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The Economics Of Inequality

Friday, 20 June 2014 - 6:00am IST Updated: Thursday, 19 June 2014 - 9:52pm IST | Place: Mumbai | Agency: dna
Research says financial inequality in the 21st century growing at a dangerous pace
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From the ruins of the greatest economic meltdowns in human history, arose a fiery reaction at the heart of global capitalism. In 2007, the crowning jewel of our epoch, Wall Street, came crashing down and displaced millions of workers around the globe. The fitting response, from workers and students, came in the September of 2011: the Occupy Wall Street Movement. A sudden mass uprising that united hundreds of labour and student unions on a horizontal plane, and represented the rise of a broader class consciousness. It was an uprising against rising economic and social inequality which segregates the super-rich and the rest, the 1% and the other 99%. 

In a fascinating turn of events, a French economist named Thomas Piketty seems to have found solid evidence that inequality is part and parcel of capitalism. His new book Capital in the 21st Century provides evidence that the world is reverting to the same conditions that existed before aristocracy was dismantled by the dual revolution of industry (Britain) and democracy (France), that later yielded what we now know as modern Capitalism. He uses taxation records that extend far back and maintains that wealth is increasingly in the hands of fewer people and like the aristocratic days, family dynasties hold great power. Thus we see that Piketty in showing this “drift toward oligarchy” might just have validated the Occupy Wall Street Movement.  
 
There has been enormous praise in the academic community for how data was handled and used. Nobel laureate Paul Krugman has lauded the empirical work and eminent professor Debraj Ray claims to have “actually learnt something” from the data sets. It appears that while Piketty has tried to maintain a distance from those economists who have a ‘childish passion for mathematics’, he has himself used intense statistical and mathematical techniques to come to such simple conclusions. 
 
We should also note that Piketty does not embrace any heterodoxy to prove his point and instead uses mainstream neoclassical tools to show that rising inequality is perfectly in synergy with perfect markets. He says, “This has nothing to do with a market imperfection: the more perfect the capital market, the higher [the return on capital]”.  
 
Then why has this upset the mainstream schools and the global institutions that are the bastions of contemporary capitalism? Piketty’s data supersedes the findings of another famous economist - Simon Kuznets. Kuznets reassured the world, in his famous U-shaped hypothesis that under capitalism inequality was rising in the short run but falling in the long run. Piketty’s superior data set shows that in the long long run no matter what you do, economic inequality will reign supreme. 
 
Like most powerful propositions, Piketty’s analysis is elegantly packed into the interaction of two variables: the private rate of return on capital ‘r’ and the growth of total income ‘g’. Piketty has used the latest statistical techniques to show us how the rate of return on capital ‘r’ and the growth rate ‘g’ has varied over time. Piketty says that historically, the general rule is r > g, but the shocks of the 20th Century (World Wars, Great Depression) allowed r < g momentarily, fooling us (via Kuznets) to believe that Capitalism could prevent rising inequality. Slowly but surely, the general conditions are returning: r has been rising steadily while g has already shown signs of falling.  
  
Parallel to his analysis, many sources verify rising inequality. A recent report from Oxfam International titled 'Working for the Few' shows that the richest 85 people of the world have as much wealth as the poorest 3.5 billion. It suggests that the top 1% of the population controls about half of the world’s total wealth. In most developed countries, the proportion of wealth controlled by the top 1 % has increased substantially over the last 30 years. 
 
Piketty fears that if this continues, those who are historically privileged will ‘pull’ away from those who are not, leading to dynastic hegemony of wealth. Today we find that just the Walton family (owners of Walmart) is as wealthy as the combined wealth of America’s poorest 42%. These hideous inequalities will lead to political and social instability. Piketty does not have any complete remedy but suggests that because even most optimistically ‘g’ is not expected to exceed 5%; strong wealth tax must be used to lower ‘r’. In what would shock even the most ardent social democrats, he suggests a steeply progressive wealth tax as high as 10% for the super rich.  
 
India, long unshackled from the burdens of license raj, is now home to a rising class of super rich. As of mid-2014, India has 70 dollar billionaires and 175,000 dollar millionaires and the number is fast rising. Prof. Amartya Sen maintains that rising income inequality has hit India harder than the other developing economies like China because India lags behind on social indicators such as immunization rates and literacy as well. It is also from Sen’s latest book that we get the popular phrase that captures India as ‘islands of California in a sea of sub-Saharan Africa’. A study by Citi Group finds that super rich Indians are leading the world in planned spending on yachts and private jets. India, despite recent setbacks, remains a very profitable county that attracts foreign investments from all around the world. An Oxfam India study on property tax shows that in the G20 economies, India has the 3rd lowest tax base and 6th lowest direct tax proportion to total tax. Piketty might have exposed the fundamental reason behind rising inequality in India because India has some of the lowest wealth taxes in the world. Compared to the BRICS nations, it has the lowest wealth tax proportion to total tax revenue, a meager 0.4% in 2006. This finding also suggests a possible way to solve to India’s inequality: increase the wealth tax on the super rich while preventing flows to tax havens.  
 
Piketty’s argument, although not novel, has been strong enough to bring inequality into mainstream academic discourse. Recently, he warded off blistering attacks on his data and methodology by the Financial Times, and emerged without a scratch. In the end, for the academic world a fresh round of debates has only begun but for students and workers the fight carries on.  
 
The writer  is student of economics at Presidency University, Kolkata. You can follow him @pranjaleco




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