inequality
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The hottest thing in the market of ideas right now is the new book by French economist Thomas Piketty, “Capitalism in the Twenty-First Century“. Everyone is talking about it. Amazon has run out of stock. It is also the number one best seller on Amazon. The book features in the top 20 of the New York Times best sellers list in the non-fiction category. All this means that a lot of people are reading it and talking about it.

However, Indian readers will have to wait a bit before they can get their hands on the book. Amazon says that the book will be released in India sometime in mid-May.

I have certain doubts about the academic nature of the book. My economist friend, who is also a French national, tells me that “Piketty is heavily involved politically”, and admittedly so (apparently Piketty notes in the introduction of his book that he left MIT because it was “too mainstream”). It is another matter that he uses the same techniques to make his claims in the book. Tyler Cowen and Veronique de Rugy claim that Piketty has been “the darling of the French Socialist party and intellectuals”. While a judgement on Piketty’s book should be reserved for until we have read the book ourselves, for now, we shall limit ourselves to secondary sources of information such as book reviews, op-eds, commentaries, etc.

Niranjan Rajadhyaksha had a brilliant piece in Mint providing historical, present and global context to the debate on ‘inequality’. Answering the question, “Is inequality growing?”, Niranjan observes,

“Inequality within countries is definitely growing. But inequality in the world as a whole is perhaps reducing because of the rapid income growth in the two most populous countries in the world: China and India. Hundreds of millions of people in these two countries have moved closer to the global average. However, the growing inequality within nations attracts more attention because politics is national.” 

Piketty shows through his extensive study of data that while inequality has been increasing in recent decades, share of income going to capital is also going up.

Garett Jones over at Reason does not quite agree with Piketty’s thesis, that in the long run return on capital (r) will be higher than the rate of growth (g), or, r>g. He uses first principles of economics to show that it is highly unlikely that in the long run return on capital will be higher than the rate of growth. For Jones, a high rate of interest means that businesses look for alternative to capital (such as labour) resulting in a decrease in demand for capital and thereby its price (rate of interest).

Few concerns comes to mind immediately when considering “rising inequality”. It becomes imperative that we understand and consider them before we pronounce judgement in the favour of or against markets, businesses, or capitalists.

  • It is most important to distinguish between ‘capitalists’ and ‘crony-capitalists’. My contention would be that the much higher rate of return on capital could also be due to protection granted by the government/state to one or a few select producers. In other words, barriers-to-entry. But we need solid evidence to test this hypothesis. One way could be to see and compare the rate of return on capital in otherwise competitive industries such as FMCG, automobiles, etc., and in industries that are otherwise protected such as, oil and gas, aviation, railways, defence, etc.
  • While the distinction between capitalists and crony capitalists may become obvious upon a little reflection, one point that often gets lost is the relationship between crony capitalism and monetary policy. Economic theory tells us that the inflationary monetary policy followed by the Central Bankers around the world hurts poor the most. While inflationary policies keep the asset prices at an elevated level, people living on fixed income (e.g., pensioners) are hurt the most due to rising prices.
  • Also, under free market capitalism, the group of individuals who at any two points of time are called ‘capitalists’ are almost never the same. The system has an inherent tendency to weed out producers who are not able to serve consumers best while people who are able to create value are rewarded (e.g., founders of Facebook and Whatsapp were able to create a lot of value as demonstrated by their huge market capitalisation despite humble origins).
  • The bail-outs granted during the global financial crisis of 2007-08 was not within the framework of capitalism or a market economy. That was a distortionary state intervention into the markets to protect few special interests. The possibility of a golden parachutes for executives and bail-outs for companies being available for businesses, in case their enterprise fail creates several moral hazards, while socialising losses and privatising profits.
  • In the real world, value gets created by producing something that is demanded by people. Producing something for which there is no demand is a wasteful exercise. Majority of the tasks performed under the employment guarantee program of the UPA government is one such example. If not a complete waste, it wasn’t the most economic use of scarce resources which a market economy rewards and fosters.

It is easy to succumb to the notion that “the rich are getting richer while the poor are getting poorer”. Attention needs to be paid to whether the lot of poor are improving or worsening; and whether rich get richer by serving the need of others (the only way one could in a free market economy), or by availing some patronage/favour of the state (as through monopoly rights awarded by the government or by inflationary monetary policy of the central bank).

Further readings:

Prashanth Perumal in his Mint column presents an Austrian critique of Piketty’s ‘Capital in the Twenty-First Century’.

Richard Ebeling has a piece addressing the issue and rephrasing the ‘inequality’ question as ‘whether the wealth accrues from production or from politics’.

Post Disclaimer

The opinions expressed in this essay are those of the authors. They do not purport to reflect the opinions or views of CCS.

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Kumar Anand

Kumar Anand is an economist with over ten years of experience working with for-profit companies, government ministries and not-for-profit think tanks. Kumar has previously worked with National Institute of Public Finance and Policy (NIPFP) where he was part of the research team that assisted the Financial Sector Legislative Reforms Commission (FSLRC). Before joining NIPFP, he worked with Hong Kong-based Asianomics Limited, where he kept a watch on the developments in the Indian sub-continent markets. Before his present role, Kumar worked with Centre for Civil Society in New Delhi, where he created an online library of Indian liberal works to preserve and revive the rich Indian liberal and free market tradition.

Currently, Kumar leads the research team at Nayi Disha in Mumbai, where he is exploring the right set of principles-based rules that should govern a city and a nation and the ways to create a popular demand for such a change. Kumar's research interests are in Indian economic history, urban economics and public choice economics. He is a graduate of Gokhale Institute of Politics and Economics, Pune.