One of the ideas that Thomas literally hammers home, using more graphs than I could count, is that it is the ‘unequal distribution of wealth’ and not the ‘rising income disparity’

Voices Tuesday, April 07, 2015 - 05:30
By Aniket Krishna The recent seminal work of the French economist Thomas Piketty, titled Capital in the Twenty-First Century, has captured the imagination of the public at large. From economists to policy makers and hedge fund managers to university graduate students, the ideas in Thomas’ work seem to be creating quite a buzz. The intent behind this piece is not to summarize Thomas’ mammoth 696-page monument of social dynamics, but rather to present a Piketty version of the classic capitalist story titled - ‘We need to invest to create more jobs’. The Setting – A bit about Thomas Piketty Let’s begin with a disclaimer about Thomas Piketty. Disclaimer - What you see in the form of a book by Thomas Piketty is in actuality a summary of a gargantuan data mining exercise carried out by a very accomplished team of researchers over the last 15 years. Henceforth and throughout this article, we shall refer to this team as Thomas Piketty himself. This would not only help in keeping our prose consistent with all the Piketty summaries floating around but also establish our empathy for the marketing idea that offers to one man the work of many! Thomas’s work contains, as claimed by several famous economists including Joseph Stiglitz and Paul Krugman, a model that begins by contextualizing the unequal distribution of wealth and income but surprisingly manages to accommodate other areas of economics itself viz., political economy, growth, poverty traps etcetera. The backbone of the analysis rests on two large collections of data – the social concentration of wealth and the income tax data along with the national income accounts for the aggregate data. Thomas then studies this data over centuries and comes up with certain Marxist insights backed up by solid empirical evidence. Once again it’s important to remember that economists don’t really invent or innovate but rather synthesize social data and as such any comparisons between Piketty and Marx would prove utterly futile. The Indian Connection India is one of the countries that Piketty studies in his book. But before we draw our conclusions about India through Thomas’ lens, we ought to comprehend one monster – The Indian Data. The time period over which India’s tax data is analyzed is from 1922 to 1999 – factually speaking the pre independence data is from the British Empire, but it’s not too bad apparently. Let’s gently take into cognizance two aspects here. One, that as an emerging market and a young democracy our tax data is bound to see a significant error term driven by tax evasion. Two, as mentioned above, Piketty’s Indian data runs until 1999 and already shows alarming levels of wealth distribution with the top 1% of the population earning 9% of the country’s income and the top 0.01% earning almost 2% of the national income. The data is far from conclusive when it comes to India. In the year 1998 there were just 14.69 million submitted tax returns from a population of a 997 million! I leave it to your imagination to comprehend these numbers in 2014. In the World of Piketty’s Ideas One of the ideas that Thomas literally hammers home, using more graphs than I could count, is that it is the ‘unequal distribution of wealth’ and not the ‘rising income disparity’ that is behind the monetary inequality in today’s society. In the pre-Piketty world, the definition of wealth was loosely based on surplus income. Your wealth was basically the accumulation of your savings. One of the most transformative ideals of the 20th century, that of ‘equal opportunity’, provided a level playing field for the generation of wealth. Gone were the days of inheritance and extremely high capital generated income in certain pockets of society. The majority of the intellectual elite claimed that the world had opened up, become freer and that society now stood on the threshold of the egalitarian ideal. Thomas destroys this picture using a series of empirical evidence. What he discovers is, that extremely high wealth pockets occur in cycles and that historically these so called wealth pockets have always sough the easiest route to self propagation which is often different from labour generated income .He ends with a slightly disturbing prophecy – we are in the upward portion of one such wealth concentration cycle. Over the past 25 years the inherited wealth in the Forbes’ list of the 400 richest Americans has grown 9 times faster than wealth created through entrepreneurial activities. The more academically inclined reader would indeed be curious as to which aspect of the data helped Thomas reach this conclusion. It was the comparison and contrast between the net-rate of return on capital versus growth. Let’s now strip away all the academic jargon for a moment and take hold of the key ideas here. ‘Income mobility’ or the ease with which someone in society can move up in the activity of wealth creation appears to be adversely impacted by the increase in the concentration of wealth. This is truly bizarre! Traditionally, the theory went as follows – State lowers tax rates for capital investments, the rich follow by investing more capital into growth, this capital brings about income and more jobs, which in turn leads to higher consumption. Thomas argues differently – increase in the concentration of capital leads to an increase in the concentration of power, which in turn leads to an imbalance in the political economy with the rich drafting policies favoring themselves, these policies in turn strengthen their capital concentration. Old school economics tells us that the proper investment of wealth creates jobs. Piketty 101 tells us that the pragmatic investment of wealth creates more wealth – with or without jobs! Read the next part of this article- The Piketty Idea and our Prime Time Lords. Aniket Krishna is an entrepreneurial mathematical epistemologist by profession, training and nature. The opinions expressed in this articles are the personal opinions of the author. The News Minute is not responsible for the accuracy, completeness, suitability or validity of any information in this article. The information, facts or opinions appearing in this article do not reflect the views of The News Minute and The News Minute does not assume any liability on the same.
Become a TNM Member for just Rs 999!
You can also support us with a one-time payment.