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The Financial Express

Thomas Piketty on inequality

| Updated: January 10, 2021 21:50:22


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French economist and academic Thomas Piketty with his magnum opus Capital in the Twenty First Century        - Reuters French economist and academic Thomas Piketty with his magnum opus Capital in the Twenty First Century        - Reuters

Thomas Piketty has written a book on a subject that is familiar to many for a long time, which has of late assumed critical importance. Inequality of income associated with capitalist development of the economy has drawn attention of economists and policy makers ever since capitalism became a dominant mode of production and distribution. Because the ownership of means of productions is skewed in favour of a few, the distribution of national income has become asymmetrical in most of the countries where the regulatory regime is weak. In the age of neo-classical economics two contrasting views emerged, one held by Karl Marx and the other by Symon Kutznets, standing at opposite poles. According to Marx, the dynamic of private capital accumulation inevitably leads to concentration of wealth and income in a few hands which becomes unstoppable.  Symon Kutznets, writing one hundred years after Marx, believed that economic growth, competition and technological progress will lead, in later stages of capitalist development, to reduced inequality. Buffeted by these two contrasting views, Piketty wanted to find out how wealth and income have evolved since the eighteenth century and what lessons can be drawn from that knowledge for the 21st century.

Though Piketty  dealt with the same subject as Marx and Kuznets, he had the advantage of using more extensive historical and comparative data than were available before. He could bring to bear data covering three centuries pertaining to more than twenty countries in his research. In addition, he has been able to use a new theoretical framework that offers a deeper understanding of the underlying mechanism of growth and distribution of income. While admitting that economic growth and diffusion of knowledge and technology have helped countries to avoid the dire consequences of capitalist exploitation and infinite accumulation, he has pointed out in his book that built-in tendency inherent in capital towards inequality has not disappeared. To him the crux of the problem of capitalism is the inevitability of the rate of return on capital to exceed the rate of growth on output and income. In other words, owners of capital, are remunerated more than managers and workers, generating arbitrary inequalities. He, however, believes that under democratic dispensation it is possible to exert control on capitalism and ensure promotion of general interests.

Where Piketty differs from others in the study on distribution of income and wealth is in his approach to the task at hand. He stresses the point that the distribution of wealth and income is too important an issue to be left to economists. In place of the traditional approach he is in favour of  what he calls `a social scientific method', which may not transform economics, sociology, history and philosophy into exact science but can make them broad based. By patiently searching for facts and dispassionately analysing the multi-disciplinary factors at work in the economy, the right questions can be asked about the course of economic growth, income and distribution, he believes.

What he sought in his research was to avoid economist determinism in concluding about the phenomenon of economic inequality. After giving a brief overview of the classical economists' view on the subject, going through Marx to Simon Kuznets, he discusses his divergences of findings and views with them, particularly with Kuznets whose U-shaped curve served as the definitive conclusion on the issue of income inequality since the mid-fifties.

By way of recapitulation, Piktetty reminds his readers that according to Kuznets' theory, income inequality automatically decreases in advanced phases of  capitalist development until it stabilises at an acceptable level. He points out that it was the first theory to rely on a formidable body of statistics. But Kuznets' statistical series on income involved only one country (USA) and covered a period of only thirty five years (1913-1948). Kuznets' sources drew from two series of data that were not available to earlier researcher: Federal Income Tax returns and Kuznets' own estimate of US national income from a few years earlier than the former. Based on these statistical data over time Kuznets concluded that inequality everywhere can be expected to follow a `Bell curve', indicating an initial increase of inequality followed by decrease over the course of economic development. But Piketty shoots a hole in Kuznets' theory, saying the sharp fall in income inequality that is seen in all developed countries during 1917-1948 were due to two world wars and the violent economic and social shocks inflicted on rich people by the Great Depression. He thus puts the distributional question back at the heart of economic analysis. That is the first thing new in Picketty's book and it is a very important one. By pointing this out he dismantles Kuznets' theory of a U-shaped reduction of income inequality. In de-mystifying Kuznets' popular theory, he has also criticised economists' long neglect of the issue of inequality in the past and at present.

In pursuance of the new task, Piketty has used new sources of data, in addition to those used by Kuznets. But here he runs into a dilemma: was Kuznets' forecast wrong because his sources and data related to a period that was not normal (war, depression) or were they inherently faulty in nature? Obviously Piketty finds fault with the first i.e., data relating to an abnormal period of economic growth and distribution. About the intrinsic merit of the data, he had no quarrel with Kuznets'; rather he was full of praise for them.

To avoid the problem of abnormal years and geographical limitation of a single country, Piketty expanded the period to three hundred years over which he collected data from twenty countries. This is a formidable body of statistical data relating to as many as twenty countries, which is adequate  enough to capture both normal and abnormal years of economic growth and thereby work out the average or general trends in respect of income distribution. Piketty, however, is too clever to avoid the pitfall of average figures and attempts to combine periods of inequality along with those when it declined. Excluding external shocks, like war and depression, he has identified periods when income inequality declines because of expansion of education, skill development and diffusion of technology, periods when the forces of `convergence' of income and wealth are robustly at work and periods of `divergence' when the opposite happens. It has taken a very painstaking research and detailed analysis of data to identify these periods for which Piketty deserves plaudits. His overall conclusion is that in the course of long period the forces of divergence exceed in frequency and robustness the periods of convergence, which makes the overall outcome of capitalist economic growth as one of growing income inequality. This strengthens the overriding feature of capitalist system to engender a rate of return on capital higher than on output and wages. Because of this inherent tendency of asymmetrical return, the process by which the wealth is accumulated and distributed, contains powerful forces pushing towards divergence that results in a high level of inequality. He concedes that forces of convergence may also exists in certain countries at certain times like expansion of education, dissemination of knowledge and skills and broadcasted use of technology, but he thinks that forces of divergence can at any time regain the upper hand as seems to be happening now at the beginning of 21st century. Though Piketty's conclusion somewhat moderates Marx's infinite accumulation and perpetual divergence, this does not change the inevitability of inequality emerging in the course of capitalist growth, which may at best be slowed down at times of convergence.

In Piketty's analysis of capitalism, inequality remains a fact of life, its occasional attenuation notwithstanding. Economic growth, over time,  does not stem its tide or slow down the process as Kuznets had demonstrated. This is the major difference of Piketty's findings with that of Kuznets. Though he says that he has no interest in criticising inequality or capitalism per se - especially scarce social inequalities are not in themselves a problem for him as long as they are justified, that is founded only upon common utility, he is keen to contribute his bit to organise society in the best way with most appropriate institutions and policies to achieve a just social order. Perhaps the apparent contradiction here can be explained by his refusal to adopt `violent measures' to remove inequality in place of democratic moderation. As a solution to the problem, he recommends the use of the  instruments of progressive  income tax, progressive inheritance tax and a global tax on wealth as the remedy for growing inequality. It is on the third option that reservations will be made by governments and it is the weakest of his policy prescription. Instead of trying to impose a global wealth tax it would be easier to opt for national wealth tax and progressive income tax by a country. Piketty's recommendations for remedial action not only lacks novelty but they are unpractical, too. In a democracy it would be difficult to impose a high rate of progressive income or inheritance tax on the rich because the latter wields considerable political power. This brings back the issue of `violent way' of diminishing the size of wealth at the root i.e., inheritance tax and a cap on the rate of return on capital (salaries, bonuses of managers). But the common critique of Piketty's analysis will be the usefulness of the idea of convergence (towards less inequality) and those of divergence resulting in opposite outcome. Since their operation will not be on regular basis and to the same degree, how will they help in estimating the extent of inequality in a particular year when tax liability  has to be assessed? Sporadic and irregular events like convergence and divergence cannot be the basis of a permanent policy, simply because the calculation of the outcome of their interaction cannot be made in real time in a particular year. So, Piketty's views on convergence and divergence, however novel, remain in the realm of only possibility, lacking certainty. In view of the familiar fact of inequality arising out of the working of a capitalist system and the known facts about the difficulty of imposing very high level of progressive tax, one wonders if the hard and painstaking work on which the book is based was worth the trouble. His only point of originality in the book is pointing out how Kuznets made a great mistake about his theory of diminishing of inequality in the course of growth.

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