Title: Capital in the Twenty-First Century

Author: Thomas Piketty

Publisher: Harvard University Press, 2014

“Capital in the Twenty-First Century” is a famous 2014 book by the French economist, Thomas Piketty. The book has been widely read since the publishing of its English version. It has stirred a lot of debate in economic circles as well as achieved remarkable reception from other disciplines of social sciences.

One of the main arguments of the book is that over a long-run period, the rate of return to capital ‘r’ is greater than the rate of economic growth ‘g’. The hypothesis seems to be consistent with empirical evidence in post-WWII developed economies of the world which the book has attempted to analyse.

It is striking to note that 60% of the increase in US national income in the 30 years after 1977 went to just the top 1% of earners. The only section of the US population that has done better than the top 1% is the top 10th of that 1%.

The other revealing statistic cited in the book is that the top 0.1% of Americans claim 9% of income which is up from 2% in the middle of the twentieth century. The top 0.1% holds a near-record 22% of the wealth while the top 0.01% claim a bigger income share than at any other time in history. It is also astonishing that corporate profits have swelled in the post-WWII period and the average CEO earns as much as earnings of 331 workers, up from a 24 to 1 ratio in the 1960s.

The book argues that the world today is returning towards ‘patrimonial capitalism’, in which much of the economy is dominated by inherited wealth. While the top 10% have amassed more wealth in the last 50 years, America’s bottom 90% is falling deeper and deeper into debt.

The author argues that Capitalism does not self-correct towards greater equality. The author recommends that governments should adopt a global tax on wealth to prevent soaring inequality. This will foster wealth mobility and keep concentration under control. Another very interesting analysis in the book is that lower growth might worsen inequality. It goes contrary to the famous Kuznet’s hypothesis which attributed high-income inequality to high economic growth. The author is also critical of supply-side economics and suggests punitive income taxes and wealth taxes to curb the concentration of wealth.

The book is an excellent attempt to bring the issue of soaring income inequality to the forefront. Even if we look beyond the aggregate numbers on income inequality, some spending patterns and budget allocations on non-essential goods are striking, to say the least, at a time when the world faces poverty at a massive scale and soaring income inequalities even in developed countries after years of sustained economic growth.

The budget for some films and video games is more than development spending in some countries. Some individual persons own more wealth than entire countries’ GDP. Income earned by the top 10 showbiz personalities together is more than the entire combined production value of 7 countries of the world. 10 persons selling entertainment earn more than what all people together earn in 7 countries! Top on that list earns more than the GDP of at least 4 countries of the world. Yet what these celebrities provide in the market system is adjudged efficient allocation of resources as long as the other rich people can put up dollar votes for buying entertainment at offered market prices.

As per Oxfam, 26 people together own the same amount of wealth as the combined wealth of 3.8 billion people who make up the poorest half of humanity. These 26 wealthiest people own $1.4 trillion. Interestingly, 10% interest on it can give them a risk-free increase in wealth of $140 billion, just enough to feed all the poor people for eight months of the year alone. 

What the economics profession needs? It needs a new premise to combat social problems of poverty and inequity. The new premise according to Nobel Laureate Amartya Sen’s empirical evidence is that rather than scarcity, it is the inequitable distribution of resources which is the main cause of economic miseries.

Interestingly, according to the Food and Agricultural Organization, for the world as a whole, per capita food supply rose from about 2,200 kcal a day in the early 1960s to more than 2,800 kcal a day by 2009.

Capitalism, the way it is practiced as an economic system, has largely allowed and provided legal cover to certain exploitative institutions and their operations based on free-market philosophy. Such institutions have been chiefly responsible for much of the distributional inequity in the world today.

Interest-based financial intermediation in fractional reserve banking with fiat money has resulted in an increased concentration of wealth in the world. To put the matters in the right perspective, income inequality even in OECD (Organization for Economic Cooperation & Development) countries is at its highest level for the past half-century.

Past growth experience of Japan and the USA or even recent growth experience of India and China has resulted in increased income inequality in these countries. Economic growth has failed to improve income distribution in these countries.

Income inequality can result from wealth inequality when there is a fixed return on loanable wealth in the form of interest. Interest-based financial intermediation brings concentration of wealth eventually in every society by granting a private right of fiat money creation to the central bank and allowing a fractional reserve banking system which gives the legal right to the private banks to create credit money. This money capital can be loaned out and fixed interest can be earned on it. Hence, financial capitalists will be immune to losses, fluctuations and uncertainty of business cycles to a large extent. But, the other factors of production cannot have that luxury as their compensation from the productive activity is either linked with the provision of services (in the case of labour) or the provision of assets (land or physical capital) that have intrinsic value. These factors of production are scarce and they also lose ‘use-value’ with time unlike the loaned amount of money capital which earns compounded interest as an exponential function.

It is a fact that people have different tolerance for risk, different innate abilities, different attitudes towards progression in life and career, different levels of ambitions and as a result, they exert different levels of effort in acquiring education, skill set and thus their productivity levels are different. The difference in characteristics highlighted above may not necessarily be a result of exploitative institutions or historical processes. Most of these reasons could be controlled and shaped by individuals through their intertemporal economic choices. But, as the author argues that it is the inequality sustaining itself from inherited wealth which gives a clear historical advantage to the elite and which cannot be effectively checked in Capitalism without bringing in necessary redistributive mechanisms.

On the other hand, Islam disallows interest-based earnings and closes the door for a systematic increase in inequality of income resulting from wealth inequity.

The author notes that the annual value of inheritances in France has tripled from less than 5% of GDP in the 1950s to about 15% now. In contrast, the inheritance laws of Islam ensure that the wealth of the deceased is distributed widely among the members of the family of the deceased and this permanently and systematically ensures doing away with concentration of wealth in every generation.

In an Islamic economy, Zakat on wealth redistributes assets too, independently of the business cycles and helps stabilize the extremes of the business cycles. Transfer payments to the unemployed, poor, needy and debtors continue even if the economy faces a recession.

We need a worldview that expands the responsibility of human beings to society, future generations, and other living species on the planet with accountability for every intentional act done by every human being. We need a worldview that regards humans as trustees for whatever material resources and mental faculties they come to possess in this world. We need a worldview or economic system that regards the market as an instrument rather than give it the role of allocating every resource in whichever way the rich people desire with the most dollar votes. That requires a balance between socialism and unfettered market principles. Economists not only need to search for the right policies but also explore which institutions and worldviews can complement them. Islamic worldview based on oneness of Allah and belief in afterlife accountability can deeply influence preferences, behaviour and choices. It not only asks for a change in some choices and giving religion a place in time and resource allocation. Rather, it presents a worldview where a human being is freed from following anyone except Allah and where a human being is equipped with spiritual rationality to act in ethical ways for the eternal bliss and social harmony in this ephemeral world.