Ever since economics coalesced together into a firm set of ideas about how the world works, people have argued that there are three basic inputs for an economy, any economy. And these have been universally defined as land, labour and capital. These three things are a kind of shorthand for the larger picture, but they stand for the fundamental combination.

Absent capital, nothing will be done by anyone who wishes to increase their production beyond subsistence farming where they make all their own tools from what they find in the forest. Similarly, without labour, nothing gets done. Things don’t make themselves. And, of course, sans land, there is no way to gather the raw materials needed to make anything. Over time, beyond just farm land, land has come to mean the wider scope of all natural resources, and labour has, increasingly, meant skilled, educated labour, rather than just raw muscle power. Capital, regardless of any fancy wrappings, has continued to be capital – whatever can be exchanged to obtain land and labour.

But while the eternal truth is that land, labour and capital are where it’s at for all of us, the mix is crucial. That, in turn, alludes to other key facts. Technology is not stable and unchanging, and the efficiency with which these things are harnessed becomes vital as well. Moreover, labour’s efficiency and productivity are maximised with the right skills and training, harnessed to the mechanisms that multiply its effects.

When this writer lived in Japan, in the midst of its most potent go-go, property bubble years, one was often served bits of sushi sprinkled with flakes of authentic, genuine 24-carat gold at splashy receptions, demonstrating the Marie Antoinette-esque nature of the country’s economy at the time. This was a time where the land the Imperial Palace in Tokyo stood on was said to be more costly than all of California – had it been put up for sale. This was a time of an extraordinary, albeit polite hubris on the part of the Japanese, and it was a time of business how-to guides to emulate the Japanese and of popular novels and films like Michael Crichton’s Rising Sun that portrayed Japan as an implacable – nearly inevitable – victor in business competitions.

Nevertheless, any conversation with anyone in government or industry inevitably began their defence of Japan’s behaviour: “Japan is a small, weak nation with no natural resources.” Every time. This was despite the fact that its vast horde of capital allowed Japan to buy natural resources from anywhere and that its vaunted labour productivity meant the manufacture of things added so much value that the money just rolled in.

Such circumstances are rooted in modern history. In the years following the Meiji Restoration in 1867 that overthrew the feudal shogunate and had followed the ending of the isolation of Japanese markets by the appearance of an American naval squadron 14 years earlier, Japan’s leaders quickly realised the nation had fallen sharply behind European nations and was now approaching a kind of existential danger echoing the fates of the Chinese and many Southeast Asian kingdoms. The Meiji era rulers conceived the slogan “Fukoku ky?hei” (Enrich the state, strengthen the military) – as a national phrase for catching up with those threatening western nations expanding their colonial presences throughout Asia and Africa.

Marshalling the nation’s wealth through forced savings campaigns, Japan’s rulers hired the best technical assistance they could find – rail-road engineers and ship builders from Britain, legal system designers from France, agricultural extension services innovators from America, and educational reformers from Germany – and they dragged their nation into the industrial age inside a generation. Companies began with textiles and then moved on to the infrastructure for spinning, weaving and sewing – and then finally up the value chain onto the production of electrical goods and machinery for export.

In the immediate post-World War II period, Japan had been devastated by defeat. The nation’s industrial base was in ruins; many of its usual export markets were now barred to it; and the country could barely feed itself. Ironically, the same men who had designed Japan’s exploitation of Manchuria/Manchukuo and had guided the country’s industrial base into war production now turned their collective attention to rebuilding a shattered nation.

Creating the global model for a developmental state, they instituted a major land reform programme that divested near-feudal-style landlords of large estates and put ownership of most farmland into the hands of willing farmers. They set out a national redevelopment plan that directed the nation’s capital to industries that could produce for export earnings and they broke up the vast corporate networks of interlocked corporate families. They enforced very high savings rates for the nation’s workforce; built a strong, knowledgeable and largely honest national bureaucracy; and then directed the country’s limited foreign currency reserves to supporting leading corporations in each industrial sector to nurture growth and exports. With a push from the bulge of allied procurement during the Korean War, by the early 1960s the country was poised to take flight into economic superpower-ness.

The visible success of this model in Japan inspired national leaders in South Korea, Taiwan, Hong Kong and Singapore to emulate the Japanese model, although there were national idiosyncrasies. And then, a decade later, nations like Malaysia, Thailand, Indonesia, and the Philippines also attempted to follow this pattern. Eventually, once Deng Xiaoping – “to be rich is wonderful” – came to power in China, that nation also patterned its growth after a variant of this model, although the Chinese model made allowances for the fact that the government held a much larger share of the national economy than was the case in the others. The developmental state model – first designed for the exploitation of an occupied Manchuria – became the template for the Asian-style economic growth envied globally.

This history is recounted in some detail as a lead-in to contemplate the impact of Professor Thomas Piketty with his book, Capital in the Twenty-first Century – and now his visit to South Africa to give the annual Nelson Mandela Lecture. Piketty was thrust into international prominence (or notoriety, depending on one’s stance on his work) with the publication of his door stopper of a book and he quickly became something of an economics rock star. People like Barack Obama were photographed carrying it on their way to their beach vacations.

A key to Piketty’s historical economic analysis argues that rates of growth in income derived from the holding of wealth will, over the long term, rise faster than any income from wages. In effect, this reverses the long-standing logic of the (Simon) Kuznets curve that while inequality increases in the beginnings of a period of rapid economic growth, eventually incomes rise for the rest. Piketty’s mantra is effectively Gershwin’s It Ain’t Necessarily So – in economic terms.

As The Economist explained last year: “Capital is built on more than a decade of research by Mr Piketty and a handful of other economists, detailing historical changes in the concentration of income and wealth. This pile of data allows Mr Piketty to sketch out the evolution of inequality since the beginning of the industrial revolution. In the 18th and 19th centuries western European society was highly unequal. Private wealth dwarfed national income and was concentrated in the hands of the rich families who sat atop a relatively rigid class structure.

“This system persisted even as industrialisation slowly contributed to rising wages for workers. Only the chaos of the first and second world wars and the Depression disrupted this pattern. High taxes, inflation, bankruptcies, and the growth of sprawling welfare states caused wealth to shrink dramatically, and ushered in a period in which both income and wealth were distributed in relatively egalitarian fashion. But the shocks of the early 20th century have faded and wealth is now reasserting itself. On many measures, Mr Piketty reckons, the importance of wealth in modern economies is approaching levels last seen before the first world war.”

Building on this historical basis, The Economist went on: “Piketty derives a grand theory of capital and inequality. As a general rule wealth grows faster than economic output, he explains, a concept he captures in the expression r > g (where r is the rate of return to wealth and g is the economic growth rate). Other things being equal, faster economic growth will diminish the importance of wealth in a society, whereas slower growth will increase it (and demographic change that slows global growth will make capital more dominant). But there are no natural forces pushing against the steady concentration of wealth. Only a burst of rapid growth (from technological progress or rising population) or government intervention can be counted on to keep economies from returning to the ‘patrimonial capitalism’ that worried Karl Marx. Mr Piketty closes the book by recommending that governments step in now, by adopting a global tax on wealth, to prevent soaring inequality contributing to economic or political instability down the road.”

In one sense, a challenge for Piketty’s ideas is a built-in assumption that the future is largely a straight-line projection from the past, rather than one consistently and increasingly disrupted because of the pace and impact of technological innovation. And that is where those earlier observations about East Asian and Japanese economic history come into play as well, particularly as each of those East Asian governments have attempted to guess correctly in order to surf the curve of technological innovation to generate a growing national income to be distributed more and more broadly. Of course, a massive property bubble in Japan conspired to mask the effects of revolutionary technological changes in that nation’s economy, just as it began exporting jobs to the rest of Asia – and even as it created all those property millionaires who could buy up Rockefeller Centre and the Pebble Beach Golf Course – and sprinkle gold foil on their nigiri-zushi at the victory parties.

For a long time, the American experience – but with a considerably more laissez faire-style economic system than Japan’s or the other Asian economies – had also continued to generate a growing economic pie that brought unprecedented numbers of people into middle-class life. But its wealth-creation machine began to splutter within the current generation, presumably as a result of technological changes eliminating some jobs and exporting others to less expensive labour environments.

Looking forward, the pace of technological change is making it increasingly likely many skilled jobs will also go the way of those factory jobs automated out of existence or exported to China. Now, add to that an American property bubble that had largely burst in the 2008 financial crisis and the illusion of continuing growth in wealth and incomes for nearly all had similarly disintegrated, giving rise to the dissatisfaction over economic inequality in America as a growing political issue.

With all this as background to the debate over how best to improve growth and increase economic equality, Piketty advanced a set of policy prescriptions for South Africa, as well as some still broader measures for the rest of the continent. Starting with the obvious, that South Africa’s economy features an unusually high level of inequality, he told his audience “we find that the share of total income going to the top 10% income earners in South Africa currently right now is between 60% and 65% of total income for the top 10%”. He argued that “unemployment is more a symptom of inequality and equal skills and equal distribution across the territories, where people cannot move to where the jobs are and have not have access to the right skills … (and) I think it’s very clear that the extreme level of inequality we have in South Africa is much more than just unemployment. It has to do, certainly, with the legacy of apartheid.

“In particular, it is striking to see what is really different in South Africa compared to other countries is the top 10% share – if you take the top 1% share it is not so different from the US today, but if you take the top 10% share, then it’s really higher in South Africa. So this really suggests that you have a relatively large group in the country, around 10%, which is very far away from the rest of the population.” No real surprises there, of course.

Piketty then argued that a number of factors have helped accentuate this skewed distribution of income, saying: “Financial deregulation, which has happened over the world in the past 25 years, has contributed to rising inequality. More generally, the fall of communism around 1990 has opened the way for a new era, an unlimited phase in self-regulated markets, and in some cases it has clearly gone too far.

“Financial deregulation is one example and this has contributed to the rise of financial fragility, and which eventually contributed to the financial crisis of 2008. More generally, if you have globalisation without proper regulation – globalisation in itself can be a powerful force to reduce inequality at a world level – but if you don’t have proper regulation at the same time, in particular, regarding taxation, this can contribute to rising inequality. Also rising commodity prices, of course have contributed to rising top income shares in South Africa.”

In his plans for redress, Piketty advocated stronger guarantees of the rights to labour, to work for a decent wage, the right to high-quality education, the right of access to property, and the right to economic and political democracy. Crucially, although most public education is deeply unsatisfactory, he insisted: “I think there is no other option than to try to improve the functioning and to contribute, to pay the tax that we need in order to finance this public sector of education. There’s no other strategy according to which we could do it, through privatising the education system and letting the business sector do it. I think it will not work; I think what has worked in history, in order to have sustainable and equitable growth is to have a well-functioning public education and health system, and South Africa should go in this direction.”

He also offered a couched criticism of broad-based black economic empowerment efforts, saying the country needs more ambitious land reform plans and – his preferred nostrum – a wealth tax levied on high-net-worth individuals. As he said: “I think it would be important and absolutely possible for South Africa to introduce an annual tax on net wealth – a progressive annual tax on net individual wealth, even if it comes with a very low tax rate to begin with. For example, 0% for R1-million in wealth, 0.1% between R1-million and R10-million and 0.5% above R10-million – I’m just putting numbers so that people have an idea.

“I think even with relatively low tax rates such as these ones, the big advantage of an annual tax on wealth is that it would produce democratic transparency about wealth and we would know more about who owns what in South Africa and how this is changing over time. I think it is very important in a country to be able to look year after year at how the different social groups and the different wealth groups are doing; and how they are benefitting or not benefitting from growth and development. If we don’t have this kind of public information, then this is what gives a voice to very extreme statements from one way or another, from both sides, and it makes it very difficult to come to reasonable and peaceful solutions.”

Of course, one has to wonder what an audience that included business and government bigwigs, along with the hoi polloi, felt about a total disclosure of the ultimate ownership of wealth that has been hidden away in all those privately listed family trusts in South Africa in order for that wealth tax to be harvested by the state. And that doesn’t even get into the question of how comfortable many would be with handing the government yet more resources to distribute in less than optimal ways or to have them pilfered away.

Piketty’s final suggestion is that there must be a more aggressive discussion about worker participation in company management, arguing Swedish and German models should be the measuring rod. Here, one might well wonder if the limited successes with such experiences with worker representation on corporate boards in the US, given sometimes similarly hostile relations between management and labour, would be more relevant than the more placid Scandinavian or German ones.

Beyond South African solutions, Piketty also argued for more equitable and more transparent international legal regimens to support better tax collection and the creation of a “world financial register on financial assets, which would be a central repository for financial assets so that we will know who owns what financial assets all across the world”. This is presumably so they could be taxed more thoroughly and in order to fight tax havens and identify the large amounts of wealth generated in Africa but now held abroad by miscellaneous despots and ‘big men’. One has to wonder about the popularity of such a measure in the face of contemporary realities.

During his visit, Piketty was treated as if he was a kind of academic rock star, very much in keeping with the South African penchant for embracing new messiahs to help the country over the rough spots in its national life. Thousands attended Piketty’s lecture in Soweto. His presentation at the University of the Witwatersrand was a standing-room-only event – and the same would have been true in Cape Town if he had been able to arrive on time (a passport snag held him up and the internet video link soured even as demonstrators took up other causes during the session). Copies of his book are seemingly on display in every book store in the land. He has been repeatedly interviewed at length on television, and his Soweto lecture was broadcast live and then repeated a day later as well.

But, in thinking about his arguments, they actually seem to nibble at the edges of change more than they offer the radical solutions many seemed to crave from him, given that South Africa’s political revolution is a generation old and the economic nirvana never seems to arrive. Moreover, Piketty’s international solutions would seem to depend on mechanisms that would need to ferret out closely held, secret information on the wealth of Russian oligarchs, the new rich class in China, all those family-owned cartels in Southeast Asia and their rough equivalents in Latin America and Africa – and any or all of whom would be notoriously reluctant to reveal anything useful for any kind of global wealth tax.

Applied unevenly, the courts around the world would be filled with cases about expropriation or they would simply drive clarity about the accumulations of wealth that are now in the shadows, even deeper into even darker recesses. Rather than a revolutionary approach, Piketty’s prescriptions can be read as one side of the tussle between those who see economic progress as a question of increasing the economic pie and hoping for the best for everyone, versus those who see the redistributionist impulse and policies as making the best of a bad situation, giving the poor at least a bit more of the cake, rather than helping them construct their own bakeries. DM

Photo: French economist and author of the book ‘Capital’, Thomas Piketty attends a meeting in the Dutch Senate in The Hague, The Netherlands, 05 November 2014. GroenLinks-member Jesse Kalver invited him to talk about his book. EPA/BART MAAT

For more, read:

• Joseph Stiglitz: Thomas Piketty gets income inequality wrong at Salon

• Thomas Piketty’s ‘Capital’ summarised in four paragraphs at The Economist

• Did a 26-year-old just take down Thomas Piketty? At Fortune

• Piketty’s hypothesis on inequality deeply flawed, a column by John Catsicas in Business Day

• Tax the wealthy to address SA’s high inequality, Piketty urges in Business Day