Introduction
This week I complete my presentation of Piketty’s recent paradigm- shifting contribution to the study of income and wealth inequality (Capital in the 21st Century), which I had introduced last week. To benefit fully from today’s column readers should recall the main content of last week’s contribution. This was my introduction of Piketty’s two basic relations used to measure income and wealth inequality. The first of these is the accounting identity that states: the share of national income (termed, a) obtained by the owners of capital in an economy is equal to the average rate of return on their capital {termed, r) multiplied by the ratio of the capital they own to national income (termed, B). This expression was simply written as: a=r x B.
Similarly, the second relation states: the ratio of income from capital to national income (which we have already termed, B above) is equal to the national rate of savings in the economy (termed, s) divided by the rate of growth of national income (termed, g). This expression is written simply as: B = s/g. The working out of a couple of examples should make this expression even clearer.
Thus if national income grows by 3% per annum (that is, g) and the savings rate is equal to 18% (that is, s),then according to Piketty’s relation the income from capital to national income ratio (that is, B) would be 18/3, which is equal to 6. This is obtained from the relation given above: B = s / g; surely readers would agree nothing can be simpler! This means it takes the approximate equivalent of 600% of previously accumulated national income (in the form of the economy’s stock of capital) to generate each year’s national income.
Again, If the savings rate (that is, s) rises to say 20% and the rate of economic growth (that is, g) falls to 2% it would make the capital/ national income ratio 20 / 2 = 10; which is far larger than in the previous example. This therefore indicates a basic rule of thumb: the lower is economic growth and the higher the savings rate, the greater is the capital stock required to generate that growth. And therefore, by simple extension, the higher is the capital/ national income ratio then the greater the degree of capital consolidation in the economy. In the next section I provide an estimate of this relation for Guyana.
A Guyana example
To be clear upfront, I attempt this exercise more in an effort to expose the limitations of Guyana’s dataset for this type of economic analysis, than to offer an accurate result. Hopefully this attempt might also convey to readers how simple and uncomplicated Piketty’s formulations are.
Further, it is important that at every step of the presentation readers keep in mind what are being used as the variables in the measurement. First, it should be observed that the national income data will be strictly represented by Guyana’s GDP for the period 2006 -2013 (that is the available rebased 2006 GDP series). Second, the complicating issues concerning the treatment of the depreciation of the capital stock, incomes earned by nationals from abroad and so on are not dealt with basically because these cannot be readily accommodated from Guyana’s available economic dataset in a newspaper article.
Thirdly, there is a distinct ambiguity as regards the savings rate! For example, is this to be used net or gross; does it include retained earnings of corporations?
Does it include both private and government savings? Such ambiguity also extends to the rate of economic growth. Should the rate of growth be looked at as its individual components or as combined population growth and per person productivity growth?
In the case of Guyana I simply use the gross savings rate and real average annual GDP growth as stipulated for the specific period, 2006 to 2013. For this exercise the average savings rate (termed, s) is 27%; the average growth rate (termed, g) is 4.6%; thereby yielding 27 /4.6 = 6 as the approximate capital income/ national income ratio. This suggests that Guyana’s capital stock is approximately 600% of its GDP.
Readers should carefully note that in Piketty’s work the relation of the savings rate to the growth rate is presented as a very long term tendency. It is not intended for the type of medium term measurement that I have attempted for Guyana over the period 2006-2013.
Conclusion
In conclusion, I emphasize two fundamental facets of Piketty’s work that I believe every Guyanese reader should constantly bear in mind: Firstly, he himself has declared emphatically and unequivocally: “The history of inequality is shaped by the way economic, social and political actors view what is just and what is not, as well as the relative power of these actors and their collective choices that result.”
In my opinion, therefore, this makes vividly clear the indisputable role of human agency, personal and collective morality and therefore individual and social responsibility for the perpetuation and or reproduction of unjust and unequal outcomes in Guyana.
Secondly, his empirical studies also show clearly that when the rate of return to capital exceeds the rate of economic growth as we have observed in Guyana then the incomes of capitalists (dividends, profits, rents, interest, and so on) grow faster than the incomes going to labour (wages and salaries). As a consequence income and wealth inequality is bound to rise.
Furthermore, his wide ranging country studies reveal there are only a few historical periods wherein labour incomes rose faster than economic growth!
Finally, I should report to readers that, in preparing this column I was shocked at the many thinly disguised ideological assaults on Piketty’s book coming from scholars who appear to believe it is their first duty to circle the respective wagons of mainstream and radical political economy to resist the threat posed by this type of scholarship.
For interested readers I have found Pieria’s piece, Perverting Piketty, available online, a quite useful introductory critique of this type of demeaning “scholarship”, which is far too frequent nowadays.
