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Economic Inequality Expressed in 'Le Capital au XXIe siècle'

Increasing economic inequality is inherent in capitalism, writes Thomas Piketty in his book, Capital in the 21st Century

A couple of months back, the English translation of a book, Thomas Piketty's 'Le Capital au XXIe siècle' (Capital in the 21st Century) was published. In the time since then, it has been widely hailed as a groundbreaking work. From Economics Nobel Laureate Paul Krugman in the New York Times to The Economist, everyone seems to be gushing over the book and the latter has even started an online chapter-by-chapter 'read-along' where readers and the magazine's editors discuss the book. It has hailed the author as no less than a 'modern Marx'. Although, when in a later issue it pointed out that it meant Karl (and presumably not Groucho), it was clear that there was a certain backpedalling on Mr. Piketty in progress.

Anyhow, for such a long and complex book, the central idea of Capital in the 21st Century is unambiguous. It says that increasing economic inequality 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 people of a certain ideological bent. However, what is distinctive about Piketty's work is that it's solidly grounded in data, some 200 years worth of data on 30 countries.

One implication of the research that he points out is that higher growth acts as a counterweight to increasing inequality, as freshly-generated income becomes relatively more important than returns on accumulated wealth. Basically, the t-shirt slogan edition of Piketty's book seems to be that Capitalism causes inequality but higher growth fixes the problem. This doesn't fit into anyone's pre-conceived notions and that's a good thing.

Disappointingly, Piketty's own cure for this problem is the standard socialist one. His recommendation for curing the ills of capitalism are high, even punitive, levels of taxation on wealth and large incomes and redistribution. One would have thought that the logical conclusion should be to see high growth as the solution, but apparently 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 which is rooted in empirical analysis, the last word is comes from ideology, and a failed ideology at that.

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

Of course, it'll be your tough luck if by the time, 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.