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Interviews | Economist Thomas Piketty, professor at the Paris School of Economics interviewed by Subodh Varma

Economist Thomas Piketty, professor at the Paris School of Economics interviewed by Subodh Varma

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published Published on May 11, 2014   modified Modified on May 11, 2014
-The Times of India
 

Is wealth trickling up instead of down? Yes, says rockstar economist Thomas Piketty whose new book proposing a wealth tax on the super rich has sparked off a firestorm. Excerpts from an exclusive interview...

His book Capital in the Twenty-First Century has put the spotlight on Thomas Piketty, transforming the Paris School of Economics professor to global superstar. In these troubled times, he highlights a troubling issue: inequality between the rich and poor is growing alarmingly with dire consequences. Piketty and his colleagues spent 15 years digging for data spanning three centuries and 20 countries to prove this point. While many are skeptical of the solutions he suggests, that his work is path-breaking remains undebated.

* You say that wealth inequality has grown tremendously. Why?

My book is about the history of income and wealth distribution in over 20 countries since the Industrial Revolution. History tells us that there are powerful forces going in both directions (equality and inequality). Which one will prevail depends on the institutions and policies that we will collectively adopt. Historically, the main equalizing force - both between and within countries - has been the diffusion of knowledge and skills. However, this virtuous process cannot work properly without inclusive educational institutions and continuous investment in skills. This is a major challenge for all countries today. In the very long run, the most powerful force pushing towards rising inequality is the tendency of the rate of return to capital 'r' to exceed the rate of output growth 'g' . That is, when 'r' exceeds 'g' , as it did in the 19th century and seems quite likely to do again in the 21st, initial wealth inequalities tend to amplify and become extreme. The top few percents of the wealth hierarchy tend to appropriate a very large share of national wealth, at the expense of the middle and lower classes . This happened in the past, and could well happen again. For instance , according to Forbes global wealth rankings, top global wealth holders have been rising three times faster than the size of the world economy over the 1987-2013 period.

* Is this inevitable? For a considerable part of the 20th century, inequality was less. Why?

In developed countries, the reduction in inequality that took place in the 20th century was mostly due to the capital shocks of the 1914-1945 period (destruction, inflation, crises ) and to the new fiscal and social institutions that were set up in the aftermath of the World Wars and Great Depression. There was no natural tendency toward a decline in inequality prior to WWI. During the 20th century, rates of return were severely reduced by capital shocks and taxation, and growth rates were exceptionally high in the reconstruction period. This largely explains why inequality remained low between 1950-80.

* Your data says that the top 1% in India owns about 8-9 % of national income. That's not much compared to the West, yet inequalities here appear starker. Is it that inequality being a relative measure, the absolute nature of poverty gets sidelined?

Let me make it clear that there are major problems with the measurement of income inequality in India. Of course, there are data problems in every country. But among all democracies , India is probably the country for which we have met the largest difficulties in getting reliable data. In particular, India's income tax administration has almost given up compiling detailed income tax statistics, although detailed yearly reports called "All-India Income Tax Statistics" are available from 1922 to 2000. This lack of transparency is problematic, because self-reported survey data on consumption and income is not satisfactory for the top part of the distribution, and income tax data is a key additional source of information in every country. The consequence is that we know very little about the actual decomposition of GDP growth by income and social groups in India over the past few decades.

* You propose a 'utopian' global wealth tax to redistribute wealth. If it is so impracticable, what's the use of proposing it?

A global wealth tax together with a global government is certainly a utopia. But there is a lot that can be achieved at the national level and through intergovernmental agreements . In particular, countries like US, China or India are sufficiently large to make their tax system more progressive. For instance, the US - about one quarter of world GDP - could transform their property tax into a progressive tax on net wealth. They are sufficiently large to impose credible sanctions on countries and banks (like Swiss banks) that do not transmit the information they need to enforce their tax law.

* You criticize economists for their 'childish passion' for mathematics in your book. How should they deal with their subject?

I am trying to put the distributional question and the study of long-run trends back at the heart of economic analysis. In that sense, I am pursuing a tradition which was pioneered by the economists of the 19th century , including David Ricardo and Karl Marx. One key difference is that I have a lot more historical data. With the help of many scholars, we have been able to collect a unique set of data covering three centuries and over 20 countries. This is by far the most extensive database available in regard to the historical evolution of income and wealth. This book proposes an interpretative synthesis based upon this data. I also use simple theoretical models in order to account for the facts.

The man behind the plan

After completing his PhD at age 22, Piketty spent three years teaching in the US after which he returned to France. He enjoys travelling with his wife Julia Cage, a Harvard educated economist, and his three daughters. "I am sure we will soon take them to India," he says. Though he leans Left, Piketty has never joined a political party and says he belongs to the post-1990 globalization generation. "I was never tempted by communism and Marxism. I think this is why I can re-open the issue of inequality under capitalism with a non-ideological, data-intensive perspective," he says.

Image Courtesy:

http://www.thestar.com/news/the_world_daily/2014/04/meet_t
homas_piketty_the_next_rock_star_economist.html 

The Times of India, 11 May, 2014, http://timesofindia.indiatimes.com/home/stoi/deep-focus/To
p-1-in-India-owns-8-9-of-national-income-Thomas-Piketty/ar
ticleshow/34949259.cms 

The Times of India, 11 May, 2014, http://timesofindia.indiatimes.com/home/stoi/deep-focus/Top-1-in-India-owns-8-9-of-national-income-Thomas-Piketty/articleshow/34949259.cms


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