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By: Ashoka Mody and Michael Walton
French economist Thomas Piketty has written a scholarly tome with the humdrum title, Capital in the 21st Century. The book has become an overnight sensation because Piketty documents an inherent tendency for ever-increasing inequality of income and wealth in capitalist economic systems. It is not an accident, he says, that many will be left behind even as others become richer. The book taps into a collective anxiety, coming as it does amidst the lingering after-effects of the global crisis and slowing global growth.
India’s capitalist dynamic — as in other emerging economies — is different from that in the richer countries that Piketty focuses on. Yet, the lessons Piketty offers should ring a cautionary bell. Indeed, even more so than in the rich countries, India could find itself in a low growth, high inequality and high insecurity trap. These are the real fears that bubble under the theatrics and ugliness of the ongoing political debate.
Piketty is not an anti-capitalist. He sees capitalism as central to the innovation and entrepreneurial risk-taking needed for economic growth. But, using conventional tools of economic analysis, he warns that there is no automatic, ultimately benign, broad sharing of income and wealth over the development process. Rather, greater inequality — which perpetuates itself over generations — is the more likely outcome. And deepening inequality can fray capitalism’s virtues.
Piketty finds that countries are on the path to “patrimonial capitalism”, with inherited wealth increasingly concentrated in few families. As long as the rich earn a return on their wealth that is somewhat greater than the country’s growth rate, inherited wealth will rise relentlessly faster than national income. This process was interrupted, and reversed, in the first half of the 20th century, because the two World Wars destroyed private wealth and then helped create the political basis for the welfare state. But, over the past three decades, the wealth-to-income ratio has steadily recovered much of the lost ground and looks set to keep rising.
The US was historically different from Europe, with a much lower role for inherited wealth. But in recent decades, it has been a leader in rising income inequality, owing to a combination of soaring salaries for “supermanagers” and rising returns on capital for the richest. These large incomes are being turned into inherited wealth, generating entrenched privilege as in Europe at the beginning of the last century. All the while, for those at the bottom of the rung, it is becoming increasingly difficult to climb the economic and social ladder. As wealth and politics reinforce each other, equality of opportunity is a fading myth.
India is at risk of forging a potentially more pernicious form of rentier capitalism. Growth in the past few decades has brought gains to most, including the poor. But there is unmistakable evidence of rising concentration of income and wealth at the very top. Piketty and Abhijit Banerjee continued…