Money Talk

Piketty starts with a denunciation of economic theory and its inclination to theorise without any data.

Capital in the Twenty-First Century. Capital in the Twenty-First Century.
Written by Neelkanth | Published on:May 10, 2014 4:37 am

Book: Capital in the Twenty-First Century
Author: Thomas Piketty
Publisher: Harvard Business Publishing
Pages: 696 pages
Price: Rs 1495

Rising income inequality has been a cause of much concern globally. RBI governor Raghuram Rajan points it out as one of the key “fault lines” in the global economy that caused the global financial crisis of 2008, and which is still unresolved. So, not surprisingly, Thomas Piketty’s acclaimed and controversial book has made waves among academics as well as financial commentators. Piketty freely acknowledges that inequality and the ways to address it are deeply political issues. His take on French President François Hollande’s 75 per cent peak income tax rate is also clear: “Wealth is so concentrated that a large segment of society is virtually unaware of its existence.” He frets about the political power of the ultra-rich.

But it would be grossly unfair and indeed myopic to view the tome through this prism. Some of Piketty’s conclusions are debatable. A good academician, he accepts this: “All my conclusions are by nature tenuous and deserve to be questioned and debated.” In the eyes of this reviewer, the book and Piketty’s research serve as the starting point of a debate, not the end of one. The book’s key contributions to the debate are two-fold: the data and the framework.

Piketty starts with a denunciation of economic theory and its inclination to theorise without any data. He has led a 15-year-long global collaboration to tabulate and estimate wealth and income data going back to 1700. He gathered data on tax returns for the previous century, mined past research and even the novels of Jane Austen and Honoré de Balzac for the period before that ( his framework, income is divided into income from labour and income from capital. These two streams vary in importance: for the ultra-rich (the top 1 per cent), most of income comes from capital (dividends, interest on bonds, rents, etc.) whereas for most of the rest, income from labour (wages) dominates. It follows that income inequality can be due to a dominance of capital over labour, and/or extreme wage inequality.

This framework drives some brilliant insights, like splitting the top 10 per cent earners into “the first 9 per cent” and the “top 1 per cent”: the former are wage-dependent and the latter capital dependent. This explains why during the Great Depression, the income share of the top 10 per cent went up even when that of the top 1 per cent fell. Senior-level jobs, particularly in government, were not hurt as much as low-level jobs, while there was significant capital destruction.

It also helps dismiss the popular “trickle-down” theory, which says that inequality rises in the early stages of economic growth but normalises naturally later. Piketty notes that the sharp reduction in inequality in the period between the two World Wars, often quoted by “trickle-down” theorists, was mostly driven by large-scale destruction of capital.

Piketty accepts …continued »

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