Capital in the Twenty-First Century (33 page)

In all the rich countries, public dissaving and the consequent decrease in public
wealth accounted for a significant portion of the increase in private wealth (between
one-tenth and one-quarter, depending on the country). This was not the primary reason
for the increase in private wealth, but it should not be neglected.

It is possible, moreover, that the available estimates somewhat undervalue public
assets in the 1970s, especially in Britain (and perhaps Italy and France as well),
which would lead us to underestimate the magnitude of the transfers of public wealth
to private hands.
¹⁹
If true, this would allow us to explain why British private wealth increased so much
between 1970 and 2010, despite a clearly insufficient private savings rate, and in
particular during the waves of privatizations of public firms in the 1980s and 1990s,
privatizations that often involved notoriously low prices, which of course guaranteed
that the policy would be popular with buyers.

It is important to note that these transfers of public sector wealth to the private
sector were not limited to rich countries after 1970—far from it. The same general
pattern exists on all continents. At the global level, the most extensive privatization
in recent decades, and indeed in the entire history of capital, obviously took place
in the countries of the former Soviet bloc.

The highly imperfect estimates available to us indicate that private wealth in Russia
and the former Eastern bloc countries stood at about four years of national income
in the late 2000s and early 2010s, and net public wealth was extremely low, just as
in the rich countries. Available estimates for the 1970s and 1980s, prior to the fall
of the Berlin Wall and the collapse of the Communist regimes, are even more imperfect,
but all signs are that the distribution was strictly the opposite: private wealth
was insignificant (limited to individual plots of land and perhaps some housing in
the Communist countries least averse to private property but in all cases less than
a year’s national income), and public capital represented the totality of industrial
capital and the lion’s share of national capital, amounting, as a first approximation,
to between three and four years of national income. In other words, at first sight,
the stock of national capital did not change, but the public-private split was totally
reversed.

To sum up: the very considerable growth of private wealth in Russia and Eastern Europe
between the late 1980s and the present, which led in some cases to the spectacularly
rapid enrichment of certain individuals (I am thinking mainly of the Russian “oligarchs”),
obviously had nothing to do with saving or the dynamic law
β
=
s
/
g
. It was purely and simply the result of a transfer of ownership of capital from the
government to private individuals. The privatization of national wealth in the developed
countries since 1970 can be regarded as a very attenuated form of this extreme case.

The last factor explaining the increase in the capital/income ratio over the past
few decades is the historic rebound of asset prices. In other words, no correct analysis
of the period 1970–2010 is possible unless we situate this period in the longer historical
context of 1910–2010. Complete historical records are not available for all developed
countries, but the series I have established for Britain, France, Germany, and the
United States yield consistent results, which I summarize below.

If we look at the whole period 1910–2010, or 1870–2010, we find that the global evolution
of the capital/income ratio is very well explained by the dynamic law
β
=
s
/
g
. In particular, the fact that the capital/income ratio is structurally higher over
the long run in Europe than in the United States is perfectly consistent with the
differences in the saving rate and especially the growth rate over the past century.
²⁰
The decline we see in the period 1910–1950 is consistent with low national savings
and wartime destruction, and the fact that the capital/income ratio rose more rapidly
between 1980 and 2010 than between 1950 and 1980 is well explained by the decrease
in the growth rate between these two periods.

Nevertheless, the low point of the 1950s was lower than the simple logic of accumulation
summed up by the law
β
=
s
/
g
would have predicted. In order to understand the depth of the mid-twentieth-century
low, we need to add the fact that the price of real estate and stocks fell to historically
low levels in the aftermath of World War II for any number of reasons (rent control
laws, financial regulation, a political climate unfavorable to private capitalism).
After 1950, these asset prices gradually recovered, with an acceleration after 1980.

According to my estimates, this historical catch-up process is now complete: leaving
aside erratic short-term price movements, the increase in asset prices between 1950
and 2010 seems broadly speaking to have compensated for the decline between 1910 and
1950. It would be risky to conclude from this that the phase of structural asset price
increases is definitively over, however, and that asset prices will henceforth progress
at exactly the same pace as consumer prices. For one thing, the historical sources
are incomplete and imperfect, and price comparisons over such long periods of time
are approximate at best. For another, there are many theoretical reasons why asset
prices may evolve differently from other prices over the long run: for example, some
types of assets, such as buildings and infrastructure, are affected by technological
progress at a rate different from those of other parts of the economy. Furthermore,
the fact that certain natural resources are nonrenewable can also be important.

Last but not least, it is important to stress that the price of capital, leaving aside
the perennial short- and medium-term bubbles and possible long-term structural divergences,
is always in part a social and political construct: it reflects each society’s notion
of property and depends on the many policies and institutions that regulate relations
among different social groups, and especially between those who own capital and those
who do not. This is obvious, for example, in the case of real estate prices, which
depend on laws regulating the relations between landlords and tenants and controlling
rents. The law also affects stock market prices, as I noted when I discussed why stock
prices in Germany are relatively low.

In this connection, it is interesting to analyze the ratio between the stock market
value and the accounting value of firms in the period 1970–2010 in those countries
for which such data are available (see
Figure 5.6
). (Readers who find these issues too technical can easily skip over the remainder
of this section and go directly to the next.)

The market value of a company listed on the stock exchange is its stock market capitalization.
For companies not so listed, either because they are too small or because they choose
not to finance themselves via the stock market (perhaps in order to preserve family
ownership, which can happen even in very large firms), the market value is calculated
for national accounting purposes with reference to observed stock prices for listed
firms as similar as possible (in terms of size, sector of activity, and so on) to
the unlisted firm, while taking into account the “liquidity” of the relevant market.
²¹
Thus far I have used market values to measure stocks of private wealth and national
wealth. The accounting value of a firm, also called book value or net assets or own
capital, is equal to the accumulated value of all assets—buildings, infrastructure,
machinery, patents, majority or minority stakes in subsidiaries and other firms, vault
cash, and so on—included in the firm’s balance sheet, less the total of all outstanding
debt.

FIGURE 5.6.
   Market value and book value of corporations

Tobin’s Q (i.e. the ratio between market value and book value of corporations) has
risen in rich countries since the 1970s–1980s.

Sources and series: see
piketty.pse.ens.fr/capital21c
.

In theory, in the absence of all uncertainty, the market value and book value of a
firm should be the same, and the ratio of the two should therefore be equal to 1 (or
100 percent). This is normally the case when a company is created. If the shareholders
subscribe to 100 million euros worth of shares, which the firm uses to buy offices
and equipment worth 100 million euros, then the market value and book value will both
be equal to 100 million euros. The same is true if the firm borrows 50 million euros
to buy new machinery worth 50 million euros: the net asset value will still be 100
million euros (150 million in assets minus 50 million in debt), as will the stock
market capitalization. The same will be true if the firm earns 50 million in profits
and decides to create a reserve to finance new investments worth 50 million: the stock
price will rise by the same amount (because everyone knows that the firm has new assets),
so that both the market value and the book value will increase to 150 million.

The difficulty arises from the fact that anticipating the future of the firm quickly
becomes more complex and uncertain. After a certain time, for example, no one is really
sure whether the investment of 50 million euros several years earlier is really economically
useful to the firm. The book value may then diverge from the market value. The firm
will continue to list investments—in new offices, machinery, infrastructure, patents,
and so on—on its balance sheet at their market value, so the book value of the firm
remains unchanged.
²²
The market value of the firm, that is, its stock market capitalization, may be significantly
lower or higher, depending on whether financial markets have suddenly become more
optimistic or pessimistic about the firm’s ability to use its investments to generate
new business and profits. That is why, in practice, one always observes enormous variations
in the ratio of the market value to the book value of individual firms. This ratio,
which is also known as “Tobin’s Q” (for the economist James Tobin, who was the first
to define it), varied from barely 20 percent to more than 340 percent for French firms
listed in the CAC 40 in 2012.
²³

It is more difficult to understand why Tobin’s Q, when measured for all firms in a
given country taken together, should be systematically greater or smaller than 1.
Classically, two explanations have been given.

If certain immaterial investments (such as expenditures to increase the value of a
brand or for research and development) are not counted on the balance sheet, then
it is logical for the market value to be structurally greater than the book value.
This may explain the ratios slightly greater than 1 observed in the United States
(100–120 percent) and especially Britain (120–140 percent) in the late 1990s and 2000s.
But these ratios greater than 1 also reflect stock market bubbles in both countries:
Tobin’s Q fell rapidly toward 1 when the Internet bubble burst in 2001–2002 and in
the financial crisis of 2008–2009 (see
Figure 5.6
).

Conversely, if the stockholders of a company do not have full control, say, because
they have to compromise in a long-term relationship with other “stakeholders” (such
as worker representatives, local or national governments, consumer groups, and so
on), as we saw earlier is the case in “Rhenish capitalism,” then it is logical that
the market value should be structurally less than the book value. This may explain
the ratios slightly below one observed in France (around 80 percent) and especially
Germany and Japan (around 50–70 percent) in the 1990s and 2000s, when English and
US firms were at or above 100 percent (see
Figure 5.6
). Note, too, that stock market capitalization is calculated on the basis of prices
observed in current stock transactions, which generally correspond to buyers seeking
small minority positions and not buyers seeking to take control of the firm. In the
latter case, it is common to pay a price significantly higher than the current market
price, typically on the order of 20 percent higher. This difference may be enough
to explain a Tobin’s Q of around 80 percent, even when there are no stakeholders other
than minority shareholders.