A Critique of Piketty's "Capital in the Twenty-first Century"
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1. A Critique of Piketty’s “Capital in the Twenty-first Century” 2. The Distributive Justice of the Market 3. The Agent-Principal Conundrum 4. The Green-eyed Capitalist 5. The Misconception of Scarcity 6. Governments and Growth 7. The Economics of Expectations 8. The Future of Work 9. Financial Investor, Strategic Investor 10. The Myth of the Earnings Yield 11. Volatility and Risk: The Roller-coaster Market 12. Seven Concepts in Derivatives 13. The Bursting Asset Bubbles 14. Is Education a Public Good? 15. To Tax or not to Tax? 16. The Benefits of Oligopolies 17. The Merits of Inflation 18. Anarchy as an Organizing Principle 19. The Revolt of the Poor 20. The Fabric of Economic Trust 21. Scavenger and Predator Economies 22. Innovation and Capitalism 23. Market Impeders and Market Inefficiencies 24. The Predicament of the Newly Rich 25. Moral Hazard and Risk
A Critique of Piketty’s “Capital in the Twenty-first Century”
In his programmatic and data-laden tome, “Capital in the Twenty-first Century” (2014), Thomas Piketty makes several assertions, two of which merit a closer look: (1) That r (the return on capital) is, in the long-run always greater than g (the growth of the real economy), thus enriching the rich; and (2) that inherited wealth tends to create a “patrimonial” form of capitalism, akin to the aristocracy in the French and British ancient regimes. Putting aside the somewhat artificial and dubious distinction between the “real” and the financial economy, r and g are apples and oranges and cannot be compared. Economic growth (g) is not the return on the real economy in the same way that r is the return on capital and its assets. R is intended to compensate for a panoply of risks and is comparable to the wave function in Quantum Mechanics: it incorporates all the publicly and privately available information about future uncertainties and provides a distribution function of all plausible scenarios. Put simply: subject to political and market vicissitudes, capital can vanish overnight. Not so the real economy: it is always there, regardless of upheavals, political meddling (usually in the form of taxation), inflation (a kind of tax, really), and disruptive technologies. Capital (wealth) can be construed as a call option on the real economy and, especially, on real estate and emerging technologies. R amounts, therefore, to the premium on this option. Income inequality is growing because of the decline in the role and importance of labor, which is being gradually supplanted by capital assets, such as robots and computers as well as being offshored, outsourced, and downsized. Again, put simply; capital can buy a lot more labor nowadays, hence the apparent lopsidedness of the distribution of wealth. Luckily for the 99%, the bulk of the nation’s wealth is inactive: dormant in deposits and other long-term assets or languishing in hordes of cash in the form of non-distributed profits. Such capital exercises political clout and muscle but is irrelevant in terms of wage compression. Inherited wealth is no different to any other form of capital. It is merely an extension of the investment horizon, a kind of immortality. If Warren Buffet lives to be 300 or hands what’s left of his wealth to future generations of Buffets is immaterial in terms of economic impact. There is no evidence that inherited wealth is less productive than riches obtained via entrepreneurship. Such claims have more to do with seething envy than with scholarly erudition. Inherited wealth concentrated in the hands of the few may be compared to an oligopoly, not necessarily a bad thing. There is no basis to prefer one type of economic activity over another on strictly scientific grounds: investment is as important as entrepreneurship and finance is as crucial as manufacturing. Wealth – inherited or not – is always invested: either in the financial sector or in the real one. To rank economic activities as more or less preferable is ideology, not science: a judgment that is driven by values and predilections, not by hard data. Similarly, to talk about a monolithic, immutable oligarchy is laughable. As any casual perusal of Forbes’ list of richest people would show, the mobility inside this group is remarkable and its composition is in constant flux. Most of its new members are there by virtue of wages and bonuses.
These nouveau riches and arrivistes raise the thorny issue of agent-principal conflicts: how the executive class institutionalized the robbery of their firms and shareholders and rendered this plunder a fine art. This travesty may be one of the main engines of skyrocketing income inequality together with the venality of politicians in an increasingly plutocratic world. It is a political failure and has to be resolved politically. No amount of taxation, progressive or flat and no quantity of transfers from the state to the poor will solve the issue of income inequality. The state should encourage wealthy people to invest and create jobs. It should penalize them if they do not (by taxing their wealth repeatedly.) It should help the poor. There is very little else it can do.
The Distributive Justice of the Market
The public outcry against executive pay and compensation followed disclosures of insider trading, double dealing, and outright fraud. But even honest and productive entrepreneurs often earn more money in one year than Albert Einstein did in his entire life. This strikes many - especially academics - as unfair. Surely Einstein's contributions to human knowledge and welfare far exceed anything ever accomplished by sundry businessmen? Fortunately, this discrepancy is cause for constructive jealousy, emulation, and imitation. It can, however, lead to an orgy of destructive and self-ruinous envy. Such envy is reinforced by declining social mobility in the United States. Recent (2006-7) studies by the OECD (Organization for Economic Cooperation and Development) clearly demonstrate that the American Dream is a myth. In an editorial dated July 13, 2007, the NewYork Times described the rapidly deteriorating situation thus: "... (M)obility between generations — people doing better or worse than their parents — is weaker in America than in Denmark, Austria, Norway, Finland, Canada, Sweden, Germany, Spain and France. In America, there is more than a 40 percent chance that if a father is in the bottom fifth of the earnings’ distribution, his son will end up there, too. In Denmark, the equivalent odds are under 25 percent, and they are less than 30 percent in Britain. America’s sluggish mobility is ultimately unsurprising. Wealthy parents not only pass on that wealth in inheritances, they can pay for better education, nutrition and health care for their children. The poor cannot afford this investment in their children’s development — and the government doesn’t provide nearly enough help. In a speech earlier this year, the Federal Reserve chairman, Ben Bernanke, argued that while the inequality of rewards fuels the economy by making people exert themselves, opportunity should be “as widely distributed and as equal as possible.” The problem is that the have-nots don’t have many opportunities either." Still, entrepreneurs recombine natural and human resources in novel ways. They do so to respond to forecasts of future needs, or to observations of failures and shortcomings of current products or services. Entrepreneurs are professional - though usually intuitive futurologists. This is a valuable service and it is financed by systematic risk takers, such as venture capitalists. Surely they all deserve compensation for their efforts and the hazards they assume? Exclusive ownership is the most ancient type of such remuneration. First movers, entrepreneurs, risk takers, owners of the wealth they generated, exploiters of resources - are allowed to exclude others from owning or exploiting the same things. Mineral concessions, patents, copyright, trademarks - are all forms of monopoly ownership. What moral right to exclude others is gained from being the first? Nozick advanced Locke's Proviso. An exclusive ownership of property is just only if "enough and as good is left in common for others". If it does not worsen other people's lot, exclusivity is morally permissible. It can be argued, though, that all modes of exclusive ownership
aggravate other people's situation. As far as everyone, bar the entrepreneur, are concerned, exclusivity also prevents a more advantageous distribution of income and wealth. Exclusive ownership reflects real-life irreversibility. A first mover has the advantage of excess information and of irreversibly invested work, time, and effort. Economic enterprise is subject to information asymmetry: we know nothing about the future and everything about the past. This asymmetry is known as "investment risk". Society compensates the entrepreneur with one type of asymmetry - exclusive ownership - for assuming another, the investment risk. One way of looking at it is that all others are worse off by the amount of profits and rents accruing to owner-entrepreneurs. Profits and rents reflect an intrinsic inefficiency. Another is to recall that ownership is the result of adding value to the world. It is only reasonable to expect it to yield to the entrepreneur at least this value added now and in the future. In a "Theory of Justice" (published 1971, p. 302), John Rawls described an ideal society thus: "(1) Each person is to have an equal right to the most extensive total system of equal basic liberties compatible with a similar system of liberty for all. (2) Social and economic inequalities are to be arranged so that they are both: (a) to the greatest benefit of the least advantaged, consistent with the just savings principle, and (b) attached to offices and positions open to all under conditions of fair equality of opportunity." It all harks back to scarcity of resources - land, money, raw materials, manpower, creative brains. Those who can afford to do so, hoard resources to offset anxiety regarding future uncertainty. Others wallow in paucity. The distribution of means is thus skewed. "Distributive justice" deals with the just allocation of scarce resources. Yet, even the basic terminology is somewhat fuzzy. What constitutes a resource? What is meant by allocation? Who should allocate resources: Adam Smith's "invisible hand", the government, the consumer, or business? Should it reflect differences in power, in intelligence, in knowledge, or in heredity? Should resource allocation be subject to a principle of entitlement? Is it reasonable to demand that it be just - or merely efficient? Are justice and efficiency antonyms? The philosopher Jean-Jacques Rousseaus’ work is an example of these irreconcilable tensions. On the one hand, he assures us that succumbing to an amorphous “general will” guarantees the simultaneous attainment of both the common good and the individual’s welfare and well-being (i.e., of that which is objectively best for him). Yet, just as we begin to equate the “general will” with the market, Rousseau launches into a tirade against the economic dependence fostered by the efficient division and allocation of labour in line with each agent’s comparative advantages. He regards trading, property, and money as the roots of all evil, injustice, and moral decay. Marx took Rousseau to its logical conclusion with his theory of alienation in industrial societies. Philosophers in Nietzsche’s mould believed that the very concept of justice was unnatural. Man-made justice sustains the weak and the individual at the expense of the strong and the collective. Nature, by comparison, is squarely on the side of the fittest, the well-adapted and the group.
Yet, justice is not concerned with survival. It is about equal access to opportunities. Equal access does not guarantee equal outcomes, invariably determined by idiosyncrasies and differences between people. Access leveraged by the application of natural or acquired capacities - translates into accrued wealth. Disparities in these capacities lead to discrepancies in accrued wealth. The doctrine of equal access is founded on the equivalence of Men. That all men are created equal and deserve the same respect and, therefore, equal treatment is not self evident. European aristocracy well into this century would have probably found this notion abhorrent. Jose Ortega Y Gasset, writing in the 1930's, preached that access to educational and economic opportunities should be premised on one's lineage, up bringing, wealth, and social responsibilities. A succession of societies and cultures discriminated against the ignorant, criminals, atheists, females, homosexuals, members of ethnic, religious, or racial groups, the old, the immigrant, and the poor. Communism - ostensibly a strict egalitarian idea - foundered because it failed to reconcile strict equality with economic and psychological realities within an impatient timetable. Philosophers tried to specify a "bundle" or "package" of goods, services, and intangibles (like information, or skills, or knowledge). Justice - though not necessarily happiness - is when everyone possesses an identical bundle. Happiness - though not necessarily justice - is when each one of us possesses a "bundle" which reflects his or her preferences, priorities, and predilections. None of us will be too happy with a standardized bundle, selected by a committee of philosophers - or bureaucrats, as was the case under communism. The market allows for the exchange of goods and services between holders of identical bundles. If I seek books, but detest oranges - I can swap them with someone in return for his books. That way both of us are rendered better off than under the strict egalitarian version. Still, there is no guarantee that I will find my exact match - a person who is interested in swapping his books for my oranges. Illiquid, small, or imperfect markets thus inhibit the scope of these exchanges. Additionally, exchange participants have to agree on an index: how many books for how many oranges? This is the price of oranges in terms of books. Money - the obvious "index" - does not solve this problem, merely simplifies it and facilitates exchanges. It does not eliminate the necessity to negotiate an "exchange rate". It does not prevent market failures. In other words: money is not an index. It is merely a medium of exchange and a store of value. The index - as expressed in terms of money - is the underlying agreement regarding the values of resources in terms of other resources (i.e., their relative values). The market - and the price mechanism - increase happiness and welfare by allowing people to alter the composition of their bundles. The invisible hand is just and benevolent. But money is imperfect. The aforementioned Rawles demonstrated (1971), that we need to combine money with other measures in order to place a value on intangibles. The prevailing market theories postulate that everyone has the same resources at some initial point (the "starting gate"). It is up to them to deploy these endowments and, thus, to ravage or
increase their wealth. While the initial distribution is equal - the end distribution depends on how wisely - or imprudently - the initial distribution was used. Egalitarian thinkers proposed to equate everyone's income in each time frame (e.g., annually). But identical incomes do not automatically yield the same accrued wealth. The latter depends on how the income is used - saved, invested, or squandered. Relative disparities of wealth are bound to emerge, regardless of the nature of income distribution. Some say that excess wealth should be confiscated and redistributed. Progressive taxation and the welfare state aim to secure this outcome. Redistributive mechanisms reset the "wealth clock" periodically (at the end of every month, or fiscal year). In many countries, the law dictates which portion of one's income must be saved and, by implication, how much can be consumed. This conflicts with basic rights like the freedom to make economic choices. The legalized expropriation of income (i.e., taxes) is morally dubious. Anti-tax movements have sprung all over the world and their philosophy permeates the ideology of political parties in many countries, not least the USA. Taxes are punitive: they penalize enterprise, success, entrepreneurship, foresight, and risk assumption. Welfare, on the other hand, rewards dependence and parasitism. According to Rawles' Difference Principle, all tenets of justice are either redistributive or retributive. This ignores non-economic activities and human inherent variance. Moreover, conflict and inequality are the engines of growth and innovation - which mostly benefit the least advantaged in the long run. Experience shows that unmitigated equality results in atrophy, corruption and stagnation. Thermodynamics teaches us that life and motion are engendered by an irregular distribution of energy. Entropy - an even distribution of energy equals death and stasis. What about the disadvantaged and challenged - the mentally retarded, the mentally insane, the paralyzed, the chronically ill? For that matter, what about the less talented, less skilled, less daring? Dworkin (1981) proposed a compensation scheme. He suggested a model of fair distribution in which every person is given the same purchasing power and uses it to bid, in a fair auction, for resources that best fit that person's life plan, goals and preferences. Having thus acquired these resources, we are then permitted to use them as we see fit. Obviously, we end up with disparate economic results. But we cannot complain - we were given the same purchasing power and the freedom to bid for a bundle of our choice. Dworkin assumes that prior to the hypothetical auction, people are unaware of their own natural endowments but are willing and able to insure against being naturally disadvantaged. Their payments create an insurance pool to compensate the less fortunate for their misfortune. This, of course, is highly unrealistic. We are usually very much aware of natural endowments and liabilities - both ours and others'. Therefore, the demand for such insurance is not universal, nor uniform. Some of us badly need and want it - others not at all. It is morally acceptable to let willing buyers and sellers to trade in such coverage (e.g., by offering charity or alms) - but may be immoral to make it compulsory. Most of the modern welfare programs are involuntary Dworkin schemes. Worse yet, they often measure differences in natural endowments arbitrarily, compensate for lack of acquired
skills, and discriminate between types of endowments in accordance with cultural biases and fads. Libertarians limit themselves to ensuring a level playing field of just exchanges, where just actions always result in just outcomes. Justice is not dependent on a particular distribution pattern, whether as a starting point, or as an outcome. Robert Nozick "Entitlement Theory" proposed in 1974 is based on this approach. That the market is wiser than any of its participants is a pillar of the philosophy of capitalism. In its pure form, the theory claims that markets yield patterns of merited distribution - i.e., reward and punish justly. Capitalism generate just deserts. Market failures - for instance, in the provision of public goods - should be tackled by governments. But a just distribution of income and wealth does not constitute a market failure and, therefore, should not be tampered with.
The Agent-Principal Conundrum
In the catechism of capitalism, shares represent the part-ownership of an economic enterprise, usually a firm. The value of shares is determined by the replacement value of the assets of the firm, including intangibles such as goodwill. The price of the share is determined by transactions among arm's length buyers and sellers in an efficient and liquid market. The price reflects expectations regarding the future value of the firm and the stock's future stream of income - i.e., dividends. Alas, none of these oft-recited dogmas bears any resemblance to reality. Shares rarely represent ownership. The float - the number of shares available to the public - is frequently marginal. Shareholders meet once a year to vent and disperse. Boards of directors are appointed by management - as are auditors. Shareholders are not represented in any decision making process - small or big. The dismal truth is that shares reify the expectation to find future buyers at a higher price and thus incur capital gains. In the Ponzi scheme known as the stock exchange, this expectation is proportional to liquidity - new suckers - and volatility. Thus, the price of any given stock reflects merely the consensus as to how easy it would be to offload one's holdings and at what price. Another myth has to do with the role of managers. They are supposed to generate higher returns to shareholders by increasing the value of the firm's assets and, therefore, of the firm. If they fail to do so, goes the moral tale, they are booted out mercilessly. This is one manifestation of the "Principal-Agent Problem". It is defined thus by the Oxford Dictionary of Economics: "The problem of how a person A can motivate person B to act for A's benefit rather than following (his) self-interest." The obvious answer is that A can never motivate B not to follow B's self-interest - never mind what the incentives are. That economists pretend otherwise - in "optimal contracting theory" - just serves to demonstrate how divorced economics is from human psychology and, thus, from reality. Managers will always rob blind the companies they run. They will always manipulate boards to collude in their shenanigans. They will always bribe auditors to bend the rules. In other words, they will always act in their self-interest. In their defense, they can say that the damage from such actions to each shareholder is minuscule while the benefits to the manager are enormous. In other words, this is the rational, self-interested, thing to do. But why do shareholders cooperate with such corporate brigandage? In an important Chicago Law Review article titled "Managerial Power and Rent Extraction in the Design of Executive Compensation", the authors demonstrate how the typical stock option granted to managers as part of their remuneration rewards mediocrity rather than encourages excellence. But everything falls into place if we realize that shareholders and managers are allied against the firm - not pitted against each other. The paramount interest of both shareholders and
managers is to increase the value of the stock - regardless of the true value of the firm. Both are concerned with the performance of the share - rather than the performance of the firm. Both are preoccupied with boosting the share's price - rather than the company's business. Hence the inflationary executive pay packets. Shareholders hire stock manipulators euphemistically known as "managers" - to generate expectations regarding the future prices of their shares. These snake oil salesmen and snake charmers - corporate executives - are allowed by shareholders to loot the company providing they generate consistent capital gains to their masters by provoking persistent interest and excitement around the business. Shareholders, in other words, do not behave as owners of the firm - they behave as freeriders. The Principal-Agent Problem arises in other social interactions and is equally misunderstood there. Consider taxpayers and their government. Contrary to conservative lore, the former want the government to tax them providing they share in the spoils. They tolerate corruption in high places, cronyism, nepotism, inaptitude and worse on condition that the government and the legislature redistribute the wealth they confiscate. Such redistribution often comes in the form of pork barrel projects and benefits to the middle-class. This is why the tax burden and the government's share of GDP have been soaring inexorably with the consent of the citizenry. People adore government spending precisely because it is inefficient and distorts the proper allocation of economic resources. The vast majority of people are rent-seekers. Witness the mass demonstrations that erupt whenever governments try to slash expenditures, privatize, and eliminate their gaping deficits. This is one reason the IMF with its austerity measures is universally unpopular. Employers and employees, producers and consumers all reify the Principal-Agent Problem. Economists would do well to discard their models and go back to basics. They could start by asking: Why do shareholders acquiesce with executive malfeasance as long as share prices are rising? Why do citizens protest against a smaller government - even though it means lower taxes? Could it mean that the interests of shareholders and managers are identical? Does it imply that people prefer tax-and-spend governments and pork barrel politics to the Thatcherite alternative? Nothing happens by accident or by coercion. Shareholders aided and abetted the current crop of corporate executives enthusiastically. They knew well what was happening. They may not have been aware of the exact nature and extent of the rot, but they witnessed approvingly the public relations antics, insider trading, stock option resetting , unwinding, and unloading, share price manipulation, opaque transactions, and outlandish pay packages. Investors remained mum throughout the corruption of corporate America. It is time for the hangover.
The Green-Eyed Capitalist
Conservative sociologists self-servingly marvel at the peaceful proximity of abject poverty and ostentatious affluence in American - or, for that matter, Western - cities. Devastating riots do erupt, but these are reactions either to perceived social injustice (Los Angeles 1965) or to political oppression (Paris 1968). The French Revolution may have been the last time the urban sans-culotte raised a fuss against the economically enfranchised. This pacific co-existence conceals a maelstrom of envy. Behold the rampant Schadenfreude which accompanied the antitrust case against the predatory but loaded Microsoft. Observe the glee which engulfed many destitute countries in the wake of the September 11 atrocities against America, the epitome of triumphant prosperity. Witness the post-World.com orgiastic castigation of avaricious CEO's. Envy - a pathological manifestation of destructive aggressiveness - is distinct from jealousy. The New Oxford Dictionary of English defines envy as: "A feeling of discontented or resentful longing aroused by someone else's possessions, qualities, or luck ... Mortification and ill-will occasioned by the contemplation of another's superior advantages." Pathological envy - the fourth deadly sin - is engendered by the realization of some lack, deficiency, or inadequacy in oneself. The envious begrudge others their success, brilliance, happiness, beauty, good fortune, or wealth. Envy provokes misery, humiliation, and impotent rage. The envious copes with his pernicious emotions in five ways: 1. They attack the perceived source of frustration in an attempt to destroy it, or "reduce it" to their "size". Such destructive impulses often assume the disguise of championing social causes, fighting injustice, touting reform, or promoting an ideology. They seek to subsume the object of envy by imitating it. In extreme cases, they strive to get rich quick through criminal scams, or corruption. They endeavor to out-smart the system and shortcut their way to fortune and celebrity. They resort to self-deprecation. They idealize the successful, the rich, the mighty, and the lucky and attribute to them super-human, almost divine, qualities. At the same time, they humble themselves. Indeed, most of this strain of the envious end up disenchanted and bitter, driving the objects of their own erstwhile devotion and adulation to destruction and decrepitude. They experience cognitive dissonance. These people devalue the source of their frustration and envy by finding faults in everything they most desire and in everyone they envy.
They avoid the envied person and thus the agonizing pangs of envy.
Envy is not a new phenomenon. Belisarius, the general who conquered the world for Emperor Justinian, was blinded and stripped of his assets by his envious peers. I - and many others have written extensively about envy in command economies. Nor is envy likely to diminish. In the 18th century, the political philosopher and novelist Jean-Jacques Rousseau made a distinction between amour de soi and amour propre. The former involved striking a balance between regard for one’s own welfare and well-being and the empathy that one owed and felt towards others. It was another phrase for self-love, self-regard, and self-awareness. The latter – amour proper - was all about grandiose and malignant narcissism, an unseemly conflation of self-gratification and conceited haughtiness, and the insatiable need to be reflected in the gaze of others as the only path to self-knowledge. Amour de soi was transformed into amour propre by the acquisition of property and the greed and envy that it, inevitably, provoked. In his book, "Facial Justice", Hartley describes a post-apocalyptic dystopia, New State, in which envy is forbidden and equality extolled and everything enviable is obliterated. Women are modified to look like men and given identical "beta faces". Tall buildings are razed. Joseph Schumpeter, the prophetic Austrian-American economist, believed that socialism will disinherit capitalism. In "Capitalism, Socialism, and Democracy" he foresaw a conflict between a class of refined but dirt-poor intellectuals and the vulgar but filthy rich businessmen and managers they virulently envy and resent. Samuel Johnson wrote: "He was dull in a new way, and that made many people think him great." The literati seek to tear down the market economy which they feel has so disenfranchised and undervalued them. Hitler, who fancied himself an artist, labeled the British a "nation of shopkeepers" in one of his bouts of raging envy. Ralph Reiland, the Kenneth Simon professor of free enterprise at Robert Morris University, quotes David Brooks of the "weekly Standard", who christened this phenomenon "bourgeoisophobia": "The hatred of the bourgeoisie is the beginning of all virtue' - wrote Gustav Flaubert. He signed his letters 'Bourgeoisophobus' to show how much he despised 'stupid grocers and their ilk ... Through some screw-up in the great scheme of the universe, their narrowminded greed had brought them vast wealth, unstoppable power and growing social prestige." Reiland also quotes from Ludwig van Mises's "The Anti-Capitalist Mentality": "Many people, and especially intellectuals, passionately loathe capitalism. In a society based on caste and status, the individual can ascribe adverse fate to conditions beyond his control. In ... capitalism ... everybody's station in life depends on his doing ... (what makes a man rich is) not the evaluation of his contribution from any 'absolute' principle of justice but the evaluation on the part of his fellow men who exclusively apply the yardstick of their personal wants, desires and ends ... Everybody knows very well that there are people like himself who succeeded where he himself failed. Everybody knows that many of those he envies are self-made men who started from the same point from which he himself started. Everybody is aware of his own defeat. In order to console himself and to restore his selfassertion, such a man is in search of a scapegoat. He tries to persuade himself that he failed through no fault of his own. He was too decent to resort to the base tricks to which
his successful rivals owe their ascendancy. The nefarious social order does not accord the prizes to the most meritorious men; it crowns the dishonest, unscrupulous scoundrel, the swindler, the exploiter, the 'rugged individualist'." In "The Virtue of Prosperity", Dinesh D'Souza accuses prosperity and capitalism of inspiring vice and temptation. Inevitably, it provokes envy in the poor and depravity in the rich. With only a modicum of overstatement, capitalism can be depicted as the sublimation of jealousy. As opposed to destructive envy - jealousy induces emulation. Consumers responsible for two thirds of America's GDP - ape role models and vie with neighbors, colleagues, and family members for possessions and the social status they endow. Productive and constructive competition - among scientists, innovators, managers, actors, lawyers, politicians, and the members of just about every other profession - is driven by jealousy. The eminent Nobel prize winning British economist and philosopher of Austrian descent, Friedrich Hayek, suggested in "The Constitution of Liberty" that innovation and progress in living standards are the outcomes of class envy. The wealthy are early adopters of expensive and unproven technologies. The rich finance with their conspicuous consumption the research and development phase of new products. The poor, driven by jealousy, imitate them and thus create a mass market which allows manufacturers to lower prices. But jealousy is premised on the twin beliefs of equality and a level playing field. "I am as good, as skilled, and as talented as the object of my jealousy." - goes the subtext - "Given equal opportunities, equitable treatment, and a bit of luck, I can accomplish the same or more." Jealousy is easily transformed to outrage when its presumptions - equality, honesty, and fairness - prove wrong. In a paper recently published by Harvard University's John M. Olin Center for Law and titled "Executive Compensation in America: Optimal Contracting or Extraction of Rents?" the authors argue that executive malfeasance is most effectively regulated by this "outrage constraint": "Directors (and non-executive directors) would be reluctant to approve, and executives would be hesitant to seek, compensation arrangements that might be viewed by observers as outrageous."