A BOOK which is attracting much attention in the United States at present is Capital in the Twenty-First Century by a French economist named Thomas Piketty. He analyses an enormous amount of historical data on changing wealth and income inequalities in the advanced capitalist countries, anticipates on the basis of this analysis that wealth inequalities are likely to increase substantially in the coming years, to a point where they seriously jeopardize the functioning of all democratic institutions, and therefore advocates substantial taxation of wealth, especially at the upper end of the wealth spectrum. At a time when neo-liberal economists have hijacked the intellectual discourse, and that too because of the biases of the corporate-controlled media and the growing influence of finance capital on institutions of higher learning, rather than any intellectual soundness of their arguments, the fact that a book expressing concern over rising wealth inequalities and arguing for wealth taxation, has caught public attention is to be welcomed. At the same time however, even on the basis of a superficial familiarity with Piketty’s argument, which is all that I can claim at present, two points about his argument strike me as worth discussing. ODD ASSERTION The first is Piketty’s view that the increase in wealth inequality arises because of the rate of return on capital being greater than the rate of growth of the economy. Suppose the rate of return on capital is 8 percent while the rate of growth of the economy is 3 percent, and suppose the initial capital stock is 100. Then the owners of capital who would be getting an income of 8 can consume half of it, invest the other half which is 4, and still have an expansion in their wealth that is larger than the rate of growth of output. So, even as they wallow in luxury their wealth can still grow at a rate faster than the society’s income, and hence faster than labour incomes. They can in short eat their cake and have it too. This however raises a number of questions. What determines the rate of growth of the economy? Piketty’s answer would be: the sum of the rate of growth of the labour force and the rate of growth of labour productivity owing to technological progress. The economy in short is always assumed to be labour-constrained, at least in the long run. This however seems an odd assertion, since capital has historically moved vast masses of people across the globe as slaves, indentured labourers or simply migrant workers, in order to satisfy its labour requirement. To imagine that capital simply relies on the domestic growth of the work-force in “efficiency units” (i.e., inclusive of the rate of growth of labour productivity) within each “developed economy”, is unreal. Besides, even if capital accumulates faster than the rate of growth of labour force, should not this fact itself, by its impact on labour demand, have an impact on the wage rate and hence on the rate of return on capital, so that ultimately the growth of capital incomes and the growth of labour incomes should become equal? In the above example, when the rate of return on capital has fallen to 6 percent from 8 percent (where it was to start with), assuming as before that the capitalists consume half of their incomes and save and invest the other half (Piketty assumes away all problems of aggregate demand, and hence the market question in general), the rate of growth of their capital stock would be 3 percent, the same as the rate of growth of output; and then onwards there should be a balanced growth of wage and profit incomes, each growing at 3 percent even though the rate of return on capital continues to be 6 percent, of which half is always consumed. The point however is that even when the shares of wages and profits remain unchanged in this manner, the threat to democratic institutions continues to remain serious and indeed to grow in intensity. To see this point, let us deliberately assume that capitalists’ consumption is nil, and that the rate of return on capital in the above example is a mere 3 percent, the same as the growth rate of output. We have in other words, not an excess of the rate of return over the growth rate of output, but an equality between the two. And let us assume for illustrative purposes that the rate of increase in labour productivity owing to technological progress is 2 percent per annum while the rate of growth of population (and hence of the work-force in natural units) is 1 percent, adding up to the growth-rate of labour force as a whole (in “efficiency units”) of 3 percent. In this case the per capita income of the society increases at 2 percent (with output growing at 3 percent and population at 1percent), the wage and profit shares remain constant, and the real wage rate increases at 2 percent (the same as the rate of growth of labour productivity). But the per capita stock of capital also increases at 2 percent among the capitalists, since the capital stock rises at 3 percent while the population growth among the capitalists (assuming it to be the same as for the general population) is only 1 percent. Wealth inequality in other words keeps getting accentuated: the working population whose savings are small continues to have zero wealth, while the capitalists, whose share in population does not increase, continue to have increasing wealth per capita. Put differently, wealth inequality in society would increase even when the rates of return on capital and the rate of growth of output are equal, because capital breeds faster than the capitalists. If capitalists constitute, say, the top 5 percent of the population, then the wealth distribution would move over time as follows: top 5 percent 100, bottom 95 percent zero; top 5 percent 200 (after some time), bottom 95 percent zero; and so on. One cannot believe that this would not jeopardize democracy, when the top 5 percent consists ad infinitum of people from the same families. PROBLEM OF WEALTH INEQUALITY FAR MORE SERIOUS Thus even in the world conjured up by Piketty where there is no unemployment, no reserve army of labour, no problems of aggregate demand and no concern over the market question, there is still cause to be concerned over wealth inequality even when the rate of return on capital equals the rate of growth of output. The problem of wealth inequality, and the dangers it poses for the functioning of democratic institutions in short is far more serious than what is highlighted by Piketty. And this even without considering centralisation of capital, primitive accumulation of capital, displacement of petty producers, and all those other factors which accentuate wealth inequality in society but which Piketty does not consider. The second point consists in the fact that Piketty’s is basically a social democratic agenda, and capitalism does not implement any social democratic agenda save when it is threatened by socialism. The idea of taxing capital, which is more or less synonymous with wealth, was discussed long ago, in 1937 in the midst of the Great Depression, by Michal Kalecki the renowned Polish Marxist economist. Kalecki had shown that of all the different ways of raising revenue to finance government expenditure for increasing employment and output in an economy, taxing capital was by far the best option. It was not only better than an indirect tax on commodities for increasing employment and output (which is an obvious conclusion since a commodity tax falls on the workers too and hence partly destroys demand even as the government’s spending of the tax revenue adds to demand); but it was also better than a tax on profit incomes of the capitalists. This is because while both, a tax on capital and a tax on profits, when matched by an equal increase in government expenditure, leave post-tax profits unchanged compared to what prevailed earlier (before the government raised its taxes and expenditures), and also have identical effects on employment in the period in question, the former, i.e., a tax on capital, has no effects whatsoever on the incentive to invest, while a tax on profits may have such effects. The reason is simple: whether a capitalist invests Rs100 in building a factory or keeps Rs100 as cash in the vault, he would have to pay the same tax anyway under a system of capital taxation; so there would be no special disincentive for holding his wealth in the form of factories, i.e., for inducement to invest. Kalecki had therefore concluded that “capital taxation is perhaps the best way to stimulate business and reduce unemployment. It has all the merits of financing the State expenditure by borrowing, but is distinguished from borrowing by the advantage of the State not becoming indebted.” But he had then gone on to add: “It is difficult to believe, however, that capital taxation will ever be applied for this purpose on a large scale; for it may seem to undermine the principle of private property..”; and had concluded by giving the first part of a well-known quotation from Joan Robinson: “Any government which had both the power and the will to remedy the major defects of the capitalist system, would have the will and the power to abolish it altogether, while governments which have the power to retain the system, lack the will to remedy its defects.” How, it may be asked in the light of Joan Robinson’s remark, did the post-war capitalist States manage to remedy the major defects of the system which consisted in the maintenance of large-scale unemployment and the generation of massive inequalities? (Piketty finds for instance that wealth inequalities declined in the decades after the Second World War until the end of the seventies). The answer lies in the fact of the socialist challenge that confronted capitalism at the time. Elements of the social democratic agenda could become acceptable to the system not because it had changed, not because it had become more “humane” or more “welfare-oriented”, but because the war had left it struggling for survival in the midst of massive working class anger and unwillingness to go back to the “old days”. Now that the socialist threat has receded, there is, if anything, an attempt to roll back even such social democratic measures as the system had adopted. The post-war social democratic measures were thus a compromise born out of desperation, a one-off concession made by the system. These measures would not be replicated by the system just because in their absence democratic institutions may be imperilled. But demanding such measures, as Piketty does, has the merit of arousing the consciousness of the working people.