Capital in the Twenty-First Century (5 page)

Compared with previous works, one reason why this book stands out is that I have made
an effort to collect as complete and consistent a set of historical sources as possible
in order to study the dynamics of income and wealth distribution over the long run.
To that end, I had two advantages over previous authors. First, this work benefits,
naturally enough, from a longer historical perspective than its predecessors had (and
some long-term changes did not emerge clearly until data for the 2000s became available,
largely owing to the fact that certain shocks due to the world wars persisted for
a very long time). Second, advances in computer technology have made it much easier
to collect and process large amounts of historical data.

Although I have no wish to exaggerate the role of technology in the history of ideas,
the purely technical issues are worth a moment’s reflection. Objectively speaking,
it was far more difficult to deal with large volumes of historical data in Kuznets’s
time than it is today. This was true to a large extent as recently as the 1980s. In
the 1970s, when Alice Hanson Jones collected US estate inventories from the colonial
era and Adeline Daumard worked on French estate records from the nineteenth century,
³³
they worked mainly by hand, using index cards. When we reread their remarkable work
today, or look at François Siminad’s work on the evolution of wages in the nineteenth
century or Ernest Labrousse’s work on the history of prices and incomes in the eighteenth
century or Jean Bouvier and François Furet’s work on the variability of profits in
the nineteenth century, it is clear that these scholars had to overcome major material
difficulties in order to compile and process their data.
³⁴
In many cases, the technical difficulties absorbed much of their energy, taking precedence
over analysis and interpretation, especially since the technical problems imposed
strict limits on their ability to make international and temporal comparisons. It
is much easier to study the history of the distribution of wealth today than in the
past. This book is heavily indebted to recent improvements in the technology of research.
³⁵

What are the major conclusions to which these novel historical sources have led me?
The first is that one should be wary of any economic determinism in regard to inequalities
of wealth and income. The history of the distribution of wealth has always been deeply
political, and it cannot be reduced to purely economic mechanisms. In particular,
the reduction of inequality that took place in most developed countries between 1910
and 1950 was above all a consequence of war and of policies adopted to cope with the
shocks of war. Similarly, the resurgence of inequality after 1980 is due largely to
the political shifts of the past several decades, especially in regard to taxation
and finance. The history of inequality is shaped by the way economic, social, and
political actors view what is just and what is not, as well as by the relative power
of those actors and the collective choices that result. It is the joint product of
all relevant actors combined.

The second conclusion, which is the heart of the book, is that the dynamics of wealth
distribution reveal powerful mechanisms pushing alternately toward convergence and
divergence. Furthermore, there is no natural, spontaneous process to prevent destabilizing,
inegalitarian forces from prevailing permanently.

Consider first the mechanisms pushing toward convergence, that is, toward reduction
and compression of inequalities. The main forces for convergence are the diffusion
of knowledge and investment in training and skills. The law of supply and demand,
as well as the mobility of capital and labor, which is a variant of that law, may
always tend toward convergence as well, but the influence of this economic law is
less powerful than the diffusion of knowledge and skill and is frequently ambiguous
or contradictory in its implications. Knowledge and skill diffusion is the key to
overall productivity growth as well as the reduction of inequality both within and
between countries. We see this at present in the advances made by a number of previously
poor countries, led by China. These emergent economies are now in the process of catching
up with the advanced ones. By adopting the modes of production of the rich countries
and acquiring skills comparable to those found elsewhere, the less developed countries
have leapt forward in productivity and increased their national incomes. The technological
convergence process may be abetted by open borders for trade, but it is fundamentally
a process of the diffusion and sharing of knowledge—the public good par excellence—rather
than a market mechanism.

From a strictly theoretical standpoint, other forces pushing toward greater equality
might exist. One might, for example, assume that production technologies tend over
time to require greater skills on the part of workers, so that labor’s share of income
will rise as capital’s share falls: one might call this the “rising human capital
hypothesis.” In other words, the progress of technological rationality is supposed
to lead automatically to the triumph of human capital over financial capital and real
estate, capable managers over fat cat stockholders, and skill over nepotism. Inequalities
would thus become more meritocratic and less static (though not necessarily smaller):
economic rationality would then in some sense automatically give rise to democratic
rationality.

Another optimistic belief, which is current at the moment, is the idea that “class
warfare” will automatically give way, owing to the recent increase in life expectancy,
to “generational warfare” (which is less divisive because everyone is first young
and then old). Put differently, this inescapable biological fact is supposed to imply
that the accumulation and distribution of wealth no longer presage an inevitable clash
between dynasties of rentiers and dynasties owning nothing but their labor power.
The governing logic is rather one of saving over the life cycle: people accumulate
wealth when young in order to provide for their old age. Progress in medicine together
with improved living conditions has therefore, it is argued, totally transformed the
very essence of capital.

Unfortunately, these two optimistic beliefs (the human capital hypothesis and the
substitution of generational conflict for class warfare) are largely illusory. Transformations
of this sort are both logically possible and to some extent real, but their influence
is far less consequential than one might imagine. There is little evidence that labor’s
share in national income has increased significantly in a very long time: “nonhuman”
capital seems almost as indispensable in the twenty-first century as it was in the
eighteenth or nineteenth, and there is no reason why it may not become even more so.
Now as in the past, moreover, inequalities of wealth exist primarily within age cohorts,
and inherited wealth comes close to being as decisive at the beginning of the twenty-first
century as it was in the age of Balzac’s
Père Goriot.
Over a long period of time, the main force in favor of greater equality has been
the diffusion of knowledge and skills.

The crucial fact is that no matter how potent a force the diffusion of knowledge and
skills may be, especially in promoting convergence between countries, it can nevertheless
be thwarted and overwhelmed by powerful forces pushing in the opposite direction,
toward greater inequality. It is obvious that lack of adequate investment in training
can exclude entire social groups from the benefits of economic growth. Growth can
harm some groups while benefiting others (witness the recent displacement of workers
in the more advanced economies by workers in China). In short, the principal force
for convergence—the diffusion of knowledge—is only partly natural and spontaneous.
It also depends in large part on educational policies, access to training and to the
acquisition of appropriate skills, and associated institutions.

I will pay particular attention in this study to certain worrisome forces of divergence—particularly
worrisome in that they can exist even in a world where there is adequate investment
in skills and where all the conditions of “market efficiency” (as economists understand
that term) appear to be satisfied. What are these forces of divergence? First, top
earners can quickly separate themselves from the rest by a wide margin (although the
problem to date remains relatively localized). More important, there is a set of forces
of divergence associated with the process of accumulation and concentration of wealth
when growth is weak and the return on capital is high. This second process is potentially
more destabilizing than the first, and it no doubt represents the principal threat
to an equal distribution of wealth over the long run.

To cut straight to the heart of the matter: in
Figures I.1
and
I.2
I show two basic patterns that I will try to explain in what follows. Each graph
represents the importance of one of these divergent processes. Both graphs depict
“U-shaped curves,” that is, a period of decreasing inequality followed by one of increasing
inequality. One might assume that the realities the two graphs represent are similar.
In fact they are not. The phenomena underlying the various curves are quite different
and involve distinct economic, social, and political processes. Furthermore, the curve
in
Figure I.1
represents income inequality in the United States, while the curves in
Figure I.2
depict the capital/income ratio in several European countries (Japan, though not
shown, is similar). It is not out of the question that the two forces of divergence
will ultimately come together in the twenty-first century. This has already happened
to some extent and may yet become a global phenomenon, which could lead to levels
of inequality never before seen, as well as to a radically new structure of inequality.
Thus far, however, these striking patterns reflect two distinct underlying phenomena.

The US curve, shown in
Figure I.1
, indicates the share of the upper decile of the income hierarchy in US national income
from 1910 to 2010. It is nothing more than an extension of the historical series Kuznets
established for the period 1913–1948. The top decile claimed as much as 45–50 percent
of national income in the 1910s–1920s before dropping to 30–35 percent by the end
of the 1940s. Inequality then stabilized at that level from 1950 to 1970. We subsequently
see a rapid rise in inequality in the 1980s, until by 2000 we have returned to a level
on the order of 45–50 percent of national income. The magnitude of the change is impressive.
It is natural to ask how far such a trend might continue.

FIGURE I.1.
   Income inequality in the United States, 1910–2010

The top decile share in US national income dropped from 45–50 percent in the 1910s–1920s
to less than 35 percent in the 1950s (this is the fall documented by Kuznets); it
then rose from less than 35 percent in the 1970s to 45–50 percent in the 2000s–2010s.

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

I will show that this spectacular increase in inequality largely reflects an unprecedented
explosion of very elevated incomes from labor, a veritable separation of the top managers
of large firms from the rest of the population. One possible explanation of this is
that the skills and productivity of these top managers rose suddenly in relation to
those of other workers. Another explanation, which to me seems more plausible and
turns out to be much more consistent with the evidence, is that these top managers
by and large have the power to set their own remuneration, in some cases without limit
and in many cases without any clear relation to their individual productivity, which
in any case is very difficult to estimate in a large organization. This phenomenon
is seen mainly in the United States and to a lesser degree in Britain, and it may
be possible to explain it in terms of the history of social and fiscal norms in those
two countries over the past century. The tendency is less marked in other wealthy
countries (such as Japan, Germany, France, and other continental European states),
but the trend is in the same direction. To expect that the phenomenon will attain
the same proportions elsewhere as it has done in the United States would be risky
until we have subjected it to a full analysis—which unfortunately is not that simple,
given the limits of the available data.

The second pattern, represented in
Figure I.2
, reflects a divergence mechanism that is in some ways simpler and more transparent
and no doubt exerts greater influence on the long-run evolution of the wealth distribution.
Figure I.2
shows the total value of private wealth (in real estate, financial assets, and professional
capital, net of debt) in Britain, France and Germany, expressed in years of national
income, for the period 1870–2010. Note, first of all, the very high level of private
wealth in Europe in the late nineteenth century: the total amount of private wealth
hovered around six or seven years of national income, which is a lot. It then fell
sharply in response to the shocks of the period 1914–1945: the capital/income ratio
decreased to just 2 or 3. We then observe a steady rise from 1950 on, a rise so sharp
that private fortunes in the early twenty-first century seem to be on the verge of
returning to five or six years of national income in both Britain and France. (Private
wealth in Germany, which started at a lower level, remains lower, but the upward trend
is just as clear.)