Capital in the Twenty-First Century (40 page)

A second reason for caution is the following. The probable long-run decrease in capital’s
share of national income from 35–40 percent to 25–30 percent is, I think, quite plausible
and surely significant but does not amount to a change of civilization. Clearly, skill
levels have increased markedly over the past two centuries. But the stock of industrial,
financial, and real estate capital has also increased enormously. Some people think
that capital has lost its importance and that we have magically gone from a civilization
based on capital, inheritance, and kinship to one based on human capital and talent.
Fat-cat stockholders have supposedly been replaced by talented managers thanks solely
to changes in technology. I will come back to this question in
Part Three
when I turn to the study of individual inequalities in the distribution of income
and wealth: a correct answer at this stage is impossible. But I have already shown
enough to warn against such mindless optimism: capital has not disappeared for the
simple reason that it is still useful—hardly less useful than in the era of Balzac
and Austen, perhaps—and may well remain so in the future.

I have just shown that the Cobb-Douglas hypothesis of a completely stable capital-labor
split cannot give a totally satisfactory explanation of the long-term evolution of
the capital-labor split. The same can be said, perhaps even more strongly, about short-
and medium-term evolutions, which can in some cases extend over fairly long periods,
particularly as seen by contemporary witnesses to these changes.

The most important case, which I discussed briefly in the Introduction, is no doubt
the increase in capital’s share of income during the early phases of the Industrial
Revolution, from 1800 to 1860. In Britain, for which we have the most complete data,
the available historical studies, in particular those of Robert Allen (who gave the
name “Engels’ pause” to the long stagnation of wages), suggest that capital’s share
increased by something like 10 percent of national income, from 35–40 percent in the
late eighteenth and early nineteenth centuries to around 45–50 percent in the middle
of the nineteenth century, when Marx wrote
The Communist Manifesto
and set to work on
Capital.
The sources also suggest that this increase was roughly compensated by a comparable
decrease in capital’s share in the period 1870–1900, followed by a slight increase
between 1900 and 1910, so that in the end the capital share was probably not very
different around the turn of the twentieth century from what it was during the French
Revolution and Napoleonic era (see
Figure 6.1
). We can therefore speak of a “medium-term” movement rather than a durable long-term
trend. Nevertheless, this transfer of 10 percent of national income to capital during
the first half of the nineteenth century was by no means negligible: to put it in
concrete terms, the lion’s share of economic growth in this period went to profits,
while wages—objectively miserable—stagnated. According to Allen, the main explanation
for this was the exodus of labor from the countryside and into the cities, together
with technological changes that increased the productivity of capital (reflected by
a structural change in the production function)—the caprices of technology, in short.
²⁶

Available historical data for France suggest a similar chronology. In particular,
all the sources indicate a serious stagnation of wages in the period 1810–1850 despite
robust industrial growth. The data collected by Jean Bouvier and François Furet from
the books of leading French industrial firms confirm this chronology: the share of
profits increased until 1860, then decreased from 1870 to 1900, and rose again between
1900 and 1910.
²⁷

The data we have for the eighteenth century and the period of the French Revolution
also suggest an increase in the share of income going to land rent in the decades
preceding the revolution (which seems consistent with Arthur Young’s observations
about the misery of French peasants),
²⁸
and substantial wage increases between 1789 and 1815 (which can conceivably be explained
by the redistribution of land and the mobilization of labor to meet the needs of military
conflict).
²⁹
When the lower classes of the Restoration and July Monarchy looked back on the revolutionary
period and the Napoleonic era, they accordingly remembered good times.

To remind ourselves that these short- and medium-term changes in the capital-labor
split occur at many different times, I have shown the annual evolution in France from
1900 to 2010 in
Figures 6.6
–
8
, in which I distinguish the evolution of the wage-profit split in value added by
firms from the evolution of the share of rent in national income.
³⁰
Note, in particular, that the wage-profit split has gone through three distinct phases
since World War II, with a sharp rise in profits from 1945 to 1968 followed by a very
pronounced drop in the share of profits from 1968 to 1983 and then a very rapid rise
after 1983 leading to stabilization in the early 1990s. I will have more to say about
this highly political chronology in subsequent chapters, where I will discuss the
dynamics of income inequality. Note the steady rise of the share of national income
going to rent since 1945, which implies that the share going to capital overall continued
to increase between 1990 and 2010, despite the stabilization of the profit share.

FIGURE 6.6.
   The profit share in the value added of corporations in France, 1900–2010

The share of gross profits in gross value added of corporations rose from 25 percent
in 1982 to 33 percent in 2010; the share of net profits in net value added rose from
12 percent to 20 percent.

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

FIGURE 6.7.
   The share of housing rent in national income in France, 1900–2010

The share of housing rent (rental value of dwellings) rose from 2 percent of national
income in 1948 to 10 percent in 2010.

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

FIGURE 6.8.
   The capital share in national income in France, 1900–2010

The share of capital income (net profits and rents) rose from 15 percent of national
income in 1982 to 27 percent in 2010.

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

As I come to the end of this examination of the historical dynamics of the capital/income
ratio and the capital-labor split, it is worth pointing out the relation between my
conclusions and the theses of Karl Marx.

For Marx, the central mechanism by which “the bourgeoisie digs its own grave” corresponded
to what I referred to in the Introduction as “the principle of infinite accumulation”:
capitalists accumulate ever increasing quantities of capital, which ultimately leads
inexorably to a falling rate of profit (i.e., return on capital) and eventually to
their own downfall. Marx did not use mathematical models, and his prose was not always
limpid, so it is difficult to be sure what he had in mind. But one logically consistent
way of interpreting his thought is to consider the dynamic law
β
=
s
/
g
in the special case where the growth rate
g
is zero or very close to zero.

Recall that
g
measures the long-term structural growth rate, which is the sum of productivity growth
and population growth. In Marx’s mind, as in the minds of all nineteenth- and early
twentieth-century economists before Robert Solow did his work on growth in the 1950s,
the very idea of structural growth, driven by permanent and durable growth of productivity,
was not clearly identified or formulated.
³¹
In those days, the implicit hypothesis was that growth of production, and especially
of manufacturing output, was explained mainly by the accumulation of industrial capital.
In other words, output increased solely because every worker was backed by more machinery
and equipment and not because productivity as such (for a given quantity of labor
and capital) increased. Today we know that long-term structural growth is possible
only because of productivity growth. But this was not obvious in Marx’s time, owing
to lack of historical perspective and good data.

Where there is no structural growth, and the productivity and population growth rate
g
is zero, we run up against a logical contradiction very close to what Marx described.
If the savings rate
s
is positive, meaning the capitalists insist on accumulating more and more capital
every year in order to increase their power and perpetuate their advantages or simply
because their standard of living is already so high, then the capital/income ratio
will increase indefinitely. More generally, if
g
is close to zero, the long-term capital/income ratio
β
=
s
/
g
tends toward infinity. And if
β
is extremely large, then the return on capital
r
must get smaller and smaller and closer and closer to zero, or else capital’s share
of income,
α
=
r
×
β
, will ultimately devour all of national income.
³²

The dynamic inconsistency that Marx pointed out thus corresponds to a real difficulty,
from which the only logical exit is structural growth, which is the only way of balancing
the process of capital accumulation (to a certain extent). Only permanent growth of
productivity and population can compensate for the permanent addition of new units
of capital, as the law
β
=
s
/
g
makes clear. Otherwise, capitalists do indeed dig their own grave: either they tear
each other apart in a desperate attempt to combat the falling rate of profit (for
instance, by waging war over the best colonial investments, as Germany and France
did in the Moroccan crises of 1905 and 1911), or they force labor to accept a smaller
and smaller share of national income, which ultimately leads to a proletarian revolution
and general expropriation. In any event, capital is undermined by its internal contradictions.

That Marx actually had a model of this kind in mind (i.e., a model based on infinite
accumulation of capital) is confirmed by his use on several occasions of the account
books of industrial firms with very high capital intensities. In volume 1 of
Capital,
for instance, he uses the books of a textile factory, which were conveyed to him,
he says, “by the owner,” and seem to show an extremely high ratio of the total amount
of fixed and variable capital used in the production process to the value of a year’s
output—apparently greater than ten. A capital/income ratio of this level is indeed
rather frightening. If the rate of return on capital is 5 percent, then more than
half the value of the firm’s output goes to profits. It was natural for Marx and many
other anxious contemporary observers to ask where all this might lead (especially
because wages had been stagnant since the beginning of the nineteenth century) and
what type of long-run socioeconomic equilibrium such hyper-capital-intensive industrial
development would produce.