A Capital Read!

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.