On Capital in the Twenty-First Century; and Anger, the Heart and Charaka!

From: aditya rana
Date: Sat, Apr 12, 2014 at 2:01 PM
Subject: On Capital in the Twenty-First Century; and Anger, the Heart and Charaka!


Rising income inequality across the world is a hotly debated topic and has important implications on economic growth and return on capital. However, the research and focus to date on this key issue has been somewhat piecemeal, until the recent publication of Thomas Piketty’s nine-hundred page magnum opus – "Capital in the Twenty-first Century" which has caused a considerable stir in the economics field. There have been numerous reviews of the book in recent weeks and Paul Krugman’s write-up in the New York Review of Books provides an insightful perspective on the main points made by Piketty – to summarise:

-Traditionally, studies on economic disparity have focussed on the gap between the working class and the upper segments of society – but what Piketty (and his colleagues) have now shown that the big story is really the rising share of wealth and income of the really rich (the "one percent" or even narrower groups), which are trending back to levels reached before World War1.

-For example, in the U.S. the share of national income going to the top one percent has followed a U-shaped path – before WW1 it was about 20%, declining to about 10% by 1950 and then rising after 1980 to reach 20% today – heralding back an age of "patrimonial capital" where the economy is dominated not by talented individuals but by family dynasties.

-Piketty’s work is a tour de force of economics – combining a grand panoramic sweep with hard data analysis – integrating the analysis of economic growth with the distribution of income and wealth.

-The U.S. is today has a higher level of income inequality than other advanced economies – while Europe has similar levels of unequal income from market activity they have far less inequality in disposable income due to redistribution policies through taxation and transfers (see table below).

-While traditional economic research has focussed on earned income as the main source of inequality, Piketty shows that capital, not earnings, drives income at the highest levels. This is similar to the pre-war era where unequal ownership of assets, not unequal pay, was the prime cause of income inequalities.

-Basically economic history is a race between capital accumulation and other factors which drive economic growth – population growth and technological progress. While in the very long run the stock of capital and income should grow at the same rate – they can diverge for long periods of time.

-For example, during the pre-war period, Europe had accumulated capital to six to seven times of national income, but the ratio was cut in half during the ensuing decades due to physical destruction and diversion of savings to fund the war effort. However, since the 1970s, slowing growth has resulted in a rising capital to income ratio which will eventually lead to a "Gilded Age" or "Belle Époque" – unless opposed by progressive taxation.

-The key driver behind this is the difference between the rate of return on capital (r) and economic growth (g) – since the 1970s growth has been slowing due to slower growth in the working-age population and slower technological progress and this trend is likely to persist – but r is likely to fall less than g, particularly as it becomes easier to replace workers with machines. Historically, slow growth and the resulting rise in the capital to income ratio has led to a widening gap between r and g (as illustrated in the graph below)..

-The consequence of this widening gap will be a redistribution of income from labour to holders of capital. For example, in Britain the share of capital (corporate profits, dividends, rents or sales of property) in income during the pre-war period was 40%, halving to 20% by 1970 and subsequently rising to about 30% today. This process is also underway in the U.S. with corporate profits soaring while wages have stagnated.

-The rising share of capital contributes to increasing income inequality as the ownership of capital is always more unequally distributed than labour income. And as the rate of return on capital exceeds the rate of economic growth, it leads to a society dominated by inherited wealth where "the past tends to devour the future".

-During the previous Belle Époque period in Europe, capital returned about 4-5% while growth was at only 1% – and with minimal taxes the return could be reinvested to ensure capital was growing faster than the economy which could then be passed onto heirs, with minimal taxation again. This transfer of wealth to the next generation amounted to 20-25% of national income and 90% of wealth was inherited, with the top 1% controlling 60% of the wealth in France and 70% in Britain.

-Capital income and inherited wealth continue to be important drivers of inequality today, and inherited share of wealth which had dropped to less than 50% in France in the early 1970s is now at 70% and rising.

-However, the rising income inequality in the U.S. (in particular) cannot be explained just by capital, with capital income accounting for about a third of the total rise in inequality. The other factor has been the significant rise in wages at the top (i.e. "superssalaries") – while real wages for most workers have not risen since the 1970s, wages for the top 0.1% have risen by 362% (165% for the top 1%).

-Why has this happened? Technological advances, by extending the reach of exceptionally talented people thereby allowing them to receive huge rewards, only impacts a tiny fraction of the earnings elite. The bigger impact is the ability of senior executives to effectively set their own pay, without paying heed to the usual constraints of social norms. This could be attributed to low tax rates which have increased the incentives to flout such social norms.

-Public policy can play a key role in halting this growing inequality driven by underlying economic conditions. What matters is the after-tax rate of return on wealth, and progressive taxation, in the form if wealth and inheritance tax, can have a significant impact in terms of reducing the gap.

-Piketty argues that history does not provide much hope in terms of the likelihood of implementing such a tax on a global basis – and the post-war period of strongly progressive taxation was an "ephemeral product of chaos" brought on by war and upheavals. For example, even during France’s Third Republic, whose ideology was highly egalitarian, wealth and income were as unequal as in Britain and public policy to reverse this was almost non-existent – "no hypocrisy is too great when economic and financial elites are obliged to defend their interest".

Absolutely fascinating stuff and does provide a strong incentive to plough through the nine hundred pages over the coming break! While Krugman’s perspective on the book is clearly from the left, and the book has (predictably) created a fierce backlash from the right (in the tradition of the University of Chicago economist Robert Lucas’s who declared in 2004: Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution”), my personal view is that the pendulum had swung to far to the right over the past three decades, and applying the time honoured principle of reversion to mean, it is highly likely to continue its swing further to the left over the ensuing decades and Piketty’s masterpiece will provide an important nudge in that direction. I will leave you with something to chew on – a great graphic below which captures this great wealth inequality rather vividly,

Anger, the Heart and Charaka:

An interesting new study on an important subject:

04 Mar 2014


-Outbursts of anger may trigger heart attacks, strokes and other cardiovascular problems in the two hours immediately afterwards, according to the first study to systematically evaluate previous research into the link between the extreme emotion and all cardiovascular outcomes.

-The study – a systematic review and meta-analysis – published online today in the European Heart Journal, found that in the two hours immediately after an angry outburst, a person’s risk of a heart attack increased nearly five-fold when compared to other times when they were not angry.

-The researchers also found that the absolute risk increased if people had existing risk factors such as a previous history of cardiovascular problems, and the more frequently they were angry.

“Although the risk of experiencing an acute cardiovascular event with any single outburst of anger is relatively low, the risk can accumulate for people with frequent episodes of anger. This is particularly important for people who have higher risk due to other underlying risk factors or those who have already had a heart attack, stroke or diabetes."

-The results are fairly consistent across the studies even though they were conducted over a period of more than 18 years in different countries and groups of people. The studies used a case crossover design to compare each person’s level of anger immediately before a cardiovascular event to anger levels at other times.

-Led by Dr Murray Mittleman, who is director of the Cardiovascular Epidemiology Research Unit at Harvard Medical School, the researchers found that “previous studies have shown that outbursts of anger are associated with an immediately higher risk of cardiovascular events, including heart attack and stroke, but since some of these studies were based on small sample sizes with few patients having outbursts of anger, the results were often reported with low precision. All of the studies found that compared to other times, there was a higher rate of cardiovascular events in the two hours following outbursts of anger.”

-The authors say there are several potential mechanisms linking anger outbursts and cardiovascular problems. “Psychological stress has been shown to increase heart rate and blood pressure, and vascular resistance,” they write in their paper. Changes in blood flow can cause blood clots and may stimulate inflammatory responses.

-Their conclusion: "A broader and more comprehensive approach to treating acute and chronic mental stress, and its associated psychological stressors, is likely to be needed to heal a hostile heart.”

It is interesting to note that the relation between mental stress and the heart was identified thousands of years ago by Charaka, who wrote down the principles and practices of Ayurveda in his treatise : "Charaka Samhita". He wrote: "one who wishes to protect the heart, circulatory system and vital essence should avoid, above all else, those causes leading to mental stress and instability. One should regularly adopt measures that support the heart and vital essence, cleanse the blood vessels, increase knowledge and calm the mind".

Here’s to managing mental stress and anger and nourish the heart though regular meditation, yogic breathing and a largely vegetarian diet. I will be out travelling for the next two weeks (and trying to get through Piketty’s magnum opus!) so the next missive will be sent out on May 3.




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