s economic policy discussions. NPR’s researchers, writers, hosts, and guests are 100% convinced that dividing the economy’s stock of real wealth by a larger number of paper tickets gives us, well, more real wealth!

Rothbard Graduate Seminar

Picture1The Rothbard Graduate Seminar, our signature event for advanced students in economics and related disciplines, began this morning with a terrific session on economic methodology. The week-long event combines plenary lectures on core Austrian concepts with student-led roundtable discussions that bring out the nuances, applications, challenges, and new directions. The text is selected chapters from Murray Rothbard’s collection Economic Controversies, along with supplemental readings from Rothbard’s Strictly Confidential. The full schedule is here. Graduate students and other scholars doing work in the Austrian tradition, plan to apply for next year’s version!

Inequality and Envy


Henry Hazlitt

Inequality seems to be the prime concern of Right Thinking People everywhere. But almost no one is drawing out the connections between inequality and envy. As Henry Hazlitt wrote in 1972, “[t]here can be little doubt that many egalitarians are motivated at least partly by envy, while still others are motivated, not so much by any envy of their own, as by the fear of it in others, and the wish to appease or satisfy it.” Indeed, contemporary discussions of income and wealth distribution, progressive taxation, the “long-run return to capital,” and the like would greatly benefit from careful study of great works like Helmut Schoeck’s Envy and Bertrand de Jouvenel’s Ethics of Redistribution. Murray Rothbard’s “Freedom, Inequality, Primitivism and the Division of Labor” should be required reading as well.

An important point coming out of this literature is that envy is generally strongest when inequalities are small, rather than large. Huge inequalities of wealth, income, or consumption are considered irrelevant; smaller inequalities are seen as remediable through state action. As noted yesterday by Peter Schiff, consumption inequality is probably far lower today, in Western countries, than in most societies in human history. The average Roman didn’t think often about Crassus, but the average American — part of the global 5% — thinks a lot about the wealthier Americans across town.

As Hazlitt noted, de Tocqueville saw modest inequality as the driving force behind the French Revolution. “The most popular theory of the French Revolution is that it came about because the economic condition of the masses was becoming worse and worse, while the king and the aristocracy remained completely blind to it. But de Tocqueville, one of the most penetrating social observers and historians of his or any other time, put forward an exactly opposite explanation.” Hazlitt quotes the French historian Emile Faguet:

Here is the theory invented by Tocqueville. . . . The lighter a yoke, the more it seems insupportable; what exasperates is not the crushing burden but the impediment; what inspires to revolt is not oppression but humiliation. The French of 1789 were incensed against the nobles because they were almost the equals of the nobles; it is the slight difference that can be appreciated, and what can be appreciated that counts. The eighteenth-century middle class was rich, in a position to fill almost any employment, almost as powerful as the nobility. It was exasperated by this “almost” and stimulated by the proximity of its goal; impatience is always provoked by the final strides.

The surge of interest in inequality among today’s pundit’s and politicians is likely driven by the fact that inequality, in the sense that matters to most people in Western countries, is far lower than its historical average.