In today’s Finshots, we explore economist Thomas Piketty’s possible solution to tackle global inequality and the dilemma it brings with it.
But before we begin we have a simple explainer on the Adani U.S. scam.
The U.S. SEC and Department of Justice have accused Gautam Adani and his associates of bribery and fraud. This has caused a wipeout of close to Rs 3 lakh crore in investor wealth as Adani Group stocks tumbled over 20%. But what are the accusations, and why are US agencies holding Adani under scanner?
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The Story
Earlier this week, the World Inequality Database (WID) dropped some shocking numbers. Sub-Saharan Africa’s average monthly income per person is 15 times lower than North America’s.1 And the per capita income in South Asia, which includes us Indians, is about one-seventh of what folks in North America earn.
But hold on. In South Africa, the richest 10% own a staggering 65% of the country’s wealth, making it the most unequal economy globally. And India isn’t far behind. The wealthiest 10% control around 60% of the nation’s riches. And according to Oxfam, that number could climb to a jaw-dropping 70%.
That’s quite a stark gap, isn’t it?
But let’s be honest. You probably aren’t all that surprised. It’s capitalism doing its thing.
Many modern economists argue that extreme inequality is just part and parcel of a market economy — a system driven by supply and demand, with minimal government interference. The idea here is that wealth gaps naturally arise because talent, hard work or entrepreneurial skills aren’t evenly distributed among individuals or across nations. And to some extent, that makes sense. In fact, some even caution that trying to reduce inequality in a capitalist system could slow down wealth creation and hamper economic growth.
But not everyone buys into this explanation.
Take for instance, French economist Thomas Piketty — yes, the one behind the global bestseller Capital in the Twenty-First Century, who has a different take.
He argues that inequality in income, wealth and social status isn’t some inevitable outcome of talent or market forces. Instead, he says that it’s shaped by deliberate societal and political choices. Policies on taxes, social spending, and access to public goods like healthcare and education play a huge role in deciding whether a society becomes more equal or tilts further toward inequality.
And history backs him up.
Before World War I, Western Europe’s wealth was concentrated in the hands of the elite, and the middle class was practically non-existent. However, the devastation caused by the two world wars forced governments to rethink their approach. Welfare states emerged, heavy taxes were imposed on the wealthy, and redistribution policies took centre stage. The result? The middle class now owns around 40% of Western Europe’s wealth. And guess what? These policies didn’t crush economic growth but fueled stability and prosperity.
Another example is modern-day Sweden. It often gets the spotlight as a shining example of prosperity and equality — a society where fairness and success seem to go hand in hand.2
But back in the late 19th century, it was one of the most unequal countries in Europe. Only the wealthiest 20% of men could vote, and the richer you were, the more votes you had. Now, that’s far from what a well-intended democracy would be like, no? So how did the transformation happen?
You see, Sweden didn’t become an egalitarian society by chance. It was the result of a determined working class. They pushed for universal voting rights, progressive taxation and prioritised investments in public education and healthcare. What’s remarkable is that they achieved all this without resorting to a violent revolution.
In fact, Piketty points out that public spending on education in Western Europe surged from less than 0.5% of national income before World War I to nearly 6% today. This investment created opportunities for millions and helped establish a thriving middle class.
Even the US followed a similar playbook. Its early focus on education was a game changer. By the 1950s, universal access to secondary schooling drove massive industrial productivity. Meanwhile, countries like Germany, France and Japan lagged behind, taking decades to catch up.
Here’s something odd though. While education and healthcare are vital for reducing inequality, many countries are pulling back on their investments in these areas, leaving citizens to figure out these ultra-necessary things for themselves. This misstep has only fuelled inequality.
Take Canada, for instance. Back in 1971, spending on education hit its peak at about 7% of national income.3 By 2022, that number had plummeted to just 4%. The end result was that students were drowning in debt, undoing much of the progress education once made in bridging inequalities.
Closer to home in India, the situation is just as worrying. As of now, India spends about 4% of its GDP on education. But with education inflation sitting at 12%, these costs are ballooning.4 At this rate, education expenses double every six years, making it increasingly difficult to allocate more funds to education in the years ahead. Healthcare costs are even more alarming — rising at 14% annually.5 According to the NITI Aayog, a staggering 7% of India’s population, or about 10 crore people, fall into poverty every year due to medical expenses.6
And it’s not just education and healthcare. Investment in social safety nets is also alarmingly uneven. Wealthy nations spend around 13% of their income on social security, while the poorest countries allocate just 1.5%. This disparity takes a direct toll on people’s quality of life, widening the gap between nations that thrive and those that struggle.
Scary, isn’t it? But more than that, it highlights a harsh reality. Despite economic growth, countries like India are stuck in a vicious cycle of poverty. The middle-income trap isn’t budging, and the dream of transitioning into a high-income economy feels far out of reach.
And that’s where Piketty’s ideas start making a lot of sense. Redistribution through progressive taxes and prioritising investments in essentials like education and healthcare could be game-changers in reducing poverty and inequality. He even suggests a fair income ratio, where the richest earn no more than 10 times what the poorest make — a stark contrast to the 1:50 or even 1:100 ratios we see today.
But there’s another side to Piketty’s argument — one that challenges his perspective.
Sure, Piketty suggests that wealth often stems from exploitation. But does that hold true across the board?
Take Taylor Swift, for example.7 She didn’t inherit her empire; she built it. She started small — writing songs, performing as a teenager and building a loyal fan base. Over time, she created a business empire worth billions of dollars. Her wealth comes from millions of fans who willingly pay for her music, concerts and merchandise because they see more value in it than the price they pay.
Or look at innovators like Eric Yuan, the mind behind Zoom. His success story is about solving a real-world problem, offering value to millions and creating wealth in the process.
To put it simply, these billionaires didn’t accumulate their wealth through exploitation. They earned it. And Nobel laureate William Nordhaus even discovered that consumers reap 98% of the value from innovations like these, with only a small slice going to the creators themselves.
So yeah, while Piketty paints inequality as a deliberate social and political choice, the modern era of innovation tells a different tale — one of mutual benefit and economic growth. Taxing wealth might seem like an easy fix, but it begs the question — Are we discouraging innovation by penalising those who create wealth?
You tell us.
Until then…
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Story Sources: World Inequality Database [1]; The Conversation [2]; The Tyee [3]; Businessworld [4]; Business Standard [5]; The Wire [6]; Hoover [7]
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