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Our PickRise of the Rich

Rise of the Rich

Published: 4th Dec 2021 11:53 pm

By V Upadhyay

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In mainstream economics, the questions related to distribution are generally not considered very significant. Discussion of distribution is confined to the field of Welfare Economics where utilitarianism provides an important theoretical framework to debate social welfare issues. Utilitarianism had initially allowed for redistributive measures if they had the effects of increasing total utility (happiness or welfare) of society as a whole. But later when arguments that did not allow inter-personal comparison of utilities had won the field, and when Pareto and Arrow criteria were assigned supreme place in the theory, possibilities of redistributive measures even when they increased society’s total welfare were not permitted within the theoretical framework of Welfare Economics. 

The subject was trivialised as it in essence became a field for futile puzzle-solving by academicians. John Rawls’ contribution which sought to provide justification for an egalitarian society failed to bring the focus back on distribution as his argument rested on the premise of an imaginary rather than real society. Critiquing Rawls’ theory of justice, Amartya Sen states: ‘Indeed, the theory of justice, as formulated under the current dominant transcendental institutionalism, reduces many of the most relevant issues of justice into empty – even if acknowledged to be “well-meaning” – rhetoric.’

Growth with Justice

After the Second World War, ie, from the 1950s to the 1970s, the dominant view, known as ‘the inverted-U hypothesis,’ held that in the early period of economic growth, distribution tends to worsen; and only after achieving a certain economic level, one can expect improvement in distribution. This hypothesis was propounded by Simon Kuznets in his 1955 paper that contained an empirical investigation of the relationship between per capita income and inequality in a cross-section of countries.

There was an earlier discernible similarity between Kuznets’ empirical results and prediction of W Arthur Lewis’ 1954 labour supply model. Lewis’ model focused on structural change in a dual economy setting, in which labour was shifted from a labour surplus traditional agricultural sector to a modern industrial sector. This process of labour transfer continued until the labour supply was exhausted. Kuznets’ hypothesis suggested a trade-off between equality and growth. For a short while, in the 1970s, a trend in literature emerged that downplayed the trade-off arguments and advocated that to alleviate poverty in many developing countries, redistribution measures should be identified that do not hamper growth.

Neoliberal Phase

The enthusiasm for ‘growth with justice,’ however, did not last long. The focus of literature shifted with the rise of neoliberalism and market fundamentalism in the early 1980s. During this neoliberal phase, questions related to distribution and poverty were set aside in favour of growth. It was argued that growth itself would curtail poverty through ‘trickle down’ mechanisms. There was, however, not much discussion about the processes through which trickle-down would work.

There are broadly two opposing strands found in the literature on the subject of distribution. At the one end of the spectrum are those who argue that a free market-based system and liberal economic policies raise incomes of all, the rich and poor, proportionately. This ‘growth is distribution-neutral’ stance translates into a stance that ‘growth is good for the poor.’ It is stated that as incomes of the poor also rise with the incomes of the rest in society, there is a reduction in poverty as measured by some fixed income levels.

At the other end of the spectrum is the argument that economic growth, especially during the last four decades, has been associated with an increase in inequality. This has prevented the benefits of economic growth from reaching the poor.

Piketty’s C21

During the last 40 years, income inequality has risen considerably in the US, Europe, and all other major economies. Thomas Piketty’s magnum opus published in 2014 ‘Capital in the Twenty-First Century’ (referred to as C21) deals with the issues of long-term trends in inequality of wealth and income in such great details and so thoroughly as not seen for a long time. Piketty’s book focuses in particular on the increasing disparity between the upper centile of the income and wealth distribution and the rest in the US and several major European countries. Before the publication of C21 as well as Piketty’s earlier works with his co-author, Emmanuel Saez, ‘most discussions of economic disparity more or less ignored the very rich.’

For several decades after the Second World War, the dominant mainstream view, known as the Kuznets fact, was that ‘all or nearly all economies had been through or would go through an industrial age in which inequality rises and then a social-democratic mass-consumption age in which inequality falls and then stabilises. It…..turns out not to be a fact — merely transient historical contingency.’

Based on a systematic analysis of long-term statistics on inequality and growth, Piketty shows that wealth concentration in the United States and Europe has just now returned to the high levels observed earlier about one hundred years ago. He also records that inequality in capital income in the Western capitalist economies has been rising rapidly since the beginning of the 21st century. 

According to Paul Krugman, ‘The big idea of Capital in the Twenty-First Century is that we haven’t just gone back to 19th-century levels of income inequality, we’re also on a path back to “patrimonial capitalism,” in which the commanding heights of the economy are controlled not by talented individuals but by family dynasties.’

One major contribution of Piketty’s work has been to show clearly that the role of inheritance flows in the dynamics of capital accumulation in the advanced capitalist economies is too significant to be ignored.   

From the foregoing analysis, it is quite evident that in the current phase of advanced capitalism, particularly in the 21st century, inequality has been on the rise in the period of growth as well as in the period of stagnation or recession. Joseph Stiglitz is in broad agreement with many analysts in economics and other social sciences when he argues that ‘inequality is the result of political forces as much as of economic ones.’ The most significant remedial measure to save capitalism that emerges from Piketty’s work is focused on a ‘progressive global tax on capital.’ 

In addition to a tax on capital, Piketty also argues for a progressive tax on income as well as a progressive real estate tax. In prevailing political conditions, all these remedies/suggestions are, however, just utopian ideas. The corporate tax rate was reduced by the Trump administration in the US from 35% to 21% in 2017. Joe Biden, who during his presidential election campaign had promised to raise corporate tax, has, under pressure from corporates, abandoned this idea after assuming office.

Bloating Billionaires

  • As per the annual Forbes list 2021, the wealth of billionaires worldwide rose by $5 trillion to $13 trillion in one year
  • Easy money pouring out of central banks has worked largely to prop up financial markets, including the stock markets. This has been one of the main causes of the phenomenal increase in wealth inequalities in the US, Europe and many other countries
  • The net worth of billionaires in the US has grown by a staggering $2.1 trillion since the start of the pandemic
  • As per the estimates by the Federal Reserve Board, in October 2021, the $5 trillion in wealth held by 745 billionaires was two-thirds more than the $3 trillion in wealth held by the bottom 50% of US households 

Covid-Triggered Gap

The Covid-19 pandemic has greatly exacerbated the problems of wealth and income inequalities. To ameliorate the downside effects of the disease on the economy, the US, Canada and many European countries have launched trillions of dollars’ worth of stimulus packages. Central banks in these countries have injected several trillion dollars into economies. 

The main beneficiaries of the expansive monetary policies have been the ultra-rich and large corporations, especially the blue-chip companies. The net worth of billionaires in the US has grown by a staggering $2.1 trillion since the start of the pandemic. As per the estimates by the Federal Reserve Board, in October 2021, the $5 trillion in wealth held by 745 billionaires was two-thirds more than the $3 trillion in wealth held by the bottom 50% of US households. 

As per the annual Forbes list for 2021, the wealth of billionaires worldwide rose by $5 trillion to $13 trillion in one year. Easy money pouring out of central banks has worked largely to prop up financial markets, including the stock markets. This has been one of the main causes of the phenomenal increase in wealth inequalities in the US, Europe and many other countries.

The rich keep their wealth in many forms, preferably in assets over which national governments and other regulatory authorities find it difficult to exercise control. In recent years, cryptocurrencies (such as Bitcoin) have emerged as a new class of assets that has many favourable characteristics. 

Bitcoin does not possess the key medium of exchange properties; therefore, it is unlikely to attain the status of a bonafide currency. It is, however, a good store of value for several reasons. It is scarce as, by design, its amount has a definite upper limit. The Bitcoin network is spread around the world. The decentralised and digital nature of cryptocurrency makes it almost impossible for governments to control it. It is resistant to forceful seizure. Because of these properties, rich people find bitcoin to be much easier to hide and keep safe in comparison even to the traditionally favoured physical assets such as gold.

Recently, there have been some developments, which can be seen as initiatives towards tackling the problem of inequality at the international level. A total of 136 countries have finalised a landmark global agreement to subject multinational enterprises to a minimum 15% tax. This is a step to curtail tax shifting and tax avoidance by multinational companies. Additional revenues accruing to governments as a result of this deal could be utilised to fund needed economic and social spending. This agreement in itself, however, is unlikely to have a significant impact on inequality. In that sense, it should only be seen as a small step in tackling the menace of inequality.

China has recently taken certain steps that seek to curb the growing influence of industrial giants on the economy and society. These steps include anti-trust investigations of major private sector companies, such as Alibaba and Tencent; cracking down on the gaming industry; and forcing the private education industry to turn non-profit. These steps show that the Chinese leadership is seriously concerned about growing economic inequality and is willing to tackle this menace through changes in policy directions. How effective these steps are will only be known in the coming years.  

(The author is SK Dey Chair Professor, Institute of Social Sciences, New Delhi)


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