June 02, 2014, 00:00 / Opinions

Rules of the game: Return of the Victorian era

Maxim Buev , economist, vice-rector of the Russian Economic School for strategic development

Since the English edition of the book “Capital in the 21st Century” by the French economist Thomas Piketty was published in April, the 700-page book has already been read and commented on in detail by the entire elite of world economic science. No wonder - the book had the effect of a bomb exploding with its original analysis of inequality in the modern world and the vision of the future of capitalism as a return to the times of the 19th century, where the elite of society owns significant wealth received by inheritance, and not earned by sweat and blood.

In particular, according to Piketty, the ratio of (accumulated) wealth in the broadest sense to national income increases if the return on capital exceeds the growth rate of the economy. According to data from three dozen countries over the past couple of hundred years, this is exactly the picture that was widely observed in the 18th-19th centuries, and is also observed now in most developed countries.

If nothing is done, i.e., for example, without introducing significant wealth taxes on the super-elite and without redistributing the proceeds, then the developed world will enter the neo-Victorian times of “patriarchal” capitalism, where society will be controlled by the capitalist class, inheriting and increasing their untold wealth . In other words, you can forget about the liberal idea of justice and equality, and about the conservative market ideals, where the main character is the entrepreneur. The Forbes 400 lists will soon largely include not the founders of hugely successful new companies a la Google, but the grandchildren of today's super-elite, aka Paris Hilton.

However, as World Bank researcher Branko Milanovic notes, Piketty’s forecast, even if true for those countries where there is a “burden of big old money,” is hardly appropriate for developing countries like China and India (he does not mention Russia), where due to historical reasons, the process of accumulating personal wealth is a completely new phenomenon. In such countries, according to Milanovic, the neo-Victorian period will not arrive for another 100 years. A reason to breathe a sigh of relief and do nothing? Not really.

Piketty, in his analysis of inequality trends, does not take into account the effect of a country's natural resources. According to research on economic growth and inequality conducted by Kirill Borisov, a professor at the European University in St. Petersburg, in resource-dependent economies, property rights to natural resources are redistributed over time in favor of the elite, which leads to a faster and sharper increase in inequality in society, compared to economies whose structure is well diversified.

This theoretical conclusion is confirmed by a recent study by Credit Suisse, according to which Russia leads the world in terms of wealth inequality. Now in our country 110 citizens control 35% of the total national wealth. This means that we simply don’t have the 100 years to think that Milanovic promised: the world of Charles Dickens’s novels with our own national flavor may be just around the corner.