Poverty & Inequality

A symposium on Piketty - II: Capitalist dynamics and the plutocrats

  • Blog Post Date 17 June, 2015
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Pranab Bardhan

University of California, Berkeley


In the last part of the series on Piketty, Pranab Bardhan, Professor of Economics, University of California, Berkeley, discusses the implications for further study that Piketty’s book has for developing countries such as India. He emphasises the need for collecting more serious information on wealth ownership in India.

Let me start with a disclosure. I have known Piketty since he was a 24-year old whiz kid at MIT faculty. He became a member of an international research group on Inequality that I co-directed for more than 10 years, starting in the middle 90s. This group funded his early work in the collection 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 resounding splash that his book has now made in the international world of academics and opinion-makers and the change in the discourse in issues of economic inequality and redistributive policy it has caused.

Since the book, deservedly, has been widely commented upon and reviewed, I’ll stick to only a brief synopsis of the by now familiar main message, and go on in this short review to dwell particularly 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).

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 deciphered 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 wealth-income ratio and the associated inequality was high in industrially advanced countries until about the World War I, then declined and stabilised in the period 1910-1970 (possibly on account of the disruptions of wars, depression, high taxes and post-war growth), and remarkably rising since then (definitively in terms of inequality of income, and probably of wealth as well, but the data is 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 workers (exacerbated by forces of skill-biased technical progress and globalisation), but for Piketty that is second order, as the inequality he unearths is not dominantly about inequality of skills1. 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 income earners. The inequality he mainly worries about is not meritocratic inequality (or even the excessive pay of ‘super-managers’ and superstars 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).

Even among capital owners, income from wealth is more concentrated than wealth itself, as the very rich through their capacity to invest in complex financial products (and to deftly utilise various 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, he brings us back to the issue of functional distribution of income, of the shares going to capital and land, that was the preoccupation of classical political economy. Over time as the very rich save and accumulate most of their income, the weight of inheritance increases. As Piketty says, “the entrepreneur inevitably tends to become a rentier, more and more dominant over those who own nothing but their labor….capital reproduces itself faster than output increases. The past devours the future.” Looking forward, if no policy corrections are made, he finds in the future of industrially advanced countries the looming shadow of “patrimonial capitalism” of the earlier centuries (profuse references to the hereditary affluent society that Austen and Balzac wrote about in their novels capture this shadow quite vividly in this book).

Piketty uses a rather loose inclusive definition of capital, to include all non-human tradeable assets net of debt, including land and real estate, finance, intellectual property rights in the form of commercial patents and, of course, physical capital (he mainly ignores the knotty issues of valuation and aggregation of different types of capital). He observes in the data that over the long span of history the rate of return (he denotes 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 1910-1950. In the long run (‘steady state’), wage incomes will rise at most at the rate g (growth of even the merit-based fortunes will be limited by this g), whereas incomes from wealth will grow roughly at 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 central element (“contradiction”) of capitalist dynamics that drives inequality.

He 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 countries hitherto unassembled. He confines himself to simple (some will say, over-simple) theoretical insights to explain the big picture with minimum technicalities (while hinting that one can spin a more complex story). While a wide range of issues relevant to historical distribution 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 historical canvas has been a reminder (of the grand tradition for some and sinister 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 firmly driving ‘a nail in the coffin’ of capitalism, 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 necessary 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 justified…By contrast, I am interested in contributing, however modestly, to the debate about the best way to organize society and the most appropriate institutions and policies to achieve a just social order.”

Going back to r > g, Piketty’s fundamental force for divergence under capitalism, while his historical evidence is quite striking, the book (including the long Technical Appendix that is available online) is deficient 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’d like a fuller discussion of the forces 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 Technical Appendix) is a standard infinite-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 account the usual transversality conditions of optimisation. But the real world is not usually on an optimal path and there is no overarching macro mechanism which will automatically bring it back to that path2. 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 determined rather than by the forces of marginal productivity as in the standard model; (b) even in the world of marginal productivity theory, if economies of scale or endogenous growth factors offset the force of diminishing returns that tends to depress the rate of return to capital; (c) since particularly land, real estate and finance are included in the definition of capital, if ‘imperfections’ in these markets jack up r; (d) if wealthy owners of capital through their enormous influence on the political and fiscal 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 differential 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 relevant parameters may be necessary for the result to hold. Also, in a multi-sector model the differential price movements will add some complexity to the link.

In developing countries (say, India and China) that are in the technology catch-up process g in recent decades has been rather high, and inequalities have been generally increasing. For such countries, the interesting theoretical analysis yet to be worked out should be of the different phases of inequality in the transitional dynamics. We do not have good estimates of r or of the forces that may have kept r even higher than g in these countries. In China, over-investment and reported over-capacity in some sectors would have depressed r but the ‘imperfections’ 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, increasing use of robotics and artificial intelligence) may be such that in replacing the need for much of blue and white collar work it may push up capital’s income share and thus the forces of inequality.

In the great numbers of charts and statistical data the book displays, there is not much about developing countries. I could find only one chart (Figure 9.9 on p. 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 countries do not go back very far. (Figure 9.9 also gives data for China and Colombia from the mid-1980s). By and large, the historical data in Figure 9.9 for the small number of developing countries displays patterns similar to those for rich countries. In India, for example, the top centile’s share of national income was about 15-18% in 1922-1950, 5-6% in 1950-1980, and 12-13% more recently (Banerjee and Piketty 2005). (It is a shame that that the Government of India has discontinued publishing detailed income tax data since 2000 — the attention Piketty’s book has received should be an occasion for Indian researchers to demand a resumption of continuous publication of the data series). Of course, the tax data for top incomes for developing countries are not comparable to those for rich countries in view of large differences in tax coverage of income, 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-GDP (Gross Domestic Product) ratio. Piketty comments on this low ratio for India compared to China (Piketty and Qian 2009); the latter therefore has a better state capacity to carry out ameliorative policies in the face of rising inequality.

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 first by the Reserve Bank of India (RBI), and later by the National Statistical Survey Organisation (NSSO)). 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 2002-3 the top 1% in India held about 16% of wealth (the Gini coefficient of household wealth distribution was 0.67) (Subramanian and Jayaraj 2008). Of course, one has to keep in mind that not do household surveys everywhere under-represent the very rich, but India may have special problems 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 find that nearly 70% of the billionaire wealth in India was either purely from inheritance or what they call “inheritance and growing” (wealth was originally from inheritance but growing since then). This is not surprising for India where most 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 inheritance in wealth accumulation, which can give valuable insights into the dynamics of capitalist growth in India. Piketty has a chart (Figure 11.11) which gives estimates of the percentage of individuals in France in each birth cohort for 200 years 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 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 revenue. Not merely the inherited wealth may have boomed in the last 30 years, revenue is not the only rationale of the inheritance tax; reducing asset inequality is a major goal, apart from the importance of enabling the keeping of regular public records of wealth ownership. India has a wealth tax, but its domain is very limited as it exempts many usual forms of wealth including productive and financial assets. 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 inheritance and wealth taxation and the discontinuation 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 capitalist set-up, which Piketty does not discuss much, include ways of expanding democratic or community control rights over property and enterprise management, promotion of open-access technology, etc.

Gandhi and Walton also find that in 2012, of the total billionaire wealth in India about 60% was derived from what they call ‘rent-thick’ sectors (like land, real estate, construction, mines, etc.). In these sectors, political allocations of scarce resources are salient, and entrepreneurial, rentier, and crony capitalism merge.

Even though Piketty gives more emphasis in his book on inequality of wealth (which, by his definition, does not include ‘human capital’) he does talk about educational inequality and the high tuition fees in higher education in the US. But for India it needs to be stressed how the extreme educational inequality is a major driver of total inequality in the country. By a crude measure of educational inequality (Gini coefficient of years of schooling in the adult population), India is much more unequal than almost all of Latin America (World Bank, 2006). Inheritance, of course, plays a crucial role in access to good-quality education. In a country that is highly socially stratified and where education often provides the only escape route from the social and economic deprivation, there has not been much work on measuring inter-generational educational mobility. On the basis of household survey data collected in the India Human Development Survey (IHDS) 2005, Azam and Bhatt (2012) construct a unique father-son matched dataset to study the intergenerational mobility in educational attainment in India across nine birth cohorts. As expected, father’s’ education has an economically and statistically signi?cant e?ect on the child’s education for each birth cohort, and the correlation is much higher than the global average. But this measure of intergenerational persistence displays a pronounced decline across cohorts over 45 years, suggesting some evidence for increased mobility in educational attainment over time in India.

Piketty’s 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 propositions that can contribute to democratic debates on inequality and take us beyond what he calls ‘the lazy rhetoric of anticapitalism’, which we know is pervasive in Indian intellectual circles.

Postscript: Since the above was written, the Indian Finance Minister in his latest budget has seen it fit to abolish the wealth tax. The excuse as usual is that it yielded very little net revenue, which is not surprising as it was riddled with exemptions (which included mutual funds, fixed deposits, exchange-traded gold funds, savings bank accounts, a self-occupied residential house, etc.). The Minister has replaced the wealth tax by an increase in surcharge on the income tax for the very rich (which, of course, has the advantage for him that the revenue for surcharge or cess usually does not have to be shared with the state governments). But as I have pointed out above, revenue earning is not the only rationale for a wealth tax. Apart from directly targeting asset inequality, keeping regular public records of wealth ownership is important, as Piketty points out (the income tax return data is not enough to keep track of all wealth, given the usual secretiveness of wealth-keeping). Now with both inheritance tax and wealth tax abolished, and with detailed income tax data no longer publicly available since 2000, researchers will have a very hard time tracking asset and income inequality in India, at a time when Piketty´s book has focused renewed attention on these matters all over the world.

This article first appeared in the Economic and Political Weekly.


  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 understanding why the 1 per cent have pulled so far ahead—the dominant phenomenon from a macroeconomic 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 return 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 affairs is socially perverse in the sense that letting 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 better social state. But there is no invisible hand to steer a market economy away from this perversity."

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