Of haves and have-nots

Value Research founder Dhirendra Kumar reviews Thomas Piketty’s Capital in the Twenty-First Century

Published 10 years ago on Jun 07, 2014 3 minutes Read

Last month, the English translation of a book, Thomas Piketty’s Le Capital au XXIe siècle (Capital in the Twenty-First Century) was published. From the New York Times to The Economist, everyone seems to be gushing over the book, with the latter even starting an online chapter-by-chapter ‘read-along’ where readers and the magazine’s editors discuss the book. It hailed the author as no less than a “modern Marx”, though when in a later issue it pointed out that it meant Karl (and presumably not Groucho), it was clear that there was backpedalling in progress.

For such a long and complex book, the central idea is unambiguous. It says the increasing economic inequality globally is inherent in capitalism. The rate of return on wealth will tend to grow at a higher rate than income from wages, resulting in an ever-increasing concentration of wealth. Obviously, this won’t be much of a surprise to people of a certain ideological bent. However, what is distinctive about Piketty’s work is that it’s solidly grounded in 200 years worth of data on 30 countries.

His research says that higher growth acts as counterweight to increasing inequality, as freshly-generated income becomes relatively more important than returns on accumulated wealth. Basically, the T-shirt slogan edition of the book seems to be that capitalism causes inequality but higher growth fixes the problem.

Disappointingly, Piketty’s own cure for this problem is the standard socialist one. His recommendations for curing the ills of capitalism are high — even punitive — levels of taxation on wealth and redistribution. One would think the logical conclusion is to see high growth as the solution, but it isn’t so for Piketty. Why he thinks that ignoring growth and soaking the rich should work this time around is not clear. For a book rooted in empirical analysis, the last word comes from ideology, and a failed one at that.

For people like us, who are just trying to make, save and invest some money, there aren’t any real takeaways from Piketty’s tome. Or are there? It seems to me that the wealth versus wages issue also exists in our personal lives. When your income is growing faster, it matters less how much accumulated savings you have and what return you are making on them. However, when the times are not so good, the reverse is true. When you are done with a major part of your earning life, this effect will accumulate. If you have emphasised savings and investments and favoured investing in growth-oriented (equity-centric) assets rather than income-oriented ones, you’ll be wealthier. It’s a simple, and when you think about it, self-evidently true idea.

Of course, it will be your tough luck if by the time that you get rich, your government has accepted Piketty’s ideas and taken it all away in taxes. You can always spend your old age digging NREGA ditches and filling them up again.