Back to top

Fellows with Friedman

Myths About Capitalism

Thomas Sowell 

Watch this interview with Thomas Sowell discussing his essay “‘Trickle Down’ Theory and ‘Tax Cuts for the Rich.’” According to Sowell, US history shows that in its first 150 years, the government did not intervene during economic downturns and that the downturns all corrected themselves. The economy does not need government intervention, because it has recuperative powers. This means that high tax rates on the wealthy are unnecessary, as they will end up causing more harm by disincentivizing people to participate in the economy. 

Read Sowell’s essay “‘Trickle Down’ Theory and ‘Tax Cuts for the Rich’,” in which he argues against the increase of tax rates on the wealthy and demonstrates that in the 1980s, when President Reagan reduced tax rates for the wealthy, higher-income taxpayers ended up paying more tax revenues into the federal treasury than under the higher tax rates, and that they continued to pay a higher percentage of tax revenues going forward. Therefore, raising tax rates for the wealthy does not mean that revenue will increase or that inequality will truly decrease. 

David Henderson

If you’ve been paying attention to economic controversies in the last decade, you may have noticed many discussions about economic inequality. It’s a hot topic, and several people believe that the alleviation of poverty requires a substantial reduction in inequality. For example, Thomas Piketty, the French economist whose book Capital in the Twenty-First Century became a bestseller, understands the distinction between income inequality and poverty but sometimes uses the terms interchangeably, as if one necessarily begets the other. But inequality of income and wealth can remain high or even increase while poverty is decreasing.

In order to understand economic inequality, we need to ask a few questions. First, are there good kinds of economic inequality and bad kinds? Second, is it a good idea, as many policymakers and even some economists insist, to reduce inequality by taxing those at the top end more heavily? Third, has poverty been increasing? Fourth, has economic inequality been increasing?

To learn more, click here to read the rest of Henderson’s essay.

John Cochrane

Suppose a sack of money blows in the room. Some of you get $100, some get $10. Are we collectively better off?

If you think “inequality” is a problem, no. We should decline the gift. We should, in fact, take something from people who got nothing, to keep the lucky ones from their $100. This is a hard case to make.

One sensible response is to acknowledge that inequality by itself is not a problem. Inequality is a symptom of other problems. But there are lots of different kinds of inequality, and an enormous variety of different mechanisms at work. Lumping them all together and attacking the symptom, “inequality,” without attacking the problems is a mistake. It’s like saying, “Fever is a problem. So medicine shall consist of reducing fevers.”

Yes, the reported, pretax income and wealth of the top 1 percent in the United States and many other countries has grown. We have an interesting debate whether this is “good” or “market” inequality (Steve Jobs starts a company that invents the iPhone, takes home one-tenth of 1 percent of the welfare—consumer surplus—the iPhone created, and lives in a nice house and flies in a private jet) or “bad,” “rent-seeking” inequality, cronyism, exploiting favors from the government.

To continue reading Cochrane’s essay, click here.