A. Rahman Inevitable inequality in capitalism June 3, 2014 IncomeInequality012214With the demise of socialism in the Soviet Union some 25 years ago, the world of capitalism is having a field day now. Not that capitalism was constrained even in those days of bipolar world, but there was some element of cautionary restraint from political imperatives. But now those political restraints of capitalism have vanished completely due to voluntary embracement of capitalism by the erstwhile communist and socialist countries of the world. Capitalism is the only game in the town now. Although China remained insular to the metamorphosis of the Soviet Union, it has accepted capitalism on its own volition. It is said that China is the largest and most ardent capitalistic society in the world today, leaving the previously ardent advocate and vigorous player — the United States of America — trailing far behind. Capitalism like communism or socialism has its vices and virtues and which of these opposing traits becomes prominent at any one time depends on how it is practised in a particular country. Whereas communism or socialism requires a dictatorship (of the proletariat) capitalism can live quite happily with a pseudo democratic system. Nonetheless, capitalism has shown to be more enduring than the communism or socialism. Capitalism also has the pretension that it holds the high moral ground offering equal opportunities to all; it allows meritocracy, not autocracy to flourish. How far these egregious pretensions can be sustained remains to be seen. A recent book by Thomas Piketty, a Professor of Economics at the Paris School of Economics, on ‘Capital in the Twenty-First Century’, published by the Harvard University Press, has given an in-depth look at the world of capitalism on a historic basis and assessed its wide ranging outcome. The book had been published barely two months ago (in March 2014) and it is already making a big stir in the economic circles of the Western World. This weighty book spanning over 640 pages deals head on with the innate properties of capitalism – the most important of which is the creation and perpetuation of inequality in wealth. Wealth has the intrinsic property of following itself and the reverse is also true i.e. the deprivation of wealth is also perpetual! These tendencies can be described in everyday language as rich becomes richer and poor becomes poorer. This is the core outcome of the capitalistic economic system and Piketty articulates it very effectively. It must be stressed at the outset that this tendency of accumulation and deprivation of wealth, as depicted by Piketty, is all based on free and fair transfer and transaction of capital. The illegal acquisition of wealth as is prevalent in the third world countries, including Bangladesh, had been left outside his discourse. The simple fact is that illegal possession follows no basic rule — a man can become multi-millionaire overnight outside the practices of the economic system or he can lose his wealth overnight by a reverse process. Also, if corruption becomes institutionalised, as in Bangladesh, the normal rules of the capitalistic system become totally irrelevant. But before going any further, one needs to have basic understanding of wealth and income. Wealth comes mainly from two sources – inherited wealth and wealth generated through income. Income in its turn is derived from two sources: earned income from labour (wages, salaries, bonuses, consultancy works etc.) and unearned income from capital (rents, interests, dividends, royalties, capital gains etc.). Capital may be considered as the total wealth owned at a given point in time, whereas income is a fluid quantity based on economic performance of an endeavour. Capital and income are two quantities which may quantify the economic performance of an individual or the nation. Capitalism does not differentiate between individuals, institutions or the government. Capital may be owned by an individual and/or by the government. The amount of available capital of an individual is the monetary value of the asset minus debt. The amount of capital in any nation is the sum total of individual capitals minus individual debts, plus national capital minus national debt. Obviously national capital and income are based on the aggregation of statistical evaluation of individuals’ capital and income. In many countries, individuals evade tax and accumulate wealth (illegally). Consequently, the government loses revenue and has to borrow more money (quite often at the international money market) and runs large national debt in order to run the country – maintain national defence, education, healthcare, transport etc. As a consequence, country as a whole becomes poorer with large debts, but individuals may become inordinately rich. This is the trend in most, if not all, of the third world countries including Bangladesh. This trend is also discernable in many corrupt Western countries. When income is obtained, it can either be saved or spent. But most plausible outcome is that a part of it is spent and a part is saved. If more income is saved than spent, then there is an accumulation of capital. On the other hand, if more is spent than saved, there is a dissipation of capital. The ratio of capital (net wealth) to income is a very good indicator of individual and/or national economic health. On a national basis, capital/income ratio indicates how national wealth if distributed per se would look like. In developed countries, as Picketty has pointed out, this ratio is between 5 and 6 in the developed world. What it means is that the average wealth of an individual is about 5 to 6 times higher than the average national income. If capital increases (due to the accumulation of capital and thereby benefitting from better returns) and the incomes of the masses get depressed, the ratio tends to go higher and that indicates that there is an unequal distribution of wealth. What Piketty has shown is that the concentration of wealth and accumulation of capital to capital-rich individuals is an intrinsic property of capitalism. For example, if the rate of return on capital is higher than the economic growth of the nation (the economic growth of the nation is captured by the increase in income), there is an accumulation of capital. It is almost always the case that the rate of return on capital – roughly 5 per cent or even higher, depending on risk tolerance – is always higher that the economic growth of a nation, which varies between 1 to 3 percent in the developed countries. There are times when the developed countries struggle to achieve even 1 per cent economic growth – for example, after the 2008 banking crisis, the average economic growth in the Western World was less than 1 per cent until very recently. Even now, when Britain is enjoying a high growth rate of about 3 per cent economic growth and the EU and America are growing by 2 per cent or so, and capital can easily grow at 5 per cent or more, thus the capital/income ratio is growing inexorably higher. History shows that capital/income ratio in the developed world had been between 5 and 6 in most of the 20th century, except during the two world wars and the inter-war period. During the wars, capital of the nation diminished due to destruction of wealth and thereby the ratio dropped. For example, before the onset of WWI the ratio in Britain and France was in the range of 6 to 7; but after the war it was just around 3. The same effect can be discerned during the WWII and its aftermath in both Europe and America. At the moment the ratio is between 5 and 6 in the developed world. The capital/income ratio gives the wealth of a nation; the higher the ratio the wealthier the nation or individuals of the nation. In general, a country with high capital/income ratio (hence wealthier nation) does not necessarily have equitable distribution of wealth; in fact just the reverse can be found to be true – there is more inequality in wealth distribution. This trend is the inherently in-built in capitalism. However, in some countries like Scandinavia countries there are high tax burden and generous social benefits – free medical facilities, free education, generous pensions etc. Even then, the inherent trend of capitalism could not be reversed. In other countries where social engineering is not practised vigorously, the inequality gets even more pronounced. Let us consider the ownership of national wealth by individuals in various countries. In Scandinavian countries where wealth is most equitably distributed (when compared to other countries) the richest 10 percent own around 55 percent of national wealth. In Britain, France, Germany and Italy, the richest 10 percent own around 60 percent of national wealth and the poorest 50 percent around 5 percent. In France, as per 2010-2011 national data, richest 10 percent own 62 percent of wealth and the poorest 50 percent only 4 percent. In the United States, the distribution of wealth is even more skewed. The top 10 percent own the staggering 72 percent of wealth and the bottom 50 per cent a mere 2 per cent! Even these data are self-reported which has the undeniable fingerprints that large amount of fortunes of the wealthy may have been understated or underestimated. In fact, underestimation of wealth by the super-rich is almost a certainty when capital can easily be transferred to tax havens with no possibility of tracing it back to the hiding place by the Inland Revenue. All of these mendacious activities leave the unmistakable fingerprints that the capitalist system is designed to give an unfair advantage to the rich. In addition, the system has been deliberately trimmed so that the poor is made to pay for the rich so that rich become even richer – the banking crises just a few years back bear testimony to that. Even when a bank loses money, the bank bosses help themselves with mouth-watering annual bonuses. These banks, the epitome of capitalist system, know very well that they are in business only because the poor sacrificed their money to rescue them. The Bank of England Governor, Mark Carney, has very eloquently presented his view at the City Conference in London recently that there was a growing sense that the basic social contract at the heart of capitalism was breaking down amid rising inequality. ————————————– A Rahman is an author and a columnist. - See more at: opinion.bdnews24/2014/06/03/inevitable-inequality-in-capitalism/#sthash.8jHCE22e.dpuf opinion.bdnews24/2014/06/03/inevitable-inequality-in-capitalism/
Posted on: Thu, 05 Jun 2014 02:05:46 +0000