Donald Trump, the Republican presidential candidate in the US, has railed against free trade. And, the Democratic candidate, Hillary Clinton, has obfuscated on the Trans-Pacific Partnership (TPP) trade agreement. The proposed TPP among twelve Pacific-rim countries includes the US, Japan, Canada, Australia and Singapore and excludes China. The tone of the debates in the ongoing campaigning in the US presidential election indicates that many voters are unconvinced about the benefits of free trade and globalisation. The subtext is that in the UK and the US income stagnation and rising wealth disparities have undermined self-confidence among blue-collar workers.
It is over two years since the publication of the English version of Thomas Piketty's widely read book Capital in the Twenty-First Century. Mr Piketty's principal conclusions in this book are that:
> There was unprecedented concentration of wealth during the Industrial Revolution and wages stagnated for the first 70 years of the 19th century;
> Salaries did go up after 1870 driven by technological progress and economic growth;
> From 1910-1950 income disparities came down in the US and West Europe due to destruction of private property during the two world wars and the Great Depression in the 1930s;
> From the 1970s income inequality has greatly increased in the US;
> If the rate of return on private capital 'r' is higher than the growth rate for national income 'g' the stock of private wealth rises relative to national income; and
> Contrary to what Simon Kuznets had suggested there are no automatic balancing mechanisms which retard or reverse income inequality and wealth accumulation.
Returns on capital come from capital gains, dividends, royalties, interest and rent. Assuming that 'r' is invariably higher than 'g', capital is owned not just by high net-worth individuals (HNIs) but also by institutional investors such as insurance companies and pension funds on behalf of large numbers of the less wealthy. In addition to compensation against accidents and pensions, developed countries provide unemployment, health and education benefits. Notwithstanding these social safety nets, workers in developed countries feel threatened since conventional manufacturing and lower-end information technology services have moved to emerging economies.
Michael Moore's cheeky documentary Roger and Me is about the travails of General Motors (GM) workers in Flint, Michigan. This film records that Roger Smith, CEO of GM in the 1980s, was oblivious about GM workers who had lost their jobs. Mr Moore should have also emphasised in this documentary that Japanese auto companies had increased their US market share because their cars were better value for money. CEOs of US auto companies were complacent about Japanese competition and US workers did not upgrade or diversify their skills. One of the tenets of the "Washington Consensus" was that free trade is always helpful and developing nations should bring down tariffs and non-tariff trade barriers. It is bizarre that trade-pessimism has now come a full circle and workers in G7 countries are apprehensive about free trade agreements.
On a lighter note, the outrageous characters and ludicrous plots in English author P G Wodehouse's novels were a delight for many in India in the 1960s and 1970s (my college in Delhi had a Wodehouse society). His short stories and novels lampooning the rich and idle in Edwardian England (that is from 1901 till the outbreak of the First World War in 1914) in inimitable prose relieved the tedium of slow non air-conditioned hot Delhi afternoons. My sense is that from the 1980s onwards television and other distractions displaced Wodehouse for successor generations in India. How may Wodehouse have characterised the Japanese in giving US car companies a run for their money? Probably by saying "that's the way to get on in the world - by grabbing your opportunities. Why, what's Big Ben but a wrist-watch that saw its chance and made good".
Wodehouse lived in patches in the UK, France and the US during his long and prolific writing career. During the Second World War he was accused of treachery in England because he gave a few talks on German radio. Although he was cleared, Wodehouse settled in the US in 1947 and never returned to the UK. It is ironic that Charlie Chaplin, another British national and comic genius, had to seek refuge on the other side of the Atlantic in Switzerland as he was deemed a closet communist in the US. Both were knighted in 1975 about a month before Wodehouse passed away. According to Malcolm Muggeridge, Wodehouse was a man "singularly ill-fitted to live in a time of ideological conflict, having no feelings of hatred about anyone, and no very strong views about anything". That is one "public" school way of dealing with angst stemming from income inequalities.
Reverting to Mr Piketty, is he somewhat Malthusian in his prediction that "r" will be persistently greater than "g" for developed countries? Mr Piketty acknowledges in his book that his conclusions are "imperfect and incomplete". He also accepts that investment in training and skills, technological changes and rise in productivity could raise "g" above "r" even for developed nations.
Mr Piketty is spot on when he suggests that economics should not pretend that it is anywhere as precise as the physical sciences and that economics is closer to sociology and history. Humans have a habit of surprising themselves with their resilience and ingenuity. Consequently, we should subject Mr Piketty's conclusions that income and wealth disparities in developed nations could increase indefinitely and that taxing wealth is the socially responsible remedy to further empirical scrutiny. Wodehouse should be allowed a flippant last word on how humans should care for each other "love and let love - with one stipulation that people who love in glass-houses should breathe on the windows".