Economic Model That is Utopian

Governments are not loyal to any single line of economics. Communism or socialism is no longer their tag line

Published: 15th May 2014 06:00 AM  |   Last Updated: 15th May 2014 01:08 AM   |  A+A-

When Vanity Fair came out with the maiden pictures of Mukesh Ambani’s 570 feet-high, 27-storey house in 2002, everyone was dumbstruck. Soon enough, the impression changed. Was it fair for a person to own such a lavish house when others living in the same area struggle for two square meals a day? The house, which has a swimming pool, reportedly uses five lakh litres of water every month, while most others in Mumbai face acute water shortage. Some even end up losing their lives fighting for water! How can the government allow such disparity?

Thomas Piketty in his new book Capital in the 21st Twenty-first Century waxes eloquent on unfair distribution and concentration of wealth. Small wonder that the book has taken the world of economists by storm. It is an excellent recapitulation of the origin of inequality in wealth, its decline during the World Wars and its return thereafter. Unlike other books on economics, this one is without jargon, easy to understand and is as riveting as Austen’s novels which the author refers to for buttressing his argument.

He describes how 90 per cent of national wealth is concentrated in the hands of the top “decile” (top 10% of people) in some developed countries and the top “centile” (1%) owns 50 per cent of the total wealth of the top “decile”. To put simply, “Some individuals are as wealthy as the entire country.” This may sound exaggerated, but the statement is backed by years of research and volumes of data collected from income tax returns in various nations. The intensity of inequality in emerging countries like India may be a little less. Yet, it is all-pervading.

Inequality in wealth is not a new phenomenon, as it dates back to the late 18th and early 19th centuries. In the absence of concrete information on taxation during this period, Piketty relies on contemporary literary works of Jane Austen and Balzac. Novels at that time painted intricate contours of wealth and its implications. Their characters speak about the social predicament of the people, their lifestyle and thought process.

One such character is Eugene de Rastignac in Balzac’s Le Père Goriot who takes no time in marrying an ugly woman from an affluent family, as it promised him a bright future. Though projected as a very ambitious man initially, Rastignac preferred to attain wealth through a much simpler way rather than working hard.

A similar trend was visible in the early 19th century in Britain and other European countries. Now what does inequality in the distribution of wealth imply? Undoubtedly, concentration of wealth in a few places a group of people in a significantly better position than others. Not only this, the rich have an edge over the poor and they are even given a say in decision-making.

Piketty explains the phenomenon in mathematical terms by evolving two fundamental laws of capitalism applicable to all societies. But, it is inappropriate to label mere accounting identities used for organising and restructuring data as “laws of capitalism”. Unlike Karl Marx, who used the rate of profit as a measure of calculating the contribution of factors of production in national income, Piketty’s calculations are based on the return on capital to segregate an individual’s average income from capital and labour. A high rate of return on capital implies that people have a tendency to accumulate more wealth than the income they earn through labour.

Piketty predicts an era of vast inequalities as the world is faced with low economic growth and low savings rate. This increases the share of income from capital, compared to income from labour. Based on this, he explains how universities like Harvard have been able to earn a good return on capital, despite low economic growth. He concludes that inherited wealth grows at a higher rate compared to output and income from labour and contributes to sizeable inequalities.

Whatever growth is there, he says, can be seen only in the emerging countries and that, too, to catch up with the developed world. A pessimist, he says growth is not a phenomenon that will take place in the near future. It is too early to predict such a situation. History does repeat itself but exceptions cannot be ruled out.

He comes down heavily on the trend of paying huge packages to “super managers” employed in top positions of companies as one reason for increasing the level of inequalities without actually delving deep into their capabilities, qualification and the role they play. Coming to liberalisation, he says a free market has an inherent tendency to facilitate concentration of wealth in a few pockets, irrespective of the fact that free trade is of the essence of global economic growth.

The book criticises the popular “Kuznets Curve” theory developed by Simon Kuznets, who claimed that inequalities tend to grow initially during industrialisation but subside on their own. He argues that till date countries have been imposing a tax on income but wealth goes unquestioned. There are some countries where a wealth tax is imposed beyond a prescribed minimum limit. But, the tax rate is as low as 1 per cent, incapable of making a significant impact on the rich or reduce the level of inequality.

Taking note of the developments during high taxation regimes in some countries, Piketty suggests imposing a progressive global taxation system accompanied by an automatic bank reporting system to reduce, if not, remove inequalities. Imposition of a higher tax in one country shall increase the possibility of capital moving from one country to another for tax evasion. He, therefore, calls for wider international cooperation for redistribution of wealth by levying a progressive tax of 80% on income beyond a limit, say $500,000, and 15% on wealth.

While taxes shall help reduce concentration of wealth in high-profile people, the proposed automatic bank reporting system shall help keep tabs on transactions aimed at tax evasion. Piketty says even if someone tries to transact in some other country to evade tax, the banking system should be efficient enough to ensure that not a single penny goes unreported.

No doubt, Piketty seeks a world of our dreams that is just in its dealings, irrespective of one’s social and financial status. As he says, “inequalities must be just and useful to all, at least in the realm of discourse and as far as possible in reality as well”. His suggestions are revolutionary but “utopian” as he admits. Unfortunately, governments today are not loyal to any single line of economics. Communism or socialism is no longer their tag line but populism is. In such a situation today, Piketty’s world has no viability at least and for the likes of Mukesh Ambani.

The author is a company secretary and can be reached at jassi.rai@gmail.com

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