Capital in the Twenty-First Century (69 page)

In order to better understand the dynamics of wealth accumulation and the detailed
data used to calculate
μ
, it is useful to examine the evolution of the average wealth profile as a function
of age.
Table 11.1
presents wealth-age profiles for a number of years between 1820 and 2010.
¹⁴
The most striking fact is no doubt the impressive aging of wealth throughout the
nineteenth century, as capital became increasingly concentrated. In 1820, the elderly
were barely wealthier on average than people in their fifties (which I have taken
as a reference group): sexagenarians were 34 percent wealthier and octogenarians 53
percent wealthier. But the gaps widened steadily thereafter. By 1900–1910, the average
wealth of sexagenarians and septuagenarians was on the order of 60–80 percent higher
than the reference group, and octogenarians were two and a half times wealthier. Note
that these are averages for all of France. If we restrict our attention to Paris,
where the largest fortunes were concentrated, the situation is even more extreme.
On the eve of World War I, Parisian fortunes swelled with age, with septuagenarians
and octogenarians on average three or even four times as wealthy as fifty-year-olds.
¹⁵
To be sure, the majority of people died with no wealth at all, and the absence of
any pension system tended to aggravate this “golden-age poverty.” But among the minority
with some fortune, the aging of wealth is quite impressive. Quite clearly, the spectacular
enrichment of octogenarians cannot be explained by income from labor or entrepreneurial
activity: it is hard to imagine people in their eighties creating a new startup every
morning.

This enrichment of the elderly is striking, in part because it explains the high value
of
μ
, the ratio of average wealth at time of death to average wealth of the living, in
the Belle Époque (and therefore the high inheritance flows), and even more because
it tells us something quite specific about the underlying economic process. The individual
data we have are quite clear on this point: the very rapid increase of wealth among
the elderly in the late nineteenth and early twentieth centuries was a straightforward
consequence of the inequality
r
>
g
and of the cumulative and multiplicative logic it implies. Concretely, elderly people
with the largest fortunes often enjoyed capital incomes far in excess of what they
needed to live. Suppose, for example, that they obtained a return of 5 percent and
consumed two-fifths of their capital income while reinvesting the other three-fifths.
Their wealth would then have grown at a rate of 3 percent a year, and by the age of
eighty-five they would have been more than twice as rich as they were at age sixty.
The mechanism is simple but extremely powerful, and it explains the observed facts
very well, except that the people with the largest fortunes could often save more
than three-fifths of their capital income (which would have accelerated the divergence
process), and the general growth of mean income and wealth was not quite zero (but
about 1 percent a year, which would have slowed it down a bit).

The study of the dynamics of accumulation and concentration of wealth in France in
1870–1914, especially in Paris, has many lessons to teach about the world today and
in the future. Not only are the data exceptionally detailed and reliable, but this
period is also emblematic of the first globalization of trade and finance. As noted,
it had modern, diversified capital markets, and individuals held complex portfolios
consisting of domestic and foreign, public and private assets paying fixed and variable
amounts. To be sure, economic growth was only 1–1.5 percent a year, but such a growth
rate, as I showed earlier, is actually quite substantial from a generational standpoint
or in the historical perspective of the very long run. It is by no means indicative
of a static agricultural society. This was an era of technological and industrial
innovation: the automobile, electricity, the cinema, and many other novelties became
important in these years, and many of them originated in France, at least in part.
Between 1870 and 1914, not all fortunes of fifty- and sixty-year-olds were inherited.
Far from it: we find a considerable number of wealthy people who made their money
through entrepreneurial activities in industry and finance.

Nevertheless, the dominant dynamic, which explains most of the concentration of wealth,
was an inevitable consequence of the inequality
r
>
g
. Regardless of whether the wealth a person holds at age fifty or sixty is inherited
or earned, the fact remains that beyond a certain threshold, capital tends to reproduce
itself and accumulates exponentially. The logic of
r
>
g
implies that the entrepreneur always tends to turn into a rentier. Even if this happens
later in life, the phenomenon becomes important as life expectancy increases. The
fact that a person has good ideas at age thirty or forty does not imply that she will
still be having them at seventy or eighty, yet her wealth will continue to increase
by itself. Or it can be passed on to the next generation and continue to increase
there. Nineteenth-century French economic elites were creative and dynamic entrepreneurs,
but the crucial fact remains that their efforts ultimately—and largely unwittingly—reinforced
and perpetuated a society of rentiers owing to the logic of
r
>
g.

This self-sustaining mechanism collapsed owing to the repeated shocks suffered by
capital and its owners in the period 1914–1945. A significant rejuvenation of wealth
was one consequence of the two world wars. One sees this clearly in
Figure 11.5
: for the first time in history—and to this day the only time—average wealth at death
in 1940–1950 fell below the average wealth of the living. This fact emerges even more
clearly in the detailed profiles by age cohort in
Table 11.1
. In 1912, on the eve of World War I, octogenarians were more than two and a half
times as wealthy as people in their fifties. In 1931, they were only 50 percent wealthier.
And in 1947, the fifty-somethings were 40 percent wealthier than the eighty-somethings.
To add insult to injury, the octogenarians even fell slightly behind people in their
forties in that year. This was a period in which all old certainties were called into
question. In the years after World War II, the plot of wealth versus age suddenly
took the form of a bell curve with a peak in the fifty to fifty-nine age bracket—a
form close to the “Modigliani triangle,” except for the fact that wealth did not fall
to zero at the most advanced ages. This stands in sharp contrast to the nineteenth
century, during which the wealth-age curve was monotonically increasing with age.

There is a simple explanation for this spectacular rejuvenation of wealth. As noted
in
Part Two
, all fortunes suffered multiple shocks in the period 1914–1945—destruction of property,
inflation, bankruptcy, expropriation, and so on—so that the capital/income ratio fell
sharply. To a first approximation, one might assume that all fortunes suffered to
the same degree, leaving the age profile unchanged. In fact, however, the younger
generations, which in any case did not have much to lose, recovered more quickly from
these wartime shocks than their elders did. A person who was sixty years old in 1940
and lost everything he owned in a bombardment, expropriation, or bankruptcy had little
hope of recovering. He would likely have died between 1950 and 1960 at the age of
seventy or eighty with nothing to pass on to his heirs. Conversely, a person who was
thirty in 1940 and lost everything (which was probably not much) still had plenty
of time to accumulate wealth after the war and by the 1950s would have been in his
forties and wealthier than that septuagenarian. The war reset all counters to zero,
or close to zero, and inevitably resulted in a rejuvenation of wealth. In this respect,
it was indeed the two world wars that wiped the slate clean in the twentieth century
and created the illusion that capitalism had been overcome.

This is the central explanation for the exceptionally low inheritance flows observed
in the decades after World War II: individuals who should have inherited fortunes
in 1950–1960 did not inherit much because their parents had not had time to recover
from the shocks of the previous decades and died without much wealth to their names.

In particular, this argument enables us to understand why the collapse of inheritance
flows was greater than the collapse of wealth itself—nearly twice as large, in fact.
As I showed in
Part Two
, total private wealth fell by more than two-thirds between 1910–1920 and 1950–1960:
the private capital stock decreased from seven years of national income to just two
to two and a half years (see
Figure 3.6
). The annual flow of inheritance fell by almost five-sixths, from 25 percent of national
income on the eve of World War I to just 4–5 percent in the 1950s (see
Figure 11.1
).

The crucial fact, however, is that this situation did not last long. “Reconstruction
capitalism” was by its nature a transitional phase and not the structural transformation
some people imagined. In 1950–1960, as capital was once again accumulated and the
capital/income ratio
β
rose, fortunes began to age once more, so that the ratio
μ
between average wealth at death and average wealth of the living also increased.
Growing wealth went hand in hand with aging wealth, thereby laying the groundwork
for an even stronger comeback of inherited wealth. By 1960, the profile observed in
1947 was already a memory: sexagenarians and septuagenarians were slightly wealthier
than people in their fifties (see
Table 11.1
). The octogenarians’ turn came in the 1980s. In 1990–2000 the graph of wealth against
age was increasing even more steeply. By 2010, the average wealth of people in their
eighties was more than 30 percent higher than that of people in their fifties. If
one were to include (which
Table 11.1
does not) gifts made prior to death in the wealth of different age cohorts, the graph
for 2000–2010 would be steeper still, approximately the same as in 1900–1910, with
average wealth for people in their seventies and eighties on the order of twice as
great as people in their fifties, except that most deaths now occur at a more advanced
age, which yields a considerably higher
μ
(see
Figure 11.5
).

In view of the rapid increase of inheritance flows in recent decades, it is natural
to ask if this increase is likely to continue.
Figure 11.6
shows two possible evolutions for the twenty-first century. The central scenario
is based on the assumption of an annual growth rate of 1.7 percent for the period
2010–2100 and a net return on capital of 3 percent.
¹⁶
The alternative scenario is based on the assumption that growth will be reduced to
1 percent for the period 2010–2100, while the return on capital will rise to 5 percent.
This could happen, for instance, if all taxes on capital and capital income, including
the corporate income tax, were eliminated, or if such taxes were reduced while capital’s
share of income increased.

In the central scenario, simulations based on the theoretical model (which successfully
accounts for the evolutions of 1820–2010) suggest that the annual inheritance flow
would continue to grow until 2030–2040 and then stabilize at around 16–17 percent
of national income. According to the alternative scenario, the inheritance flow should
increase even more until 2060–2070 and then stabilize at around 24–25 percent of national
income, a level similar to that observed in 1870–1910. In the first case, inherited
wealth would make only a partial comeback; in the second, its comeback would be complete
(as far as the total amount of inheritances and gifts is concerned). In both cases,
the flow of inheritances and gifts in the twenty-first century is expected to be quite
high, and in particular much higher than it was during the exceptionally low phase
observed in the mid-twentieth century.

Such predictions are obviously highly uncertain and are of interest primarily for
their illustrative value. The evolution of inheritance flows in the twenty-first century
depends on many economic, demographic, and political factors, and history shows that
these are subject to large and highly unpredictable changes. It is easy to imagine
other scenarios that would lead to different outcomes: for instance, a spectacular
acceleration of demographic or economic growth (which seems rather implausible) or
a radical change in public policy in regard to private capital or inheritance (which
may be more realistic).
¹⁷