The nature of the institutions determines outcomes, not the means of production or processes
In 2013 the French economist Thomas Piketty released Capital in the Twenty-First Century, a magnum opus on income inequality. It was an event book very much like Stephen Hawking’s A Brief History of Time. Hawking’s book sold as many as 10 million copies, by comparison Piketty’s tome had 2.4 million buyers so far. Such event books are more often than not read by only a fraction of the buyers. Speaking for myself, I still have somewhere a slightly read copy of James Joyce’s Ulysses, still considered by the cognoscenti as the foremost work of modern literature. It is said that an analysis of Kindle readers of the Piketty book revealed that a typical reader got through 26 of its 700 pages. But have no fear, those first 26 pages have all you need to know. They encapsulate the rationale and results of Piketty’s monumental work.
I once asked a well-known economist who had reviewed Piketty’s Capital about what the main proposition of the book was. He encapsulated it quite brilliantly. He just said that Piketty had set out to prove that R was greater than G, where R is the return on capital and G is the growth of the economy. There is much empirical evidence to back this up. In the eight years between 2006 and 2014, the US benchmark index S&P 500 gained 45 per cent, an average simple growth rate of 5.6 per cent, four times higher than the average GDP growth rate of around 1.5 per cent. The consequence of this, of course, is the explosion in income inequality, which is the hallmark of the post-World War II era, and particularly after the advent of globalisation. Oxfam has informed us that in the past two decades 73 per cent of the growth has been cornered by just one per cent of the population. Oxfam has a known tendency to exaggerate a bit to prove its point, but this proposition, that few people benefitted the most during this period of huge economic expansion, is undisputable.
Paul Krugman wrote: “What excited them was Piketty’s novel hypothesis about the growing importance of disparities in wealth, especially inherited wealth, as opposed to earnings. We are, Piketty suggested, returning to the kind of dynastic, ‘patrimonial’ capitalism that prevailed in the late 19th century.” We only need to look around us to see that most of the wealthy today are inheritors, and without doubt many of them are building on those inheritances to further accentuate the income inequality. What is really troubling about this growing concentration of wealth is the concentration of political power in the hands of very few who are able to influence politics and policies.
According to Marx an individual’s position within a class hierarchy is determined by their role in the production process and argues that political and ideological consciousness is determined by class position. He saw a class as those who share common economic interests and are conscious of those interests. Classes, according to Marx, were inherently antagonistic and in a state of constant struggle.
In his new book Capital and Ideology, Thomas Piketty argues, with far greater validity, that inequality is driven by human institutions, which in turn reflect the dominant ideology. Piketty defines his thesis very succinctly thus: “Inequality is neither economic nor technological: it is ideological and political. In other words, the market and competition, capital and debt, skilled and unskilled workers, natives and aliens, tax havens and competitiveness -- none of these things exist as such. All are social and historical constructs, which depend entirely on the legal, fiscal, educational, and political systems that people choose to adopt and the conceptual definitions they choose to work with. These choices are shaped by society’s conception of social justice and economic fairness and by the relative political and ideological power of contending groups and discourses.”
Does this mean Marx was wrong? The times in which Marx and Piketty lived are very different. Marx saw the distortions and inequity in society and wondered why? He came up with explanations. His prescriptions were limited by the knowledge and evidence available to him then. The world has moved on and moved very far since then. When Karl Marx began writing his first three volumes of Das Kapital (1867-1883), it was the early days of electricity. Marx couldn’t contemplate the massive leaps of productivity made possible in the 1900s, when the world witnessed a monumental expansion of knowledge and, with it, capital. Piketty’s study relates to how both capital and knowledge came to be inequitably allocated because of the institutional arrangements within societies.
To understand how institutional arrangements determine outcomes, just think of India’s educational system. We now have two or possibly three parallel educational streams. The two urban upper classes largely benefit from a higher standard and quality of education imparted in English in schools with high quality teaching and facilities. This is the stream that produces India’s managerial classes (both government and industrial). The working class stream flows out of our government schools, with its emphasis on vernacular education and indifferent standards. There is a third stream of rural education from which escape even into the next higher class becomes even more difficult, if not impossible. The flow into the upper reaches of Indian society from these three streams is vastly unequal. What Piketty is saying is just this. The nature of the institutions determines outcomes, not the means of production or processes.
Capital and Ideology is rich in references to India and draws inferences about the institution of castes (varnas) and the rising role of brahmins, after the advent of Muslim rule, leading to the diminution of the role of Kshatriyas. The role of the brahmins expanded to an even more dominant status under the British. Piketty lauds the determined “affirmative action” policies after Independence that vastly increased the upward mobility of the lower castes, like most of us do. He also notes that the benefits could not be fully realised due to the low standards of education and its unevenness in towns and the hinterland and between regions. So, what’s new? Most Indians with even an elementary understanding of post-independence India know this. The question is --what is to be done now?