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Inequality and the nature of capital: a reminder to economists

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In Brief

Despite the recent economic crises that hit suddenly and caught economists by surprise, they still hold sway with the media, policymakers and business leaders. Thomas Piketty’s book Capital in the Twenty-First Century has made waves not just in the world of economics but also internationally as a best-seller. His argument is that the ‘normal’ state of capitalism is one where the rate of return on capital exceeds economic growth, therefore allowing high rates of inequality to persist over the long run.


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The book has garnered a significant response, with opinions divided along predictable ideological lines. Various experts have called into question the accuracy of his underlying data, but these analyses focus on whether Piketty is right or wrong. Few have asked whether he simply missed the point.

For something named Capital in the Twenty-First Century, the book is rooted in the twentieth-century notion that the West exclusively shapes the world and its future. Much of the book’s success is because inequality is the intellectual flavour of the month — the hype in the West almost makes inequality seem like a recently discovered phenomenon.

But for the rest of the world, which experienced the inequalities associated with Western-led colonialism, the discussion is old hat. Many countries are only recently recovering from the effects of plundering, destruction of social and cultural institutions and resource extraction. Yet Piketty’s analysis is framed exclusively by Western historical experience and ignores the global context in which Western wealth creation, which many nations seek to emulate today, occurred.

Which is why if someone were to ask Narendra Modi if he agrees with Piketty’s analysis, India’s new prime minister would likely say it is irrelevant to him and to India. For that matter so would Xi Jinping, China’s president, and Joko Widodo, the front-runner in Indonesia’s presidential elections — and there you have the leaders of almost three billion people.

Piketty seeks to explain the world with reference to economic capital (financial instruments such as cash and stock as well as physical goods like manufacturing assets, property and equipment) alone while ignoring the most important form of capital — natural capital.

One way to think about the hierarchy of capital is as follows: first is natural capital, which is the stock of natural assets, such as water, air and soil, on which human life depends and is the basis for all production. Then there is human capital, concerning the welfare of human beings, our ideas and creativity. Third is social capital, which is made up of the institutions that allow people to realise their potential.

Finally, we have economic capital, the least important. It is far easier to live without stock options than without a water supply, health or law and order. Economic capital has no intrinsic value. It is important only as a means of trading or owning the other types of capital.

The true problem with the current model of capitalism is therefore not inequality of economic capital, but the fact that it thrives on a collective free ride on natural capital.

Addressing inequality in developing countries, while sustainably managing natural capital, will be the defining challenge of the twenty-first century. What is often ignored is the most acute form of inequality around, which exists between those that have access to the most basic essential resources (water, food and housing) and those that don’t. Because those without access are not high on the economic ladder, their complaints are not heard in the media and remain outside the public discourse. Providing assistance is not a matter of increasing economic capital but rather protecting and equitably distributing natural capital.

By under-pricing natural capital and externalising the costs of environmental degradation, as well as keeping valuable resources such as clean air and water free in the name of economic growth, governments promote massive consumption in the short term. But the long-run outcome is a depletion of the planet’s resources, making sustainability and access increasingly difficult.

For example, Burma is now one of the world’s hottest markets. It also has one of the worst rates of deforestation, losing 20 per cent of its forest cover between 1990 and 2010. But Burma’s wider population has little say on the fate of the ecosystem they depend on, which is under threat in the name of attracting foreign investment and generating economic capital.

So long as policymakers continue to see the world through the lens of economic capital alone, the damage done to human, social and natural capital will go unnoticed. Even a far more equitable form of capitalism that promotes consumption and short-term growth over proper management of natural capital will eventually result in disaster.

Piketty’s key recommendation is a global wealth tax on the rich for the poor. But this redistribution of economic capital alone would be akin to more equitably distributing the silverware at a dinner table without any food.

A more farsighted solution would be a hefty tax on access to natural resources so that economic growth is no longer based on environmental degradation. For a fighting chance at addressing the root cause of global inequalities, the first step is to stop looking in the wrong place.

Chandran Nair is the founder and CEO of the Global Institute For Tomorrow (GIFT). He is the author of Consumptionomics: Asia’s Role in Reshaping Capitalism and Saving the Planet.

A version of this article first appeared here on the Yale Global website.

One response to “Inequality and the nature of capital: a reminder to economists”

  1. Global poverty and global environmental degradation are not the same problem and their solutions do not have to be mutually exclusive. Economic capital redistribution may not cure all of society’s ills but it is much easier to go to school part time, participate in political activism, and separate out your recyclables when you do not fear starvation on a daily basis.

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