Not just r > g but r + q >> g: Piketty meets Ricardo in the long run of Indian history

Wealth-income ratios are rising everywhere – they are not cyclical but rather unambiguously upward trending for the past three decades. Put simply, the accumulation of wealth is outpacing economic growth. This is true in America, Europe and Japan (Piketty and Zucman 2014), as well as China and Russia (Novokmet, Zucman & Yang 2018). In recent research (Kumar 2018), I found this same trend to persist in the world’s largest democracy – Indian wealth-income ratios have been rising since the 1970s. Why are these trends so similar in countries with such deep structural differences and distinct economic trajectories? By themselves, high wealth-income ratios are not necessarily a social dilemma – they may imply more wealth for everyone. But in general, there is a tendency for wealth to be more concentrated than income. As a result, a rise in wealth over income tends to increase wealth inequality. This is certainly the situation in most economies today. Thus, these trends and the mechanisms behind them need to be understood with careful attention.


Had we assumed rising wealth was a phenomenon for the rich world only, the problem would be mostly explained away using the standard model of capital accumulation. In the long run, the economy reaches a steady state so that b= s/g where s is the rate of saving and g is the rate of economic growth, and b is the wealth-income ratio. Differences between Europe and the US (b is greater in Europe) stemmed from differences in saving rates (s is higher in Europe) and economic growth (g is higher in the US). Facing low growth due to demographic stagnation, past savings would dominate income growth and Thomas Piketty’s famous law r > g would create a chronically worsening state of inequality. The beneficiaries would be those who own private property since they could rely on profit rates (r) to generate capital income. But the case of China, Russia and India tells us that something else is also at play here. China and India have some of the highest rates of economic growth in the world and yet wealth-income ratios are rising…and rising fast. Simultaneously, public capital is being expropriated by private wealth. It stands to reason that wealth accumulation is being driven by more than simply the relationship between savings and growth.

Ricardian forces

Many assets have the potential to become valuable without actual accumulation. Writing in the initial stages of capitalism, Ricardo recognized the unusual position which landlords occupy: they control a non-reproducible asset, which generates rents under expanded capital accumulation. These rents extract away from surplus value and get capitalized into higher land prices. His vision was partially invalidated by gains in agrarian productivity but the history of wealth-income ratios testifies to the strength of the underlying principle. A monopolization of resources has the potential to drive up the magnitude of wealth as much as the accumulation process (if not more) – think of real estate prices in Manhattan, San Francisco, London, Shanghai, Mumbai and Bangalore. For any rate of capital gains (1+q) on existing assets, if q > g then wealth rises relative to income due to the divergence of asset prices and consumer price inflation. This inequality (q > g) is critical to deciphering large swings in wealth-income ratios. Over the long run, capitalists may steadily accumulate reproducible capital but in the medium run there can be strong redistributions of wealth towards the rentier class.

Indian wealth-income ratios 1860-2012

To draw up answers to these trends, I decided to go back as far as possible to build wealth-income ratios for India and investigate their relationship to the structure of national savings. National wealth can be seen in two ways. It is the sum of private and public wealth. Or it is the sum of non-financial assets (reproducible capital and land) plus a country’s net foreign asset position, all valued at nominal market prices. My benchmark series for India covers the colonial period (1860-1947), the socialist experiment (1950-1980) and the more modern neoliberal phase (1980-2012). Data were constructed using historical studies, surveys, official national accounts and statistical abstracts. Until World War I, b lagged far behind the two major imperial powers – it was around 250% in India whereas it exceeded 700% in Britain and France. This is the state to be expected in a wealth-poor colonial economy where accumulation had been stagnating for decades. But the capital destruction due to war transformed relative wealth-income ratios. The shocks of the war transmitted into dramatic price shocks for Europe, while Ricardian forces took hold in India. In the inter-war period b in India rose very fast to reach almost 600% while in Britain and France it fell to half its pre-war value. Yet this upsurge was not related to rising s/g ratios. The national saving rate averaged only 2-3% between 1900 and 1946 and rates of economic growth actually rose modestly after much of the stagnation in the late 1800s. Instead, the rising magnitudes of wealth reflected a phenomenal upsurge in land values which easily captured most of what constituted national wealth. The fundamental point is that if q > g even for a few decades, then the national profile of wealth can be altered tremendously.


India became independent soon after World War II and lost much of its most fertile land to the newly created country of Pakistan. The shocks from the turbulent period preceding and following independence substantially drove down land prices and were accompanied by the rise of industrialization. The development planning model in newly independent India (itself based on a Marxist capital accumulation model) raised the level of savings compared to the past and drove up the national capital stock. It was envisaged that capital accumulation would raise the level of economic growth. Wealth-income ratios declined until 1960 because the importance of land fell more than the increase in productive capital. Put simply, anti-rentier policies (estate & wealth taxation, nationalization, land reforms etc.) were able to withstand a further enriching of property owners relative to income growth. At the same time, an increasing claim on capital was being extended by the public. The rise of national savings was mostly driven by public rather than private or foreign savings. Even though economic growth was low by international standards (roughly 3.5%), it was meant to be equalizing.


A range of staggered policy changes slowly reversed the decline of the wealth-income ratio, b. India began a series of market reforms in the 1980s and opened up to globalization in the 1990s. Wealth-income ratios in India have actually been rising since the 1970s, with a particular acceleration in the 21st century. By 2012, b was approaching 560% – the closest it had ever been to its historical high in 1939 (b = 600%). This resurgence was due to a combination of sustained accumulation of capital stock and a re-emergence of the importance of land (almost 200% of national income) following significant changes in incentives to hold private property. Domestically, corporate capital began rapidly eating into public capital as – this should be expected, since many public companies had been privatized already and many more national assets should be up for sale over the next decade. Overall, these findings pose new questions regarding the trajectories of development. At the aggregate level, today Britain and India have roughly the same level of wealth – a remarkable turnaround since the era of colonialism. But on a per-capita basis living standards in India are a fraction of that in Britain. The situation is strikingly similar to the last decade of colonialism. Wealth is rising in times of great poverty.


The rise of wealth is not simply a matter of accumulation but the designation of control under the institution of private property. Whether for the production of agricultural commodities or the provision of housing services, gaining property rights to land can redistribute wealth very rapidly. Demographic dividends and urbanization create tremendous pressure on space and have the potential to rapidly drive up wealth-income ratios. These effects can be very strong when growth creates competition for such limited assets or when lack of growth empowers those who already possess them. For example, even in rich countries like the UK and the US, modern trends seem to be a capital gains phenomena related to real estate. The demand for such an important property right residing with rentiers is as much a driver of wealth today as the steady accumulation of capital by capitalists. Today both capital and land values are rising faster than national income. As long as such private wealth grows faster than income, workers will remain excluded from any notion of shared prosperity. This is one of the reasons why Smith, Ricardo, Malthus and Marx spoke about class dynamics in rigorous terms. Much may still be learned from taking these classical political economists seriously.


Lídia Brun and Ignacio González: Tobin’s Q and Inequality (2017).

Rishabh Kumar (2018): Poor country, rich history, many lessons: the evolution of wealth-income ratios in India 1860-2012.

Filip Novokmet, Gabriel Zucman, Li Yang (2018): From Communism to Capitalism: Private vs. Public Property and Inequality in China and Russia (2018). American Economic Association Papers & Proceedings (forthcoming)

Thomas Piketty, Gabriel Zucman (2014): Capital is back: Wealth-income ratios in rich countries 1700–2010. Quarterly Journal of Economics


Rishabh Kumar is Assistant Professor of Economics at California State University, San Bernardino. @Kumar_EconIneq.


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