Monthly Archive:: June 2014

Piqued by Piketty

The rise of the middle class has been a hugely important political and social development across the world, spanning a large part of the 20th century. How would society change if the number of jobs that have historically driven this section of the population were to come crashing down, as a result of technological progress and automation? Would widespread unemployment potentially result in the kind of social, political and economic unrest normally associated with wars? More importantly, would the economic inequality brought about by such changes cause civilization to go off track?

Thomas Piketty, an economist at the Paris School of Economics, recently published a book in which he argues that the US might be pioneering a hyper unequal economic model in which the wealthy top 1% hold the lion’s share of the national income, leading to an ever increasing marginalization of the middle class. The book has had some glowing reviews, with one reviewer terming it “An economic, social and political history of the evolution of income and wealth”. Piketty’s inspiration is wide ranging, taking cues from the books of Honore De Balzac and Jane Austen, and offers a treasure trove of data that he along with his Berkeley collaborator Emmanuel Saez have collected over the last decade. As the world bank researcher Branko Milanovic says in his review,

“I am hesitant to call Thomas Piketty’s new book Capital in the 21st century (Le capital au XXI siècle in the French original) one of the best books in economics written in the past several decades. Not that I do not believe it is, but I am careful because of the inflation of positive book reviews and because contemporaries are often poor judges of what may ultimately prove to be influential. With these two caveats, let me state that we are in the presence of one of the watershed books in economic thinking.”

Heady praise indeed.

Piketty’s main thesis is that over time, the return on investment will be higher than the rate of growth of the overall economy, implying that extremely wealthy individuals will own a bigger slice of the global economic pie. In fact, he believes that this will happen automatically without any natural factors to staunch its progress. Technology and automation will serve merely to enhance this process, given a large section of society will lose their jobs and the resulting mass unemployment is likely to create a society rife with social unrest and upheavals, further weakening the middle class.

If these arguments have wings, then it becomes entirely clear that there are world altering factors at play here. A future which holds widespread unemployment, even though technological progress has historically never failed to generate new opportunities, is hard for most to accept and plan for.

Inequality has been a matter of routine for most portions of human history. A large fraction of the super rich have been born into wealth, and it has only been in recent times  that the common man has been able to achieve parity with them through their own efforts. Since the post World War II period began, it has seemed but obvious that the reduction in inequality in various countries around the world has been a direct result of the political environment surrounding democracy and the policies that stem from it. But if one listens to Piketty, democratic and capitalistic principles don’t automatically lead to a reduction in inequality – this period was in fact an aberration rather than being the norm.

Like many other unifying theories, the development of a unified theory for capitalism has been the holy grail for a large number of economists in the past century or two. Rev. Thomas Malthus laid down the theory that the growth in population would keep the bulk of humanity trapped in poverty – and this was most definitely the case for most of human history. David Ricardo linked the value of a fixed amount of land relative to the expanding supply of other goods to the wealth of the landed aristocrats. And finally, Marx predicted that competition amongst workers and investors would drive down wages to levels that would offer bare sustenance, concentrating wealth in fewer hands.

What all of them failed to anticipate and account for was the fact that there was an explosion of productivity driven by new technology, which allowed the masses to insure themselves from the dystopic futures that had been imagined for them. This “fact” has become commonplace enough in today’s economic scenarios that no one has really debated its veracity.

Enter Piketty. With an impressive collection of data going back centuries to back his theory up, he argues that that the underlying mechanisms of capitalism are likely to reassert themselves, once again generating “arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based.”

There are two ways of thinking through this – the first is to determine how governments would deal with a situation like this, if it were to arise. Would a significant percentage of the population need to be supported by a welfare state? Can one then say that democratic states that adhere to a capitalistic model are actually driving themselves to a state of socialism? Mass unemployment is bound to cause social unrest at scale – what are governments to do then? Entirely new models of dealing with this would be needed. Are people thinking about this before it’s too late?

The second is about how we can check and overturn the events that are leading us down this path. Can we prevent the accumulation of wealth in the hands of a few, and prevent a class of rentiers – the small group of wealthy yet untalented offspring of the current generation which controls vast sections of the economy and strikes down competition from the talented but poor have-nots? In essence, are we saying that our economic future in a few generations will look like Europe before the First World War unless something is done about it?

Perhaps we are. So what should we do about it?

Piketty proposes is the introduction of a global progressive tax on individual net worth. Those who are just getting started in their careers would pay little, but those who have billions would pay a lot. This would not only make it easier for people to climb the ladder, but it would also inject transparency into the processes that drive global wealth dynamics by putting them under public scrutiny – as he mentions, “The lack of financial transparency and reliable wealth statistics is one of the main challenges for modern democracies”.

Sounds good on paper, but there’s more to it from a practical standpoint than meets the eye. As Tim Worstall in his excellent Forbes article points out, there is a real world barrier to how much tax can be extracted from the super rich, in the same way sales tax rates are bound by real world constraints.

Sales tax is levied at the point of retail such that the ultimate seller of the product can pay a regulatory authority a portion of the sale price. If we wanted to increase the sales tax on a given product, it couldn’t be done purely at the point of sale itself – we would have to levy it at every step it takes to manufacture that product so that every participant can recover the tax they’ve paid. This allows us to charge a pretty high tax rate (which is termed Value Added Tax or VAT) without seeing issues like tax evasion eat into the collected amounts.

An issue not unlike the one described above tends to occur when we try to levy higher wealth taxes. Countries like France do levy wealth tax at arond 1-2%, but they’re able to do this only  because the rate of return on capital is much higher than the tax rate, and the super rich are able to pay this out of their income, while maintaining their wealth.

What Piketty proposes is a tax that is much higher – so much so that it eats into the wealth itself. It’s almost like taking from the rich and giving it to the poor, except in a regulated and legal way. Robin Hood would be proud. And this is where we run into a vexing problem.

If a higher tax like this was imposed, it would mean that the super rich would need to give away money from their holdings to pay it. Assuming we were to set this tax at 10%, someone like Bill Gates or Warren Buffett would have to pay out around $7-8 billion per year in taxes, meaning they would have to liquidate their wealth (which in most cases today tends to be locked into stocks, securities and other investments such as art or jewelry). The question now is – who buys this from them in return for cash? Stocks and financial instruments are relatively easy – there are enough organizations such as mutual funds that are willing to offer hard cash for them. But how do they sell immovable assets like property (after all, one can’t just sell 10% of a mansion), or priceless pieces of art? In trying to do this, we’re reducing the value of the items that are being sold, which in turn reduces the wealth of those who hold them.

Piketty’s book doesn’t hold answers to this question – but it is definitely different from the others in that it offers not just a set of guidelines to policy makers on potential solutions to stem the rate at which inequality is increasing, but also makes a call to people on the street to “take a serious interest in money, its measurement, the facts surrounding it and its history”. As he mentioned to an interviewer,

“It’s too easy for ordinary people to just say, ‘I don’t know anything about economics, but economics is not just for economists”.

Agreed. Even if his proposals don’t end up being actionable very soon in any real manner, he has started a public debate that I hope will have very real repercussions in the way we think about income inequality and ways to address it today and in the future.

Thoughts on the Tablet era

Apple’s iPad has been the poster child of the “post PC era” ever since its inception. As the device has matured however, it has gained competition from practically every company that can build a hardware device, from Microsoft to Samsung. Its reviews have gone from praising it as the harbinger of the post PC era to how its interactions are broken to a point where it will never serve the generic handheld computing device purpose it was once slotted into.

At least by the media.

Steve Jobs knew this wasn’t going to be the case in 2010 when he said this in an interview,

When I am going to write that 35-page analyst report, I am going to want my Bluetooth keyboard. That’s 1 percent of the time. The software will get more powerful. I think your vision would have to be pretty short” to think these can’t grow into machines that can do more things, like editing video, graphic arts, productivity. “You can imagine all of these content creation” possibilities on these kind of things. “Time takes care of lots of these things.”

I agree with the sentiment. For a majority of the use cases, the iPad and others of its ilk will do just fine. But as we start to mature in our use of such devices, the simplistic interfaces that exist today just won’t cut it. What we need next are methods that make this device even more powerful than it is today – and that is by unleashing a whole new series of content creation paradigms.

Think about spreadsheets – Microsoft Excel for iPad has *just* been released – four years after the original iPad came out. And we still can’t run macros on it. Because of a policy decision somewhere in the Apple ecosystem, the most dominant end user programming language that comes with Excel is unusable on the tablet – which completely undermines one of the most powerful features that desktop Excel offers. And more importantly, not one spreadsheet with macros can run on the iPad – effectively rendering Excel for iPad useless for cross computer collaboration.

Lest one think spreadsheets are an isolated case, consider the work flow in writing this blog post and publishing it. Once I figure out what I’m writing about and what the essential facts I want to convey are, my flow is mostly split between composing text in a text editor, and using a browser to do research – gathering quotes, images, et al and somehow embedding it in the post. A trivial task on the desktop, with the availability of quick app switching, lots of screen real estate, and simple to use copy/paste. Not to mention having persistent storage on your hard drive. On the current tablet model, this simple task becomes needlessly complicated. The drawback of being able to run only one application at a time means that more time goes switching between apps than does in actually getting effective work done.

The next big revolution has to be in defining paradigms for these oft used, non trivial interactions in the touch world. The company or product that lights the way in doing so will capture a significant portion of mind-share and, hopefully, the market. Which is not to say there aren’t a few positive trends in this direction – Hopscotch, a programming application for kids that allows one to build an iPad app from within an iPad is quite excellent. For the first time, you can actually use the tablet to create content for it. But it’s early days yet.

This week saw a couple of interesting developments in the world of tablet computing though.

Microsoft released the Surface Pro 3 which, as per almost every review I’ve read so far, is being hailed as a laptop killer. After looking at videos, pictures and specs, I’m inclined to agree. It can run all kinds of native windows applications, offers a solid keyboard, a stylus for precision work and a form factor that makes it not appear as a compromise as Microsoft’s earlier tablets were wont to do. But one of the biggest disadvantages is that it tries to replace a laptop – meaning it offers a sleeker, thinner, lighter, touch screen enabled version of a traditional laptop that can compete in the ultrabook market. But there’s no innovation in the touch interaction arena there. In my book, that is a mistake.

Mary Meeker released her State of the Internet presentation, arguably the one presentation in the year which seems to be an event unto itself. In it, she presents a chart that blows away the recent meme of “tablets have peaked and are dying” – almost 80 million tablets were sold, which equals the combined numbers of desktop and laptop computers!

What this means is that all of a sudden, Microsoft has a tablet that rivals a macbook air in the kind of functionality it offers. You can run full apps on it, and it offers a trackpad to do finegrained manipulation. Apple on the other hand has an entrenched tablet that hasn’t really moved the needle recently in terms of game changing features, and offers watered down versions of full scale desktop applications that the Surface can run.

What we’re missing is someone to show the way on what the next generation of tablet interactions are going to look like.