A version of this review was published in the June issue of The CSR Analyst.
Capital
in the Twenty-First Century (2014), Thomas Picketty, Translated by Arthur
Goldhammer, Harvard University Press, pg. 685
“What the bourgeoisie produces, above
all, are its own gravediggers. Its fall and the victory of the Proletariat are
equally inevitable.”
Karl Marx, The Communist Manifesto,
1848
“Growth is a rising tide that lifts all
boats.”
A neo liberal aphorism
The much awaited, enormously important
book of the decade is out! Thomas Picketty, Professor of Economics at the Paris
School of Economics and one of the world’s leading experts on wealth, income
and inequality has come out with his remarkably ambitious book that dwells on
the important questions of Political Economy with a meticulous historical
analysis. Unearthing data collected through fifteen years of collaborative
research on the historical records of twenty countries spanning three centuries,
is an Olympian task that Professor Picketty undertakes to unravel the economic
patters that the elusive Capital takes as it grows and dominates at times and
then dwindles and evaporates only to resurface again later. The central
concerns of our generation regarding the unprecedented concentration of wealth
in the hands of some and the widening inequality that portends a bleak future
for many is at the core of this book. In this monumental work, Professor
Picketty is ably aided by his collaborators who defined new grounds in economic
history- be it Anthony Atkinson who studied historical evolution of income
inequality or Emmanual Saez who unearthed the growth of the top 1 percent in
the US since the 1980s. This gives a solid foundation of facts and figures to
back intellectual arguments. The book is divided into four parts- the first
three sections devoted to developing the concepts of income, wealth, capital
and the structure of inequality by a process of inter-national comparison of
European economies with that of the US. The last section dwells on the measures
that the author recommends to reduce inequality while being wary of economic
determinism and prophetic predictions.
Acknowledging
the Pioneers
The author devotes a considerable space
for the work that went before him acknowledging the merits of the early
pioneers and pointing out the flaws in their methodology. A generous
acknowledgement is also given to the intuitive understanding of many literary
writers of early eighteenth and nineteenth century on the economic travails of
their times. Jane Austen, Victor Hugo and Honoré de Balzac were sensitive to
the importance of wealth in the structuring of individual destiny and depicted
the minute details of property ownership and rents, debts and means through an
evocative language that impresses an economist today. Unfortunately, the
economists themselves had to work with ‘an abundance of prejudice and paucity
of fact.’ The extreme and radical positions taken by Thomas Malthus through his
Essay on the Principle of Population
(1798) or the travel diaries of Arthur Young prove this point. Even David
Ricardo and Karl Marx through their respective works on Capital were deeply
unnerved by the increasing prosperity of Capital in the hands of some at the
expense of many. Till Simon Kuznets came up with a fairy tale rendering of
growth that lifts everyone (not discounting his enormous contribution to the
documentation of US national income data), optimism was fragile and radical
prophesies was the norm. What is important about Ricardo and Marx is that they
asked the right questions and did their best with the meagre economic data
available even though they were subject to personal prejudice in the
interpretation and their empiricism was at best rudimentary.
Capital
through History
Throughout the modern economic history,
Capital has executed two important functions- that of being a source of saving
or housing and that of being a factor in production. From the industrial times,
two major threats to Capital were thought to be technology and the abundance of
Capital stock (that gave rise to the aphorism ‘too much Capital kills itself).
The perception about Capital has been inconsistent with what was actually
transforming it as is evident from the case of France that altered the
structure of Capital twice in its modern history without knowing why. Nations
hard pressed by economic downturns and political and military upheaval have
experimented with different degrees of involvement and withdrawal from controlling
Capital by transforming the form wealth takes, but without altering the
structure of Capital stock. For instance, from the time of the Ancien Régime in
France to the present day, wealth has taken the form of land, income and wages
and presently business and financial capital; but the basic structure of the
Capital stock has seldom altered. This is important to understand the revival
of Capital especially that from inheritance in the twenty first century and the
forms it will take in the long run.
In the economically tranquil years of
the eighteenth and nineteenth century besotted by low growth and near zero
inflation, wage stagnation and improved access to foreign capital bestowed by
Colonialism, Capital prospered in Europe. What truly shattered the core of
Capital was the first World War in the twentieth century. The tumultuous years
following the war and even the inter war periods saw the intervention of the State
at unprecedented levels, the documentation of national income, the advent of
income taxes and the journey of democratic hopes and meritocratic ascent began.
The United States, which had lower levels of domestic inequality than Europe
and limited foreign capital owing to absence of colonialism, became the
creditor to Europe. The war that destroyed the Capital of many developed countries
like Germany and Japan also led to their eventual catching up with the US that
led to the coinage ‘Trente glorieuses’ (the glorious thirty years) in Europe
and ‘The Gilded Age’ in the US. Post Thatcherism and public disinvestments
coupled with low growth, the beginning of the twenty first century at least
expects the return of the Capital and accumulation of private wealth leading to
ever widening inequality between the poorest and the richest.
Structure
of Inequality
The reason why this book was written is
explained by the author half way through the book at the juncture inequality is
explained. Wealth is so concentrated that a large section of the society is
unaware of its existence; so that some people imagine it belongs to surreal and
mysterious entities, he says. There are perennial sources of convergence and
divergence in the distributive aspect of wealth. While diffusion of knowledge
(skill, education and technical know-how), free and open trade that mobilises finance
and in turn encourages large investment in education, a stable legal
environment with a legitimate and efficient government, demographic growth,
inflation and time (through the process of catching up) are all agents of
convergence that reduce inequality, there are equally potent sources of
divergence in today’s world. The astronomical pay of top managers that is
inexplicable in terms of marginal productivity, we know of the ‘black holes of
growth’ that we observe in the developing countries. In countries like India,
for example, the liberal estimate of growth does not match with the squalor of
lives in many sectors leading economists to believe that a disproportionate
share of growth might be apportioned by the top deciles in the economic
hierarchy.
The
impact of the book
The return of Capital and the
increasing inequality compels us to take a different approach. The author
recommends the return of the State albeit after an economic modernisation that
is willing to invest in skill dissemination, setting wage scales and evolving
progressive taxes on income and Capital. The modern redistribution has to be in
terms of services that the poorest half can avail of. A rethinking on marginal
productivity of the top managers, increasing economic transparency, Capital
control and protectionism, the question of public debt, inflation and austerity
and the role of the central banks would be put to scrutiny. What sets this book
apart from others on these questions is many. The intellectual rigour of the
arguments backed by meticulous research of historical records and comparative
analysis of data is primary. The fundamental focus of the book is long term
which in part justifies the ambitious title that encompasses a century to come.
Professor Picketty is wary of economic determinism and boldly criticises a
school of economists that has failed to get over ‘its childish passion for
mathematics’ so that theoretical speculation precedes historical analysis and
collaborative research. This point particularly augurs well for the discipline
by compelling it to look inwards and transforming its methodology and shedding
its pretence of scientific security at the cost of honesty. The book also
scores in the method of presentation clarifying definitions and using a
gripping narrative to take the momentum along. Finally and most importantly,
the core of the book testifies to the central contradiction of Capitalism and
keeps the well being of the least well off at the centre of focus through a
democratic control of Capitalism and economic transparency. The book
encompasses what we refer to as the developed world, but its lessons may after
all prove to be uncannily relevant for the developing.
