 Inequality is the hot issue of the moment. President Obama mentioned in his 2014 State of the Union address that income inequality was going to be one of his top priorities for this year. And just in the last few weeks, a book by the French economist Thomas Piketty on wealth inequality has surged to the top of the Amazon bestseller list. What is inequality? Why is inequality important? What's the right way to think about inequality? Well, let me make a few general points from the perspective of basic Austrian economics. As Murray Rothbard and Ludwig von Mises pointed out, inequality, meaning differences of talent, of taste, of temperament, is sort of fundamental to the human condition. Right? All of us are different. All of us have different interests and different abilities. Because in a free market, the returns to our abilities, the money that we generate, the wealth that we accumulate, is tied to our individual characteristics, we wouldn't expect income or wealth to be distributed evenly across all people at all times. Labor income wages are determined by the marginal productivity of labor on the free market. Profits are determined by the skill with which entrepreneurs can deploy and combine and recombine resources under conditions of uncertainty. Interest returns are determined by prior savings and wealth accumulation, and so on. So diversity, in that sense, is not something to be avoided, but rather something to be celebrated. If all of us were identical, if we had identical talents, there would be no reason to come together in the form of a society. There would be no division of labor. There would be no gains from trade. And we could all live as individuals isolated from each other rather than participating in a global market economy. This very interesting book by Piketty on the long-run distribution of wealth is gaining a lot of attention. Professor Piketty claims that inequality of wealth has a systematic tendency to increase. It decreased slightly in the 20th century, but it had been increasing before and will continue to increase. And he recommends very steep progressive taxation on wealth to remedy this inequality. Moreover, Piketty focuses on long-run trends in the returns to capital, the income that accrues to capital holders or wealth holders, and the long-run rate of economic growth. And he claims that the return to capital is growing faster over time than general economic growth. And this will tend to exacerbate inequality going forward. The fundamental flaw in the way that Piketty's work approaches this problem is that it thinks of wealth or capital in the wrong sense. Right to Austrian economists, capital is not a homogeneous pool of funds that magically and automatically reproduces itself. Rather, capital is a stock of heterogeneous assets, machines, land, technical know-how and so forth. And these heterogeneous resources must be invested by entrepreneurs under conditions of uncertainty. So entrepreneurs are always seeking profit. They're seeking to deploy productive assets in a way that generates profit for them and avoids losses. But there's no such thing as a rate of return on capital. Certainly not a rate of return on capital that is automatic, that is generated simply by the fact of capital's existence. Capital is not a homogeneous blob. It's a heterogeneous collection of resources that are always under the control of entrepreneurs. And income that is earned by capital holders is the result of superior entrepreneurial foresight and entrepreneurial skill, and in some cases, luck. Attempts by the state to change levels of wealth and income, to take wealth from some people and give wealth to other people, diminishes the incentives of entrepreneurs to engage in those activities that create wealth in the first place. So in short, if people are concerned about income that accrues to certain people unjustly for reasons of government privilege, for example, the salaries earned by the top executives at Lockheed Martin or Goldman Sachs, or the speaking fees earned by Hillary Clinton, right, or the incomes of U.S. sugar farmers protected by a very steep tariff, yes, then I would be concerned about those too. And I think we need to attack those inequalities by removing special government privilege that gives wealth unjustly to some people at the expense of others. But inequality of income or wealth per se, that's not really a very useful construct, and it's certainly not a good way to think about designing government policy.