Flight to Capital

In late 2005, a group of wealth analysts in the US declared the world safe for the rich. Led by Arjun Kapur—then with Citigroup—inequality of wealth did not matter for them. What mattered, in their charming expression, was ‘Plutonomy’, an economy driven and dictated by plutocrats. Such were the ambitions of this group that they could even imagine a re- drawing of the world’s map: The US, UK and Canada were Plutonomies; continental Europe (minus Italy) and Japan was the ‘egalitarian’ block; and the rest frankly did not matter. The key predictions were that Plutonomies would see more inequality, capitalist-friendly governments, technology- driven productivity and more profits.

The prognostication was rather premature. Within three years, disaster struck and in a single month in late 2008, some of the biggest investments banks and firms ceased to exist. It took an American president elected on a socialist plank to fix the broken plumbing of capitalism. The Troubled Asset Relief Program was implemented under Barack Obama and ended up spending nearly $450 billion to prevent the collapse of the US economy, something that would have hit the global economy beyond repair. The after-effects of that crisis could be felt years later: the crashing of the Greek economy and its near-exit from the Eurozone in 2015 being the latest example.

Plutonomy is not an expression that one hears usually these days. What resonates now is the rage against the very ideas put forward by writers of the Plutonomy report.

If one ignores the sensational and the savage, if there is one piece of writing that raises this anger to a philosophical level, it is the French economist Thomas Piketty’s Capital in the Twenty-First Century. Published seven years after the collapse of Lehman Brothers, it harks to an older tradition of evaluating capitalism. In more than one way, Capital bears resemblance to another Capital, one written 148 years earlier. The new Capital captures the anger and rage against inequality.

Piketty has brought masses of data on wealth and inequality on a scale that Karl Marx could never have imagined. The book is global in scope and when seen along with the publicly released data by its author on different countries, it remains unparalleled in its ambition and achievement.

By the closing decade of the 20th century, the search for what were once called the ‘General Laws of Capitalist Accumulation’ had become a discredited goal. Other such universalising quests, too, became unfashionable. Francis Fukuyama’s The End of History and the Last Man remained the only exception to this trend. But going by the events of the last quarter century, even that work has received its share of bruises.

Piketty, using the data in his hand, has again tried to look for ‘Laws of Capitalism’. And he succeeds in finding three laws. If one leaves aside the technical details, his argument boils down to one trend: the rate of return on capital exceeds the rate of growth and that is fuelling the huge inequalities observed for a while now.

Armed with this insight, and much like Marx, Piketty argues that inequality in the world has increased in tandem with increases in wealth. This is illustrated by the share of the richest 1 per cent of persons in national income. The 1 per cent numbers have become a tool for looking at how unequal is the world in which we live. Increasingly, among those who feel so, Piketty’s arguments and his data inform attitudes towards wealth. India is no exception even if its anger against wealth has older roots. But when one compares Piketty’s ideas with what has taken place in 20th century India, a very different picture emerges.

The most serious charge against Piketty and his understanding of the dynamics of wealth and inequality centres on his ignoring institutional history that creates different outcomes in different countries. Much like Marx’s ideas of the falling rate of profit and the pauperisation of the proletariat— which sought a universal theory of exploitation under capitalism and the coming demise of the latter—Piketty’s laws without history are not very different.

How does India size up in the Piketty world? Here, as elsewhere, data tells its own story. Fortunately, Piketty and his collaborator on the project to study global inequality, Emmanuel Saez, have put together a huge data-set for a number of countries that allows one to look at income shares, price indices, average incomes and other data for the 20th century. For India, the Piketty-Saez data-set begins in 1922 and ends at 1999, practically the better part of the 20th century. When combined with developments of the last 15 years, it is sufficient to give a reasonable picture for almost a century. The data-set is maintained at The World Top Incomes Database

If one looks at the share of income of the top 1 per cent the story begins in 1924 when their share of income rises from 11.46 per cent and goes to a maximum of 17.82 per cent in 1938. This is the highest share of income that has ever accrued to the top 1 per cent in 20th century India. India was a British colony at the time and was subject to economic exploitation by colonial firms and policies that favoured British companies and it does not take much imagination to conclude that this income pie was largely in British hands.

From the peak in 1938, the top 1 per cent share collapsed in the next five years to a bottom of 10.32 per cent in 1943. Again, this is understandable: the Second World War intervened and wartime mobilisation and uncertainties probably led to a collapse of wealth generation and the share garnered by persons at the top of the pyramid.

The dynamics that are of great interest, however, begin in 1947 when after Independence, India experienced a pronounced socialist bent in economic policymaking. After a maximum of 14.41 per cent income share garnered in 1955, a steady decline takes place with the bottom being reached in 1981 when the top 1 per cent share collapsed to barely 4.39 per cent of the national income. These two years—1955 and 1981—mark the high and low point of top 1 per cent income shares. These years can be considered the most unequal and most equal from the perspective of wealth distribution in the country. After 1981, there has been a steady upward creep in this trend with the century ending at 8.95 per cent of the share of income going to the top 1 per cent.

This is a dull, colourless story. One can add some flavour to it by considering it in terms of Piketty’s variables. Even then, bereft of any institutional and political detail, these numbers will not inform us in any way as to what happened to wealth—and its alleged obverse, misery— in India. This, as observed earlier, is the great weakness of Piketty’s framework and India is no exception to it.

The Left may persist and see a story here. This would run roughly in this way: Once India took recourse to the “socialistic pattern of society”, income inequality began to reduce and 1955 marked its high point. Thereafter, as the public sector gained the commanding heights, the moneybags were put in their place. From this perspective, 1973 was an important inflexion point. In that year, the estimated paid-up capital of government- owned companies outstripped that of non-government companies. 1981, too, is a milestone—albeit a negative one—in this tale. From 1980, India warmed up to the private sector and the gains of the socialist age began to erode; inequality started to rise and from 1991—when liberalism prevailed over socialism—there has been no looking back.

This variant of the wealth and inequality story (call it Piketty+) does not say much. What is worse is the fact that it is the intellectual Left, that believes in taking a fine-grained look at history—historical materialism— to arrive at appropriate real-world lessons, always ignores the need for historical flesh in this bare bones data story. There are good reasons why it does not add to it.

The truth about capitalism and attitudes to wealth and inequality in modern India is different. India, or at least socialist India, believed in what could be called the ‘zoological park’ variety of capitalism. Capitalists are animals who are too dangerous to be let loose in a socialist paradise. But one needs to save these dangerous creatures in the safe confines of a zoo. The zoo is a rather evocative phrase for the web of government controls that allowed the private sector to survive but under strict state supervision.

This is a question that Piketty’s framework cannot answer: Why let the private sector survive when by institutional design it is the public sector that is the bearer of economic destiny? The answer—which says a lot about Indian attitudes to wealth, innovation and economic freedom in the 20th century—is to be found in an exceptionally potent, but intellectually understated force. It was the cost of running mass democracy in India that ensured the survival of those who could generate wealth. This survival was no better than organised slavery for this section of society. If one goes back to Piketty’s data on top 1 per cent income share for India, a different story emerges. The years from 1966 to 1970 mark a plateau: the top income share remained a tad below 10 per cent. But in the decade from 1970 to 1980, there is a steady decline with almost six percentage points shaved off of the top income share. Politically, this was the most turbulent decade in Independent India’s political history. By the end of 1960s, there was a great deal of fragmentation in party politics in India. The Congress party lost its sway at the state-level in 1967 and from 1969; the mushrooming in the number of political parties in India had a direct bearing on the fortunes of the private sector. The cost of running electoral campaigns became exorbitant: between 1962 and 1977, the official expenditure per elector more than doubled. This figure again doubled between 1977 and 1980. The actual expenditure—which includes what parties and individuals spent on campaigning—defy any realistic estimates. The American scholar Stanley Kochanek put a tab of Rs 25-30 crore for the 1971 election, which was almost double of the official expenditure of Rs 11.6 crore; for the 1980 election season, this figure shot up to anywhere between Rs 170-200 crore (the official number was approximately Rs 55 crore). Officially, this number was not breached until a decade afterwards when the 1991-92 polls cost Rs 359 crore. By then, the actual costs—again un- estimated—had touched stratospheric levels.

The money for this celebration of democracy came from dipping into the wealth generated by the private sector. Its sole purpose was to ensure the running of election campaigns by political parties and had little to do with creating wealth for its own sake and spreading it among Indians. From the socialist vantage, India in 1980 was as good as it ever got: the moneybags were in check and India was close to being a socialist paradise. In reality, Indians—especially those at the bottom of the consumption pile— were subjected to savage inflationary pressures, food shortages and, in general, bleak economic prospects. Not only was there little wealth, it was despised publicly. Secretly, of course, it was allowed to survive for plainly instrumental reasons.

Philosophers and economists alike have made a limiting case for tolerating inequality. John Rawls famously said that inequality was fine as long as it served the poorest persons in a society. Vilfredo Pareto had a more prosaic view when he said it did not matter if one got rich as long as it did not make anyone worse off. This latter conception motivates most economists. But in all these ideas, one question remains unanswered: equality—everybody to count for one, nobody for more than one—is held to require no justification. It is inequality that requires justification, and an extensive one at that. Logically, in any moral system—one that is governed by rules—symmetry should prevail. If equality needs no justification, then inequality, too, needs no explanation. If inequality requires answering, so should equality. These assumptions may sound grotesque to many. It is simply “immoral” to view the world in this perspective and equality, one of the most cherished human convictions, ought to be kept away from such a corrosive glare. At an emotional plane, it is easy to grant this. Still why inequality? This remains unanswered.

The intellectual Left in India has always confounded inequality with wealth and given the most pernicious justifications against creating wealth. It refuses to believe that wealth can benefit anyone except the rich. From its perspective, curbing the private sector and promoting the public sector is the end-all of generating prosperity. As long as the public sector held sway, ‘assets’ were created and ‘national’ wealth increased. It is another matter that this made little economic sense. By definition, an asset is supposed to give a return. Instead, the public sector in India needed constant replenishment from budgetary resources to keep it afloat. Its damaging and lasting effects lay elsewhere. From 1970 until well into the 21st century, India was an innovator’s dead-end. It was almost after 20 years of the wave of liberalisation in 1991 that India witnessed its first world-class innovations: Tata’s Nano; the almost assembly-line process of carrying out complex cardiac surgical procedures pioneered by Dr Devi Shetty and the slew of startup’s that have dramatically altered the commercial complexion of the country. It is a travesty to call these renewed efforts at generating wealth as favouring the rich and disadvantaging the poor.

In India sustained decrease in poverty and an acceleration of wealth generation have taken place the 21st century. That said, the last decade has copied the political ideas of the 1970s and even their effect has been similar. The intellectual class on the Left, as always, continues to view wealth with suspicion. It refuses to accept that a new class is at the forefront of generating ideas, money and prosperity. They are beyond the clutches of the government. What is troubling is the attitude towards industrialisation and its potential to create jobs. Questions about land and environment have been framed in a manner to pit the poor against the rich. As in the 1970s, Leftist justifications against “ceding any ground” to business and enterprise abound in the name of social justice. The toxic combination of a renewed regulatory vigour, this time spearheaded by civil society that had the attention of the government, nearly derailed economic growth and wealth creation.

Once again, the reality is different: even ‘brick and mortar’ entrepreneurs today come from different, and often underprivileged, social backgrounds. The last 20- odd years have seen an unleashing of entrepreneurial spirit and talent that have not been observed since 1947. The denial of opportunities to this group in the last decade may still come to haunt India. None of this can come in the way of anger and resentment against wealth which is still confounded with its alleged obverse, inequality. Unsurprisingly, Piketty’s 1 per cent numbers and Capital in the Twenty-First Century have great appeal for the class in India that believes we live in an age of heightened injustice. They are not alone and are part of a global crowd.

IndiaKarl MarxprosperityThomas PikettyUK and CanadaUSwealth