Life/Style

Kapital Returns: Bibek Debroy reviews Thomas Piketty book

Bibek DebroySeptember 4, 2014 | 17:25 IST

Thomas Piketty's Capital in the Twenty-First Century is a formidable book. Should we be interested in inequality, as distinct from poverty? The former is relative, the latter is absolute. Whatever be the timeline, whatever the definition of poverty and whatever the country, there is no denying poverty has declined globally. The average world citizen is better off. Debates are about the extent of decline.

However, perceptions about equity are also relative. A sense of well-being can be a function of how others are doing and public policy may need to address this. There, too, a difference exists in equitable access to inputs (law and order, health, education, roads, electricity, water) and equity in outcomes (wealth, income). If one takes care of the former, should one worry about the latter? On the assumption one should, public policy is concerned about the distribution of some economic variable or the other, within countries and between countries. In a country like India, distribution of land might be worthy of discussion. In developed countries, it would typically be wealth (a stock) and income (a flow). There are also technical questions about how inequality is measured. For instance, is one interested in personal distributions or broad aggregates like capital and labour?

The broad aggregate approach has two kinds of antecedents-one is Marxian, the other is national income identity and growth theory-driven. While equity is a building block of most public policy, it is possible to argue these aggregates serve a limited purpose. As economies become more complicated, capital/labour distinctions are no longer as clear as they were in the days of Karl Marx and there is significant variation within these aggregates too. Piketty is part of the Marxian tradition and much has been made of his two "laws". Of these laws, only one is important, since the other follows from a national income identity. Stated simply, the "law" is the following: If the rate of return on capital is greater than the rate of economic growth, inequality will increase. Has inequality indeed increased? This can either be a theoretical or an empirical question. The original Marxian examination was theoretical. Theory doesn't get far and most work on inequality has therefore been empirical, including Piketty's. This is a tradition that goes back to the work of Simon Kuznets in the 1950s. Kuznets found a pattern in inequality, an inverse U-shape. As economies grew, inequality increased. But beyond a point, inequality started to decline. There was thus a mechanism that corrected inequality increases.

Inequality trends don't change overnight. Any empirical exercise therefore has to consider long time periods, even centuries. Piketty's empirical exercise is based on Western Europe and the US, though there are passing references to other countries. The book reads very well, a tribute to the excellent translation from French by Arthur Goldhammer. The 18 chapters are clustered under four heads-income and capital; the dynamics of the capital/income ratio; the structure of inequality; and regulating capital in the 21st century. As is obvious, the fourth head is in the nature of policy suggestions. There is also an introduction and a conclusion.

The breathtaking scope is because of the empirical richness and novel use of data, such as tax returns. There has been some criticism and scepticism of the statistical work. As far as I can make out, this doesn't amount to anything substantive. The conclusions are robust enough. From an academic purist's angle, the book could have done with better explanations and endnotes about methodology and data. A more substantive criticism is about the way "capital" and "capitalism" are defined. Note that a word like capitalism isn't typically used by proponents of free markets. Free-market proponents argue that all inputs (land, labour, capital) are used more efficiently with free markets, subject to appropriate regulation. Thus, choice, competition and efficiency associated with free markets are as much labourism as capitalism. Deviation from that ideal state and violations of rule of law and regulation in some developed countries don't alter the substance of that ideal configuration.

To return to Piketty, subject to that caveat about the definition of "capital" and its utility, the empirical conclusion is robust enough. Inequality in income (measured in the labour/capital sense) has increased. What of wealth? Wealth is a stock, income is a flow. If income inequality is taken care of, why should one worry about inequality in wealth? The answer lies in another issue that is empirically probed, the phenomenon of inherited wealth, described as "patrimonial capitalism". Based on data for Western Europe and the US, the first three heads are thus sufficient reason to read the book, though one must be careful about the generalised "capitalism" template that is applied across a diverse range of countries (capitalism in France is distinctly different from capitalism in the US). This takes us to the fourth head of remedial policy suggestions. In my view, this isn't Piketty's USP or strength and this part of the book is the weakest. The broad thesis is that capitalism must be reformed through public intervention-such as progressive income taxes, stiffer inheritance taxes and global taxes on capital. These are nothing short of naive, apart from the obvious trade-off between growth and redistribution.

Inequality (of both income and wealth) is a process and inequality in outcomes is a function of what has happened for inputs like physical and social infrastructure. There is a difference between attempting to correct the former and correcting the latter. It's a bit like saying that all students should have the same right of access to educational institutions and arguing that all must graduate with identical marks. These inputs often require state financing, if not state delivery. They can be characterised by market failures. While the timeline is important, across a range of developed countries it can be argued that there has been a collapse of this state role since the 1980s, and this is a plausible explanation for inequality increases. Rather oddly, the concluding chapter of the book is not as good as the introduction. Here is the last sentence: "Refusing to deal with numbers rarely serves the interests of the least well-off.One can't argue with that and this has really been the Piketty contribution. That's the reason one should read this book, with its remarkable span, delving not just into data but also literature.

The word of caution is about policy prescriptions and the lens one uses while reading this book. The Piketty lens is a developed country one. For a country like India, with a nominal per capita GDP of something like $1,500, inequity and poverty remain concerns, as do issues of increasing growth. However, priorities can be somewhat different. If there is one reason why Marx was wrong about predicting the demise of capitalism, it is that he assumed there was and would be a uniform template. In a similar way, this book isn't really about capital in the 21st century. It's about the experiences of a select group of countries. While it's true that development often has a standardised template, I don't think that would be true of Piketty's empirical base. At least not now; 50 years down the line, it might be different.

Last updated: September 04, 2014 | 17:25
IN THIS STORY
    Read more!
    Recommended Stories