‘If democracy is someday to regain control of capitalism…[the] concrete institutions in which democracy, capitalism are embodied, need to be reinvented again and again’

How should the government fund the welfare programs of India? Despite thousands of crores being spent on several schemes, reaching the beneficiaries has been a problem in most of India. Due to a lack of effective implementation, questions are asked about the effectiveness of the welfare schemes so much so that the central contribution under various pension schemes is still between Rs 200 and Rs 625 per person, and it is left to the states to top up that amount and expand the base of beneficiaries. With the growing clamour of increasing the welfare amount from states, how should a government fund the welfare scheme? 

Should spending be cut, or should more be invested in capital expenditure, i.e. building assets and thereby creating jobs? How should India prioritise? What kind of taxes should be levied to create a social state where top quality education, healthcare, food security, clean drinking water and housing are universally accessible? More importantly, how can taxation co-exist in a mixed economy like India which started with Nehruvian socialism, and has now culminated in crony capitalism or, more importantly, oligarchy? 

It is not that the government is not budgeting thousands of crores for welfare schemes; implementation has been the major bottleneck. Despite these attempts, inequality has been rising: according to the World Inequality Lab, the top 10 percent own 65 percent of the wealth–which is all fortunes combined i.e. value of the capital stock–in India. If we look at income, i.e. income from labour and income from capital, the top 10 percent take 57.7 percent of the total, a jump of 17.7 percentage points since 2000. 

In this context, I am reviewing a book Capital in the Twenty-First Century by Thomas Piketty, first published in 2013, to get a sense of inequality of wealth and income, its effects, and how to best work to create a social state with funds. To be sure, India doesn’t have a problem allocating the budget for welfare schemes. 

Take, for example, the budget estimates, i.e. the outlay, for financial year 2026-2027: PM Garib Kalyan Anna Yojana: Rs 2,27,429 crore to give 35 kilograms of rice to the poorest of the poor; Jal Jeevan Mission: Rs 67,670 crore to provide clean drinking water supply to most of the populace; Pension schemes under the National Social Assistance Programme: Rs 9,671 crore as central contribution ranging from Rs 200 to Rs 650 per person; and Ayushman Bharat - Pradhan Mantri Jan Arogya Yojana (PMJAY): Rs 9,500 crore to give medical insurance of Rs 5 lakh per family. 

First, 35 kilograms of wheat or rice to 100 crore people is not enough despite several interventions. My own ground reporting has shown that, with no census conducted since 2011, the rural quota was exhausted more than six years ago in several states, leaving no scope to add new beneficiaries. In August this year, I reported how clean drinking water is still an illusion for many in the Gangetic plain, especially in Bhagalpur, because of arsenic contamination in the groundwater; people are unknowingly getting “poisoned”. A few years ago, I had also reported how the Jharkhand government had to pitch in to expand the base and increase the pension amount. In Chhattisgarh and other states, CAG reports have flagged excess payments and fraud in the PMJAY scheme. 

Rather, how does India create the institutions to implement these schemes to impact the lives of the bottom 50 percent of the income and importantly to the poorest of the poor, and at a time when the number of billionaires in India grew at least fourfold in the last 12 years. In Capital in the Twenty-First Century, Piketty starts by explaining the concepts of Capital or Wealth, and Income, and is careful to exclude human capital from capital. 

He writes that income from capital and income from labour are the foundation of all incomes, and their split shows how capital-intensive a business is. He then explains Capital or Wealth, and makes a basic distinction: for instance, public capital is the sum of assets such as buildings and roads constructed by the government, and natural resources such as mineral reserves, whereas private wealth is the assets owned by private individuals in the form of buildings, plants, factories, machinery and financial assets such as shares, stocks and mutual funds. 

In the process to make the readers understand the effects of inequality, Piketty gives us basic formulas. Consider these: 

#National Income= Gross Domestic Product-Depreciation+Net income received from abroad. 

Interestingly, if a country has a lot of foreign investments in the form of FPIs or FDIs etc., then the income derived from it is subtracted from domestic output because it flows out of the country, which is why national income may be lower than GDP. Conversely, if a country invests heavily abroad, its national income may be higher than its GDP. 

#National Wealth=National Capital (value of)=Private Wealth+ Public Wealth 

He explains that since Public Wealth is near zero or negative in most countries due to Public Debt, National Wealth= (Value of) Domestic Capital+ (value of) Net Foreign Capital. 

The First Law of Capitalism 

Since Income is a flow and Capital is a stock, it is essential to understand the Capital/Income ratio in a bid to understand inequality. Represented by the Greek letter β, it shows how many years of National Income the total Capital Stock is worth. 

The author says that it is an important first step to understand inequality. So, if Europe had a per capita income of 3500 euros, and the per capita value of Capital stock was 18000 euros, then β=Capital/Income ratio=18000/3500=roughly between 5 and 6. Rounded up, β=6, or the value of Capital Stock is six times the National Income. Caveat: Per capita doesn’t mean that everybody had the same amount of money, it is merely an average. 

Then to the first law of capitalism, which is an accounting identity: α (capital's share of national income) = rate of return on capital r × β. The rate of return on capital has often been around 5%. With this formula, if β is 5 then α is 25% or if β is 6 then α is 30%. It means that the share of Income from the Capital is 30 percent and share of Income from Labour is 70 percent. This gives a fair idea of how capital-intensive or labour-intensive a business is. 

The author says that certain comparisons may be misleading when one goes into finer details, for example if an entrepreneur is also working in his organisation, but it is a useful starting point. Importantly, he says that β, α and r-rate of return on the capital, are dependent on each other. 

To emphasise the inequality, the author says: “Global inequality ranges from regions in which the per capita income is on the order of 150–250 euros per month (sub-Saharan Africa, India) to regions where it is as high as 2,500–3,000 euros per month (Western Europe, North America, Japan), that is, ten to twenty times higher. The global average, which is roughly equal to the Chinese average, is around 600–800 euros per month.”

The author says that the global inequality would be much higher if per capita output i.e. Gross Domestic Product-depreciation, which is domestic output, were calculated at market exchange rates–one dollar is Rs 88–rather than at purchasing power parity (the comparison of how much a basket of goods can be bought domestically using respective currencies and making corrections accordingly). 

Just for understanding, India’s GDP ranks fifth in the world at market exchange rates, also called nominal GDP; at purchasing power parity, it ranks third, behind China and the US. Neither measure, however, tells us about the quality of that output. 

The author emphasises: “The reality of inequality between countries is multidimensional, and it is misleading to say that it can all be summed up with a single index leading to an unambiguous classification, especially between countries with fairly similar average incomes. In the poorer countries, the corrections introduced by purchasing power parity are even larger: in Africa and Asia, prices are roughly half what they are in the rich

countries, so that GDP roughly doubles when purchasing power parity is used for comparisons rather than the market exchange rate…Broadly speaking, the poorer a country is, the greater the correction: in 2012, the correction coefficient was 1.6 in China and 2.5 in India.” 

The author then brings up the inequality of global distribution of income, and the output–although both are the same economic realities–as rich countries are “doubly wealthy: they both produce more at home and invest more abroad, so that their national income per head is greater than their output per head.The opposite is true for poor countries.”

He notes, however, that net income from abroad is only slightly positive and does not much alter the living standards of people. He flags Africa as an exception: a continent not in equilibrium, where a substantial share of capital is owned by foreigners. “According to the balance of payments data compiled since 1970 by the United Nations and other international organizations such as the World Bank and International Monetary Fund, the income of Africans is roughly 5 percent less than the continent’s output (and as high as 10 percent lower in some individual countries). With the capital's share of income at about 30 percent, this means that nearly 20 percent of African capital is owned by foreigners.” 

The author adds an important caveat on why convergence has often failed: such countries have been “subject(ed) to chronic political instability” and explains why two distinct types of economies exist: “When a country is largely owned by foreigners, there is a recurrent and almost irrepressible social demand for expropriation. Other political actors respond that investment and development are possible only if existing property rights are unconditionally protected. The country is thus caught in an endless alternation between revolutionary governments (whose success in improving actual living conditions for their citizens is often limited) and governments dedicated to the protection of existing property owners, thereby laying the groundwork for the next revolution or coup.”

So what is the way forward to reducing inequality between countries? One way he suggests is the diffusion of knowledge: “...the poor catch up with the rich to the extent that they achieve the same level of technological know-how, skill, and education, not by becoming the property of the wealthy.”

Piketty says that the diffusion of knowledge does not come out of nowhere; it is often accelerated by openness and trade, but it depends on the country’s ability to mobilize financing as well as institutions that encourage “large-scale investment in education and training of the population while guaranteeing a stable legal framework that various economic actors can reliably count on”. It is therefore closely associated with the achievement of legitimate and efficient government. The book states that this is one of the “main lessons that history has to teach about global growth and international inequalities”.

The author then emphasises the law of cumulative growth, i.e. a small amount of investment over a sustained period of time will lead to substantial growth provided the returns from the capital consumed is small in comparison with the growth rate of the society in the question. The author says that between 2013-14 the economy grew at the rate of 3 percent, out of which population growth was around 1 percent, and the remaining per capita output growth, around 2 percent. 

He presents a table showing, first, that the world grew at modest annual rates in the eighteenth century. Second, that the demographic and economic components of growth sum up the entire economic growth story i.e. average annual growth rate of GDP, population, output per capita stood at 0.5, 0.4 and 0.1 percent respectively. Similarly, between 1913 to 2012, the average annual growth rates stood at 3, 1.4 and 1.6 percent respectively. 

He warns that even at 1 percent a year, the population doubles in 70 years and grows 1.35 times in 30 years. However, he says that it is “neither especially plausible nor desirable” to reach a population of 70 billion in 2300. Since economic growth depends on both population and output per capita, it is important to understand what has been highlighted in the book. 

The book also notes a striking reversal: in 1780, the population of Western Europe was more than 100 million and of North America barely 3 million. “By 2010, the population of Western Europe was just above 410 million, while the North American population had increased to 350 million…What explains this reversal? Not just the flow of immigrants to the New World but also the markedly higher fertility rate there compared with old Europe. The gap persists to this day, even among groups that came originally from Europe, and the reasons for it remain largely a mystery to demographers. One thing is sure: the higher fertility rate in North America is not due to more generous family policies, since such policies are virtually nonexistent there”. 

The book highlights how France and Germany also saw reversals in population despite high life expectancy, possibly due to falling fertility rates, and are on the way to recovering due to better health outcomes. 

However, the author emphasises: “What demographic history teaches us is that these childbearing decisions are largely unpredictable. They are influenced by cultural, economic, psychological, and personal factors related to the life goals that individuals choose for themselves. These decisions may also depend on the material conditions that different countries decide to provide, or not provide, for the purpose of making family life compatible with professional life: schools, day care, gender equality, and so on. These issues will undoubtedly play a growing part in twenty-first-century political debate and public policy,” Capital in the Twenty-First Century by Thomas Piketty says. 

Remarkably, the book points out that population growth has a say on the future of economic growth too. It remains to be seen whether, with the advent of technology, there is after all a different outcome: the population growth rate will be around 0.8 percent or the “official estimate” of 0.2 percent per year. 

Capital and (In)equality in different countries

In 2010, German private wealth was lower than the private wealth of Britain and France: i.e. barely four years of national income in Germany compared with five or six in France and Britain and more than six in Italy and Spain. 

The book compares how capital is owned across these countries, noting the low price of German real estate. However, the author says that low housing costs are not the only reason for lower private wealth; it is also due to the lower stock market capitalisation of German firms.

So, the book asks why the value of German firms was lower than the market value of firms in other countries despite having high savings? It is here that the book introduces a model called “Rhenish capitalism” or “the stakeholder model”. 

“It is an economic model in which firms are owned ‘not only by shareholders’ but also by certain other interested parties known as ‘stakeholders’ starting with representatives of the firms’ workers (who sit on the boards of directors of German firms not merely in a consultative capacity but as active participants in deliberations, even though they may not be shareholders), as well as representatives of regional governments, consumers’ associations, environmental groups, and so on,” he writes. 

Piketty says that the point is not to idealize any model of shared social ownership, which has its limits, but simply to note that it can be at least as efficient economically as “Anglo-Saxon market capitalism or the shareholder model (in which all power lies in theory with shareholders, although in practice things are always more complex), and especially to observe that the stakeholder model inevitably implies a lower market valuation but not necessarily a lower social valuation.” 

In early America, the capital/income ratio, i.e. β, was around three years of National Income, compared with more than seven in European nations, as the weight of the “landlords” and accumulated wealth was less. “With a few years of work, the new arrivals were able to close the initial gap between themselves and their wealthier predecessors—or at any rate it was possible to close the wealth gap more rapidly than in Europe,” the book stated. 

However, while the British and French empires abolished slavery in 1838 and 1848 respectively, America retained slavery until 1865, and the civil rights of southern Black Americans remained curtailed until the 1960s. In 1860, slaves formed 40 percent of the southern population. 

In the South, the combined value of farmland and slaves exceeded four years of national income. “All told, southern slave owners in the New World controlled more wealth than the landlords of old Europe. Their farmland was not worth very much, but since they had the bright idea of owning not just the land but also the labor force needed to work that land, their total capital was even greater,” the book said. So, the book says that if one were to add the market values of slaves to the other components of wealth, the value of southern capital exceeded six years of income, nearly as much as in Britain and France, and double the North's three years of income. 

 Piketty writes: “In fact, the New World combined two diametrically opposed realities. In the North we find a relatively egalitarian society in which capital was indeed not worth very much, because land was so abundant that anyone could become a landowner relatively cheaply, and also because recent immigrants had not had time to accumulate much capital. 

In the South we find a world where inequalities of ownership took the most extreme and violent form possible, since one half of the population owned the other half. 

“This complex and contradictory relation to inequality largely persists in the United States to this day: on the one hand this is a country of egalitarian promise, a land of opportunity for millions of immigrants of modest background; on the other it is a land of extremely brutal inequality, especially in relation to race, whose effects are still quite visible.” 

The Second Fundamental Law of Capitalism: β = rate of savings/rate of growth, a more dynamic law

In the long run, the Capital/Income ratio β is related in a simple and transparent way to the savings rate s and the growth rate g according to the following formula: β = s / g. For example, if s=12 percent, g=2 percent, then β=6. In other words, if a country saves 12 percent of its income a year and its economy grows 2 percent a year, it will in the long run accumulate capital worth six years of National Income. “A country that saves a lot and grows slowly will over the long run accumulate an enormous stock of capital(relative to its income), which can in turn have a significant effect on the social structure and distribution of wealth,” notes Piketty. 

 Karl Marx and his thesis of infinite capital accumulation

Piketty discusses Karl Marx's thesis that “the bourgeoisie digs its own grave” corresponds to what Piketty calls “the principle of infinite accumulation”:  capitalists accumulate ever increasing quantities of capital, which ultimately leads inexorably to a falling rate of profit (i.e., return on capital) and eventually to their own downfall. 

The book states that in Marx's time the implicit hypothesis was that output grew through the accumulation of industrial capital rather than through productivity (output for a given quantity of labour and capital); however, long-term structural growth, as per the book, is possible only because of the productivity growth.

The book says that Marx did not use mathematical models, so it is difficult to be sure what he had in mind. “But one logically consistent way of interpreting his thought is to consider the dynamic law β = s / g in the special case where the growth rate g is zero or very close to zero.” 

He explains that if growth, the combination of productivity growth and population growth, is close to zero, then β, the Capital/Income ratio, will increase indefinitely. In that case, by the formula α = rate of return on the capital r x β, either the return on capital keeps falling as β keeps rising, or a time will come when capital's share devours the National Income. Marx perhaps lacked good data and historical perspective at the time. 

However, Piketty says that the only logical way out is structural growth, which alone can balance the process of capital accumulation–to a certain extent. Therefore, he argues that only “permanent growth of productivity and population” can compensate for the permanent addition of new units of capital, as the law β = s / g makes clear. 

“Otherwise, capitalists do indeed dig their own grave: either they tear each other apart in a desperate attempt to combat the falling rate of profit (for instance, by waging war over the best colonial investments, as Germany and France did in the Moroccan crises of 1905 and 1911), or they force labor to accept a smaller and smaller share of national income, which ultimately leads to a proletarian revolution and general expropriation. In any event, capital is undermined by its internal contradictions,” says Piketty. 

Inequality of Labour and Capital 

The book shows that the top 10 percent of the labour income distribution receives 30 percent of total labour income, while the top 10 percent of the wealth distribution always owns more than 50 percent of all wealth. The bottom 50 percent of the labour distribution gets around 25-33 percent of the labour income, while the bottom 50 percent of the wealth distribution owns next to nothing–less than 10 percent, if at all. 

There is inequality within labour income too, driven by the rise of the “supermanagers”. “Inequalities with respect to labor usually seem mild, moderate, and almost reasonable (to the extent that inequality can be reasonable—this point should not be overstated)...(however) what primarily characterizes the United States at the moment is a record level of inequality of income from labor (probably higher than in any other society at any time in the past, anywhere in the world, including societies in which skill disparities were extremely large) together with a level of inequality of wealth less extreme than the levels observed in traditional societies or in Europe in the period 1900–1910.” 

“It is therefore essential to understand the conditions under which each of these two logics [co-existence of rentiers and supermanagers] could develop, while keeping in mind that they may complement each other in the century ahead and combine their effects. If this happens, the future could hold in store a new world of inequality more extreme than any that preceded it.”

So, did inequality reduce after the French Revolution in 1789? No 

Piketty says that it had little impact in terms of capital/income ratio (in a bid to measure change in inequality levels) and states that it also had relatively “little effect on the distribution of wealth”. 

“...Both before and after the Revolution, France was a patrimonial society characterised by a hyper concentration of capital, in which inheritance and marriage played a key role and inheriting or marrying a large fortune could procure a level of comfort…the fundamental inequality r > g can explain the very high level of capital inequality observed in the nineteenth century, and thus in a sense the failure of the French Revolution,” the book states.

 “Although the revolutionary assemblies established a universal tax (and in so doing provided us with a peerless instrument for measuring the distribution of wealth), the tax rate was so low (barely 1–2 percent on directly transmitted estates, no matter how large, throughout the nineteenth century) that it had no measurable impact on the difference between the rate of return on capital and the growth rate. Under these conditions, it is no surprise that inequality of wealth was as great in nineteenth-century France,” he says. 

Did inequality reduce? Why has wealth inequality not returned to past levels? 

Yes, and it is evident from multiple examples. Piketty draws on literature too. The book notes that specific sums of money disappeared from many novels after the shocks of two World Wars. The book says that the fall in the capital/income ratio between 1914-1945 was due only to a limited extent to the physical destruction of Capital, and due to the “collapse of foreign portfolios and the very low savings rate characteristic of the time (together, these two factors, plus physical destruction, explain two-thirds to three-quarters of the drop) and on the other the low asset prices that obtained in the new postwar political context of mixed ownership and regulation (which accounted for one-quarter to one-third of the drop).”

So, yes, inequality did reduce, and the book emphasises that as a result of three significant changes, large private fortunes began to disappear. “ (the wealthiest 1 percent Parisians) left the next generation just enough to yield capital income of 30–40 times the average wage; by the late 1930s, this had fallen to just 20 times the average wage. For the rentiers, this was the beginning of the end. This was probably the most important reason for the deconcentration of wealth that we see in all European countries (and to a lesser extent in the United States) in the wake of the shocks of 1914–1945.” 

Concentration has not caught up since, partly because people now live longer, which has slowed the pace at which estates pass to the next generation, once roughly every 30 years. 

Oligarchic divergence 

 “The secession of wealth tends, moreover, to obscure the very idea of nationality, since the wealthiest individuals can to some extent take their money and change their nationality, cutting all ties to their original community. Only a coordinated response at a relatively broad regional level can overcome this difficulty.” 

 Democracy and Financial Transparency 

The book says that the primary purpose of the capital tax is “not to finance the social state” but to regulate capitalism. “The goal is first to stop the indefinite increase of inequality of wealth, and second to impose effective regulation on the financial and banking system in order to avoid crises. To achieve these two ends, the capital tax must first promote democratic and financial transparency: there should be clarity about who owns what assets around the world”. 

The author also says that a purpose of the tax on capital is to force people who use their wealth inefficiently to sell assets in order to pay their taxes, thus ensuring that those assets wind up in the hands of more dynamic investors.