The last part of Chapter 1 discusses measuring national income and wealth, and differences among nations.
Thomas Piketty points out that measuring income and wealth was a political act.
The first attempts to measure national income and capital date back to the late seventeenth and early eighteenth century…It is worth noting that (the authors of these measurements) often had a political objective in mind, generally having to do with modernization of the tax system. By calculating the nation’s income, they hoped to show the sovereign that it would be possible to raise tax receipts considerably while keeping tax rates relatively low, provided that all property and goods produced were subject to taxation and everyone was required to pay, including landlords of both aristocratic and common descent. (Page 56)
A cartoon from the time of the French Revolution. The nobility and the clergy were exempt from taxation, so the entire cost of supporting the state was borne by the common people, leading to an enfeebled state and larger-scale poverty than there otherwise would have been. The rough translation is “One can hope I’ll be done soon,” spoken by the commoner.
In my view, academia is inherently political, by virtue of what we choose to measure and consider “serious” versus frivolous.
I see it also as notable how these debates continue to this day, with “progressives” wanting to strengthen the state by providing it with resources to do more, while others claim poverty. It echoes how often we are told that “America can’t afford” something at a time when we are richer than we have ever been.
Go below the fold for a graph and a table!
This shows how during the 19th and 20th Centuries, Europe and the Americas pulled ahead of the rest of the world, thanks to the Industrial Revolution. It appears that the rest of the world (Asia, at least) is gradually catching up.
Furthermore, both Europe and the Americas can be broken down into two highly unequal subregions: a hyperdeveloped core and a less developed periphery. Broadly speaking, global inequality is best analyzed in terms of regional blocks rather than geographic blocks. This can be seen clearly in (the table below.)
(Comment by me: “core” vs. “periphery” is more tautological than geographical. In other words, being among the wealthiest countries puts you, by definition, in the core.)
“To sum up, global inequality ranges from regions in which the per capita income is on the order of 150-250 euros per month (sub-Saharan Africa, India) to regions where it is as high as 2,500 – 3,000 euros per month (Western Europe, North America, Japan), that is, ten to twenty times higher. The global average, which is roughly equal to the Chinese average, is around 600 – 800 euros per month. (Page 64)
Thomas Piketty then justifies using “purchasing power parity” rather than “exchange rates” as a gauge for relative income. These are economic concepts which I’ll endeavor to explain: Exchange rates involve multiplying your income (dollars) the exchange rate (say, euros/dollar) to get how rich we are. Purchasing Power Party looks at that figure, but then factors in the cost of living. For example, as of 2014, prices for most of what folks spend money on (food, housing, etc.) are roughly half as much in Ghana. So Ghana’s 2014 per capita income is $3,500 when measured by exchange rates but almost $7,000 when looking at purchasing power parity. Put it another way, the 2014 per capita income of the United States was just over $44,000. So the average person in Ghana could purchase less than 8% as much gold with their yearly earnings, but could purchase over 15% as much housing, food, etc. (Still pretty poor.) Purchasing power parity better reflects how comfortably people really live. However, it is a crude estimate, as clearly a house in Ghana is not exactly equivalent to one in the United States.
Next is a bit about what causes international “convergence” (= less inequality), as opposed to “divergence” (= more inequality). There’s a bit about how foreign-owned investments in a country tend not to produce much development (a painful fact that we’ve seen in poorer countries of central and South America, as well as Africa).
None of the Asian countries that have (become a lot richer) in recent years benefited from large foreign investments, whether it be Japan, South Korea, or Taiwan and more recently China. In essence all of these countries themselves financed the necessary investments in physical capital and, even more in human capital. Conversely, countries owned by others countries, whether in the colonial period or in Africa today, have been less successful, most notably because they have tended to specialize in areas without much prospect of future development and because they have been subject to chronic political instability. (Page 70)
Last year I read a book, Why Nations Fail, by Daron Acemoglu and James Robinson, which which economics are all laid out as on an axis from “inclusive” to “extractive,” with the inclusive economies generating much more long-run growth and prosperity. Foreign investment, particularly in areas such as mining, are pretty much the definition of “extractive,” where the wealth is pulled out and leaves the area, with people having precious little to show for it.
To sum up, historical experience suggests that the principal mechanism for convergence (of per capita income among countries) at the international as well as the domestic level is the diffusion of knowledge. In toher words, the poor catch up with the rich to the extent that they achieve the same level of technological know-how, skill, and education, not by becoming the property of the wealthy.
This is the one benefit of foreign investment–the technology and training of workers. (And also why resource-extractive industries such as mining don’t help, as people aren’t learning valuable long-term skills, particularly if the mine is going to be depleted sometime soon.) However, you can get similar results through partnerships with foreign businesses (such as China and Japan have done) and by sending your young people to foreign schools.
As noted earlier this bit about inequality among nations wasn’t really the main point of the book, though it’s always worth noting that was we talk about inequality without our countries that most of us still count among the global well-to-do.
I read Capital in the Twenty First Century in 2014-2015 and was extremely impressed by both the content and the presentation. In my views, it’s easily in the running for most important economics book of the last few . This year I am doing an in-depth, chapter-by-chapter review of the book. One chapter will be reviewed and discussed every two weeks.