June 21, 2014 vol xlix no 25 EPW Economic & Political Weekly

32
book reviews
Capitalist Dynamics
and the Plutocrats
Pranab Bardhan
Capital in the Twenty-First Century by Thomas
Piketty (Cambridge, Massachusetts: Harvard University
Press), 2014; pp 696, $39.95.
L
et me start with a disclosure. I
have known Piketty since he was
a 24-year-old whiz-kid on the fac-
ulty of the Massachusetts Institute of
Technology. He became a member of an
international research group on inequal-
ity that I co-directed for more than 10
years, starting in the mid-1990s. Our
group funded his early work in the col-
lection of historical data on income and
wealth from the tax archives in France.
But none of us was prepared (neither, I
presume, was he) for the big splash that
his book has now made in the interna-
tional world of academics and opinion-
makers and changed the discourse on
issues of economic inequality and redis-
tributive policy.
Since the book, deservedly, has been
widely commented upon and reviewed, I
will stick to only a brief synopsis of the
by now familiar main message, and go
on in this short review to dwell particu-
larly on the implications for further
study it has for a developing country like
India. This may be worthwhile as there
is very little on developing countries in
this large book of nearly 700 pages (of
dense small print).
Use of Historical Data
The main contribution of this book is the
massive amount of historical data that
Piketty and his associates have collected
on inequality for several countries, and
the broad patterns that they have deci-
phered in terms of historical changes. In
particular, the Kuznets presumption that
has prevailed in Economics for many
decades that inequality goes up in the
initial stages of development and then
mercifully starts declining is found by
Piketty to be limited by the short range
of data Kuznets looked into, and highly
misleading about historical trends when
seen in the larger perspective that is
provided in the Piketty book. Instead
it shows that the wealth-income ratio
and the associated inequality was high
in industrially advanced countries until
about the rst world war, then declined
and stabilised in the period 1910-70
(possibly on account of the disruptions
of wars, depression, high taxes and post-
war growth), and has been rising re-
markably since then (denitively in
terms of inequality of income, and prob-
ably of wealth as well, but the data are a
bit more spotty for the latter).
In the discussion of income inequality
in recent years the emphasis has been on
that between skilled and unskilled work-
ers (exacerbated by forces of skill-biased
technical progress and globalisation),
but for Piketty that is second order, as
the inequality he unearths is not domi-
nantly about inequality of skills.
1
The
income gap in recent years between even
the top 0.1% and the remainder of the
top 10% has been far wider than that
between the top 10% and average in-
come earners. The inequality he mainly
worries about is not meritocratic ine-
quality (or even the excessive pay of
super-managers of companies and su-
perstars in the entertainment, sports or
fashion worlds), it is rather the inequality
inherent in the booming capital incomes
concentrated at the very top (including
the rentier income of the children of
super-managers).
Shares of Capital and Labour
Even among owners of capital, income
from wealth is more concentrated than
wealth itself, as the very rich, through
their capacity to invest in complex nan-
cial products (and to deftly utilise vari-
ous tax loopholes and offshore tax
havens), earn a higher return than
smaller owners of capital. In a sense,
away from the usual recent discussion
among economists of skill premium and
wage inequality, Piketty brings us back
to the issue of functional distribution of
income, of the shares going to capital,
land and labour, which was the preoc-
cupation of classical political economy.
Over time, as the very rich save and
accumulate most of their income, the
weight of inheritance in wealth increases.
As Piketty says, the entrepreneur inevi-
tably tends to become a rentier, more
and more dominant over those who own
nothing but their labour...capital repro-
duces itself faster than output increases.
The past devours the future. Looking
forward, if no policy corrections are
made, he nds in the future of industri-
ally advanced countries the looming
shadow of patrimonial capitalism of
the earlier centuries (Pikettys profuse
references to the hereditary afuent so-
ciety that Austen and Balzac wrote about
in their novels capture this shadow quite
vividly in this book).
Piketty uses a rather loose inclusive
denition of capital, to include all non-
human tradeable assets net of debt,
inclu ding land and real estate, nance,
intellectual property rights in the form
of commercial patents and, of course,
physical capital (he mainly ignores the
knotty issues of valuation and aggrega-
tion of different types of capital). He
observes in the data that over the long
span of history the rate of return (he de-
notes it by r) to capital in this broad
sense has been larger than the rate of
growth (he denotes it by g), except in the
period 1910-50. In the long run (steady
state) wage incomes will rise at most at
the rate g (growth of even the merit-
based high incomes will be limited by
this g), whereas incomes from wealth
will grow roughly at the rate r (barring the
small drain of capitalist consumption). As
long as r > g, income and wealth of the
rich will grow faster than the typical
income from work. He calls r > g the
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Economic & Political Weekly EPW June 21, 2014 vol xlix no 25
33
central element (contradiction) of cap-
italist dynamics that drives inequality.
Piketty thus deals with the big picture,
traversing hundreds of years in pursuit
of grand historical tendencies, which for
all its blurring of important details is a
refreshing change from the narrow
technical preoccupations of most of his
fellow economists. Yet he is careful to
base himself on painstakingly collected
large sets of data from different coun-
tries hitherto unassembled. He connes
himself to simple (some will say, over-
simple) theoretical insights to explain
the big picture with minimum techni-
calities (while hinting that one can spin
a more complex story). While a wide
range of issues relevant to historical dis-
tribution inequality are discussed, the
presentation is lucid (ably helped by his
translator, Arthur Goldhammer) and
usually kept at a reasonably accessible
level for the lay reader.
To many, both on the Left and the
Right, his examination of the darker
trends of capitalism drawn on a big his-
torical canvas has been a reminder (of
the grand tradition for some and sinis-
ter for others) of Karl Marx (the book
title invites a clear allusion). Piketty, a
French social democrat, while sharing
the Marxian insights on the inexorable
tendency for capital to accumulate and
become concentrated in fewer hands,
departs in many ways from his analysis
and his prediction of an apocalyptic
end to capitalism. For those on the
Left who look up to Piketty as rmly
driving a nail on the cofn of capita-
lism, the following passage in his book
is worth quoting:
I belong to a generation that came of age
listening to the news of the collapse of
the Communist dictatorships and never
felt the slightest affection or nostalgia for
those regimes or for the Soviet Union. I was
vaccinated for life against the conventional
but lazy rhetoric of anticapitalism, some of
which simply ignored the historic failure
of Communism and much of which turned
its back on the intellectual means neces-
sary to push beyond it. I have no interest
in denouncing inequality or capitalism
per se especially since social inequalities
are not in themselves a problem as long as
they are justiedBy contrast, I am inter-
ested in contributing, however modestly, to
the debate about the best way to organise
society and the most appropriate institutions
and policies to achieve a just social order.
Gaps in Understanding
Going back to r > g, Pikettys funda-
mental force for divergence under capi-
talism, while his historical evidence is
quite striking, the book (including the
long Technical Appendix that is availa-
ble online) is decient in providing an
adequate analytical explanation of the
mechanism that sustains it. He, of course,
says that I take it for a historical fact,
not a logical necessity. Yet one would
have liked a fuller discussion of the forc-
es that keep the rate of return to capital
systematically higher than the rate of
growth. The implicit model in the book
(somewhat more explicit in the Techni-
cal Appendix) is a standard innite-
horizon optimum growth model. As
Debraj Ray and Andres Rodriguez have
pointed out to me, r is always larger than
g in such models once you take into ac-
count the usual transversality condi-
tions of optimisation. But the real world
is not usually on an optimal path and
there is no overarching macro mecha-
nism which will automatically bring it
back to that path.
2
In such a world one
can, however, think of many factors
which can keep r above g: for example,
(a) if the wage rate is institutionally de-
termined rather than by the forces of
marginal productivity as in the standard
model, and if/as the labour organisa-
tions decay due to social and economic
forces; (b) if, even in the world of mar-
ginal productivity theory, economies of
scale or endogenous growth factors offset
the force of diminishing returns that tends
to depress the rate of return to capital;
(c) if imperfections in land, real estate
and nance markets, which are included
in the denition of capital, jack up r;
(d) if wealthy owners of capital through
their enormous inuence on the political
and scal process can keep r high.
These factors, if operative, need to be
grounded in a theoretical framework. Also,
in a non-optimal growth model with dif-
ferential saving propensities of different
types of capital owners and wage-earners,
the link between (r g) and increasing
inequality needs to be spelled out. Some
restrictions on the r elevant parameters
may be necessary for the result to hold.
In addition, in a multi-sector model the
differential price movements will add
some complexity to the link.
In developing countries (say, China
and India) that are in the technology
catch-up process, g in recent decades has
been rather high, and at the same time
inequalities have been generally increas-
ing. For such countries the interesting
theoretical analysis yet to be worked out
should be of the different phases of ine-
quality in the transitional dynamics.
Empirically, we do not have good esti-
mates of r or of the forces that may have
kept r even higher than g in these coun-
tries. In China over-investment and re-
ported overcapacity in some sectors
would have depressed r but the imper-
fections mentioned above may have
acted as a countervailing force. In any
case Piketty mainly talks about the long
run, beyond the catch-up phase, when
with declining population growth and
limited technological progress on the
horizon he expects g in future to be in
the 1% to 1.5% range whereas he expects
the (pre-tax) r to be much higher. Some
people may not share his technological
pessimism but even for them the nature
of technological progress (say, increas-
ing use of robotics and articial intelli-
gence) may be such that in replacing the
need for much of blue and white collar
work it may push up capitals income
share and thus the forces of inequality.
Limited Discussion
on Developing Countries
In the great numbers of charts and sta-
tistical data the book displays, there is
not much about developing countries. I
could nd only one chart (Figure 9.9 on
pp 327) which gives the historical time
series of income inequality over many
decades for some developing countries
(India, South Africa, Argentina and
Indonesia). This is primarily because the
tax data (for top incomes) in many coun-
tries do not go back very far. (Figure 9.9
also gives data for China and Colombia
but only from the mid-1980s.) By and
large the historical data in Figure 9.9
for the small number of developing
countries display patterns similar to
those for rich countries. In India, for
BOOK REVIEW
June 21, 2014 vol xlix no 25 EPW Economic & Political Weekly
34
example, the top centiles share of national
income was about 15%-18% in 1922-50,
5%-6% in 1950-80, and 12%-13% more
recently.
3
(It is a shame that the Govern-
ment of India has discontinued publish-
ing detailed income tax data since 2000
the attention Pikettys book has re-
ceived should be an occasion for Indian
resear chers to demand a resumption of
continuous publication of the data
series.) Of course, the tax data for top in-
comes for developing countries are not
comparable to those for rich countries in
view of large differences in tax coverage
of income, exemptions, tax evasion, etc.
Even compared to other developing
countries, India has an unusually large
informal (mostly self-employed) sector
which drives down the domain of the
tax system and the tax-gross domestic
product (GDP) ratio. Piketty comments
on this low ratio for India compared to
China;
4
the latter therefore has a better
state capacity to carry out ameliorative
policies in the face of rising inequality.
Data on Wealth in India
Piketty may not be aware of it, but India
has been producing a series on wealth
distribution for the last six decades or so,
on the basis of household survey data
(collected at rst by the Reserve Bank of
India, and later by the National Sample
Survey). One could use this series to
make some rough comparisons with the
wealth distribution on the basis of
household survey data in rich countries.
To get some orders of magnitude, in
2002-03 the top 1% in India held about
16% of wealth (the Gini coefcient of
household wealth distribution was
0.67).
5
Of course, one has to keep in
mind that not merely household surveys
everywhere under-represent the very
rich, but India may have special prob-
lems of under- reporting of land, real
estate and gold holdings.
In view of the under-representation of
the rich in household survey data, some
people turn to a highly imperfect, rough
and ready, journalistic source of data on
billionaire (in dollar terms) wealth, the
Forbes magazine (Piketty also refers to
this source in one chapter). From this
data source Gandhi and Walton (2012)
estimate that in 2012 the total billionaire
wealth to GDP ratio for India was higher
not just than in China, but higher than
even in Brazil and Saudi Arabia. From
the same data source they nd that
nearly 70% of the billionaire wealth in
India was either purely from inheritance
or what they call inheritance and grow-
ing (i e, wealth was originally from
inheritance but growing since then).
This is not surprising for India where
most private corporate business is family-
controlled. This is even more likely to be
the case for the numerous rich who have
not yet made it to the dollar billionaire
list. In general we need to collect more
serious information on the impact of in-
heritance in wealth accumulation, which
can give valuable insights into the dy-
namics of capitalist growth in India (in-
cluding the ways barriers to entry in
business and the oligarchic inuences
on politics work). Gandhi and Walton
also nd that in 2012 of the total billion-
aire wealth in India about 60% was
derived from what they call rent-thick
sectors (like land, real estate, construc-
tion, mines, etc). In these sectors, politi-
cal allocations of scarce resources are
salient, and entrepreneurial, rentier, and
crony capitalism merge.
Piketty has a chart (Figure 11.11)
which gives estimates of the percentage
of individuals in France in each birth
cohort for two centuries since 1790 who
inherited (as bequest or gift) amounts
larger than the equivalent of the lifetime
labour income received by the bottom
half of all workers (this fraction has been
increasing in France since the birth
cohort of 1910). I wish someday a
researcher in India could give us similar
data, even if they were for a shorter
range of birth cohorts.
In a country rampant with hereditary
wealth it is interesting to note that India
abolished the inheritance tax (estate
duty) in 1985. The usual excuse given is
that it yields only a small amount of rev-
enue. But it is not merely that inherited
wealth may have boomed in the last 30
years and this excuse does not hold
(apart from the need to close the usual
loopholes in such tax laws), revenue is
not the only rationale of the inheritance
tax; reducing asset inequality is a major
goal, not to speak of the importance of
enabling the keeping of regular public
records of wealth ownership. (Piketty
emphasises the need to challenge the
opacity and secretiveness in wealth data
all over the world.) India has a wealth
tax, but its domain is very limited as it
exempts many usual forms of wealth in-
cluding productive and nancial assets.
Global Wealth Tax?
Piketty has famously proposed a global
wealth tax, but he recognises that the
extent of international coordination that
will be needed is unrealistic to expect at
this point. But limited forms of inherit-
ance and wealth taxation and the discon-
tinuation of a lenient treatment of capital
gains within a country should be taken
up much more seriously. Other forms of
redistributive policy even within a capi-
talist set-up, which Piketty does not
discuss much, include ways of expanding
democratic or community control rights
over property and over the local com-
mons, enterprise management, promo-
tion of open-access technology, etc.
Even though Piketty places more em-
phasis in his book on inequality of wealth
(which by his denition does not include
human capital), he does talk about
educational inequality and the high tui-
tion fees in higher education in the United
States. But for India it needs to be
stressed how extreme educational ine-
quality is a major driver of total inequal-
ity in the country. By a crude measure of
educational inequality (Gini coefcient
of years of schooling in the adult popula-
tion), India is much more unequal than
almost all of Latin America.
6

Inter-Generation Mobility
Inheritance, of course, plays a crucial
role in access to good-quality education.
In a country that is highly socially strati-
ed and where education often provides
the only escape route from social and
economic deprivation, there has not
been much work on measuring inter-
generational educational mobility. We
lack the necessary panel data, and the
usual cross-section household survey
data are also decient in giving us data
on sons and particularly daughters who
are not co-resident in the household.
On the basis of household survey data
BOOK REVIEW
Economic & Political Weekly EPW June 21, 2014 vol xlix no 25
35
collected in the India Human Develop-
ment Survey 2005, Azam and Bhatt (2012)
construct a unique father-son matched
data set to study inter-generational
mobility in educational attainment in
India across nine birth cohorts. As ex-
pected, the fathers education has an
economically and statistically signicant
effect on the childs education for each
birth cohort, and the correlation is much
higher in India than the global average.
But this measure of inter-generational
persistence displays a pronoun ced decline
across cohorts over 45 years, suggesting
some evidence for increased mobility
in educational attainment over time
in India.
Pikettys book, while it is not mainly
concerned about developing countries,
thus raises a serious challenge of more
research in these countries. His massive
empirical effort highlights the need
for and should inspire the search for
more intensive data and analysis to
warrant meaningful evidence-grounded
propositions that can contribute to demo-
cratic debates on inequality and take us
beyond what he calls the lazy rhetoric
of anticapitalism, which we know is
pervasive in the community of Indian
social scientists.
Pranab Bardhan (bardhan@econ.berkeley.edu)
is at the University of California, Berkeley,
the US.
Notes
1 Piketty says: they (US economists) pay too
much attention to wage gaps between workers
with different skill levels (a crucial question for
the long run but not very relevant to under-
standing why the 1% have pulled so far ahead
the dominant phenomenon from a macroeco-
nomic point of view).
2 Robert Solow (2014) in his review of Piketty
makes a similar point:
There is no logical necessity for the rate of re-
turn to exceed the growth rate: a society or the
individuals in it can decide to save and to invest
so much that they (and the law of diminishing
returns) drive the rate of return below the
long-term growth rate, whatever that happens
to be. It is known that this possible state of af-
fairs is socially perverse in the sense that let-
ting the stock of capital diminish until the rate
of return falls back to equality with the growth
rate would allow for a permanently higher level
of consumption per person, and thus for a bet-
ter social state. But there is no invisible hand to
steer a market economy away from this perver-
sity.
3 This is based on Banerjee and Piketty (2005).
4 This is based on Piketty and Qian (2009).
5 These estimates are by Subramanian and
Jayaraj (2008).
6 See World Bank (2006), Table A 4.
References
Azam, M and V Bhatt (2012): Like Father, Like
Son? Intergenerational Education Mobility in
India, IZA Discussion Paper no 6549, Bonn.
Banerjee, A and T Piketty (2005): Top Indian
Incomes, 1922-2000, World Bank Economic
Review.
Gandhi A and M Walton (2012): Where Do Indias
Billionaires Get Their Wealth?, Economic &
Political Weekly, 6 October.
Piketty T and N Qian (2009): Income Inequality
and Progressive Income Taxation in India and
China, 1986-2015, American Economic Journal:
Applied Economics.
Solow, R M (2014): Thomas Piketty Is Right, The
New Republic, 22 April.
Subramanian, S and D Jayaraj (2008): The Distri-
bution of Household Wealth in India in
J B Davies (ed.), Personal Wealth from a Global
Perspective, WIDER Studies in Development
Economics, Oxford University Press.
World Bank (2006): World Development Report:
Equity and Development, Washington DC.