Capital in the Twenty-First Century (6 page)

This “U-shaped curve” reflects an absolutely crucial transformation, which will figure
largely in this study. In particular, I will show that the return of high capital/income
ratios over the past few decades can be explained in large part by the return to a
regime of relatively slow growth. In slowly growing economies, past wealth naturally
takes on disproportionate importance, because it takes only a small flow of new savings
to increase the stock of wealth steadily and substantially.

If, moreover, the rate of return on capital remains significantly above the growth
rate for an extended period of time (which is more likely when the growth rate is
low, though not automatic), then the risk of divergence in the distribution of wealth
is very high.

This fundamental inequality, which I will write as
r
>
g
(where
r
stands for the average annual rate of return on capital, including profits, dividends,
interest, rents, and other income from capital, expressed as a percentage of its total
value, and
g
stands for the rate of growth of the economy, that is, the annual increase in income
or output), will play a crucial role in this book. In a sense, it sums up the overall
logic of my conclusions.

FIGURE I.2.
   The capital/income ratio in Europe, 1870–2010

Aggregate private wealth was worth about six to seven years of national income in
Europe in 1910, between two and three years in 1950, and between four and six years
in 2010.

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

When the rate of return on capital significantly exceeds the growth rate of the economy
(as it did through much of history until the nineteenth century and as is likely to
be the case again in the twenty-first century), then it logically follows that inherited
wealth grows faster than output and income. People with inherited wealth need save
only a portion of their income from capital to see that capital grow more quickly
than the economy as a whole. Under such conditions, it is almost inevitable that inherited
wealth will dominate wealth amassed from a lifetime’s labor by a wide margin, and
the concentration of capital will attain extremely high levels—levels potentially
incompatible with the meritocratic values and principles of social justice fundamental
to modern democratic societies.

What is more, this basic force for divergence can be reinforced by other mechanisms.
For instance, the savings rate may increase sharply with wealth.
³⁶
Or, even more important, the average effective rate of return on capital may be higher
when the individual’s initial capital endowment is higher (as appears to be increasingly
common). The fact that the return on capital is unpredictable and arbitrary, so that
wealth can be enhanced in a variety of ways, also poses a challenge to the meritocratic
model. Finally, all of these factors can be aggravated by the Ricardian scarcity principle:
the high price of real estate or petroleum may contribute to structural divergence.

To sum up what has been said thus far: the process by which wealth is accumulated
and distributed contains powerful forces pushing toward divergence, or at any rate
toward an extremely high level of inequality. Forces of convergence also exist, and
in certain countries at certain times, these may prevail, but the forces of divergence
can at any point regain the upper hand, as seems to be happening now, at the beginning
of the twenty-first century. The likely decrease in the rate of growth of both the
population and the economy in coming decades makes this trend all the more worrisome.

My conclusions are less apocalyptic than those implied by Marx’s principle of infinite
accumulation and perpetual divergence (since Marx’s theory implicitly relies on a
strict assumption of zero productivity growth over the long run). In the model I propose,
divergence is not perpetual and is only one of several possible future directions
for the distribution of wealth. But the possibilities are not heartening. Specifically,
it is important to note that the fundamental
r
>
g
inequality, the main force of divergence in my theory, has nothing to do with any
market imperfection. Quite the contrary: the more perfect the capital market (in the
economist’s sense), the more likely
r
is to be greater than
g.
It is possible to imagine public institutions and policies that would counter the
effects of this implacable logic: for instance, a progressive global tax on capital.
But establishing such institutions and policies would require a considerable degree
of international coordination. It is unfortunately likely that actual responses to
the problem—including various nationalist responses—will in practice be far more modest
and less effective.

What will the geographical and historical boundaries of this study be? To the extent
possible, I will explore the dynamics of the distribution of wealth between and within
countries around the world since the eighteenth century. However, the limitations
of the available data will often make it necessary to narrow the scope of inquiry
rather severely. In regard to the between-country distribution of output and income,
the subject of the first part of the book, a global approach is possible from 1700
on (thanks in particular to the national accounts data compiled by Angus Maddison).
When it comes to studying the capital/income ratio and capital-labor split in
Part Two
, the absence of adequate historical data will force me to focus primarily on the
wealthy countries and proceed by extrapolation to poor and emerging countries. The
examination of the evolution of inequalities of income and wealth, the subject of
Part Three
, will also be narrowly constrained by the limitations of the available sources. I
try to include as many poor and emergent countries as possible, using data from the
WTID, which aims to cover five continents as thoroughly as possible. Nevertheless,
the long-term trends are far better documented in the rich countries. To put it plainly,
this book relies primarily on the historical experience of the leading developed countries:
the United States, Japan, Germany, France, and Great Britain.

The British and French cases turn out to be particularly significant, because the
most complete long-run historical sources pertain to these two countries. We have
multiple estimates of both the magnitude and structure of national wealth for Britain
and France as far back as the early eighteenth century. These two countries were also
the leading colonial and financial powers in the nineteenth and early twentieth centuries.
It is therefore clearly important to study them if we wish to understand the dynamics
of the global distribution of wealth since the Industrial Revolution. In particular,
their history is indispensable for studying what has been called the “first globalization”
of finance and trade (1870–1914), a period that is in many ways similar to the “second
globalization,” which has been under way since the 1970s. The period of the first
globalization is as fascinating as it was prodigiously inegalitarian. It saw the invention
of the electric light as well as the heyday of the ocean liner (the
Titanic
sailed in 1912), the advent of film and radio, and the rise of the automobile and
international investment. Note, for example, that it was not until the coming of the
twenty-first century that the wealthy countries regained the same level of stock-market
capitalization relative to GDP that Paris and London achieved in the early 1900s.
This comparison is quite instructive for understanding today’s world.

Some readers will no doubt be surprised that I accord special importance to the study
of the French case and may suspect me of nationalism. I should therefore justify my
decision. One reason for my choice has to do with sources. The French Revolution did
not create a just or ideal society, but it did make it possible to observe the structure
of wealth in unprecedented detail. The system established in the 1790s for recording
wealth in land, buildings, and financial assets was astonishingly modern and comprehensive
for its time. The Revolution is the reason why French estate records are probably
the richest in the world over the long run.

My second reason is that because France was the first country to experience the demographic
transition, it is in some respects a good place to observe what awaits the rest of
the planet. Although the country’s population has increased over the past two centuries,
the rate of increase has been relatively low. The population of the country was roughly
30 million at the time of the Revolution, and it is slightly more than 60 million
today. It is the same country, with a population whose order of magnitude has not
changed. By contrast, the population of the United States at the time of the Declaration
of Independence was barely 3 million. By 1900 it was 100 million, and today it is
above 300 million. When a country goes from a population of 3 million to a population
of 300 million (to say nothing of the radical increase in territory owing to westward
expansion in the nineteenth century), it is clearly no longer the same country.

The dynamics and structure of inequality look very different in a country whose population
increases by a factor of 100 compared with a country whose population merely doubles.
In particular, the inheritance factor is much less important in the former than in
the latter. It has been the demographic growth of the New World that has ensured that
inherited wealth has always played a smaller role in the United States than in Europe.
This factor also explains why the structure of inequality in the United States has
always been so peculiar, and the same can be said of US representations of inequality
and social class. But it also suggests that the US case is in some sense not generalizable
(because it is unlikely that the population of the world will increase a hundredfold
over the next two centuries) and that the French case is more typical and more pertinent
for understanding the future. I am convinced that detailed analysis of the French
case, and more generally of the various historical trajectories observed in other
developed countries in Europe, Japan, North America, and Oceania, can tell us a great
deal about the future dynamics of global wealth, including such emergent economies
as China, Brazil, and India, where demographic and economic growth will undoubtedly
slow in the future (as they have done already).

Finally, the French case is interesting because the French Revolution—the “bourgeois”
revolution par excellence—quickly established an ideal of legal equality in relation
to the market. It is interesting to look at how this ideal affected the dynamics of
wealth distribution. Although the English Revolution of 1688 established modern parliamentarism,
it left standing a royal dynasty, primogeniture on landed estates (ended only in the
1920s), and political privileges for the hereditary nobility (reform of the House
of Lords is still under discussion, a bit late in the day). Although the American
Revolution established the republican principle, it allowed slavery to continue for
nearly a century and legal racial discrimination for nearly two centuries. The race
question still has a disproportionate influence on the social question in the United
States today. In a way, the French Revolution of 1789 was more ambitious. It abolished
all legal privileges and sought to create a political and social order based entirely
on equality of rights and opportunities. The Civil Code guaranteed absolute equality
before the laws of property as well as freedom of contract (for men, at any rate).
In the late nineteenth century, conservative French economists such as Paul Leroy-Beaulieu
often used this argument to explain why republican France, a nation of “small property
owners” made egalitarian by the Revolution, had no need of a progressive or confiscatory
income tax or estate tax, in contrast to aristocratic and monarchical Britain. The
data show, however, that the concentration of wealth was as large at that time in
France as in Britain, which clearly demonstrates that equality of rights in the marketplace
cannot ensure equality of rights tout court. Here again, the French experience is
quite relevant to today’s world, where many commentators continue to believe, as Leroy-Beaulieu
did a little more than a century ago, that ever more fully guaranteed property rights,
ever freer markets, and ever “purer and more perfect” competition are enough to ensure
a just, prosperous, and harmonious society. Unfortunately, the task is more complex.

Before proceeding, it may be useful to say a little more about the theoretical and
conceptual framework of this research as well as the intellectual itinerary that led
me to write this book.