Capital in the Twenty-First Century (9 page)

To sum up, a country’s national income may be greater or smaller than its domestic
product, depending on whether net income from abroad is positive or negative.

National income
=
domestic output
+
net income from abroad
⁶

At the global level, income received from abroad and paid abroad must balance, so
that income is by definition equal to output:

Global income
=
global output
⁷

This equality between two annual flows, income and output, is an accounting identity,
yet it reflects an important reality. In any given year, it is impossible for total
income to exceed the amount of new wealth that is produced (globally speaking; a single
country may of course borrow from abroad). Conversely, all production must be distributed
as income in one form or another, to either labor or capital: whether as wages, salaries,
honoraria, bonuses, and so on (that is, as payments to workers and others who contributed
labor to the process of production) or else as profits, dividends, interest, rents,
royalties, and so on (that is, as payments to the owners of capital used in the process
of production).

To recapitulate: regardless of whether we are looking at the accounts of a company,
a nation, or the global economy, the associated output and income can be decomposed
as the sum of income to capital and income to labor:

National income
=
capital income
+
labor income

But what is capital? What are its limits? What forms does it take? How has its composition
changed over time? This question, central to this investigation, will be examined
in greater detail in subsequent chapters. For now it will suffice to make the following
points:

First, throughout this book, when I speak of “capital” without further qualification,
I always exclude what economists often call (unfortunately, to my mind) “human capital,”
which consists of an individual’s labor power, skills, training, and abilities. In
this book, capital is defined as the sum total of nonhuman assets that can be owned
and exchanged on some market. Capital includes all forms of real property (including
residential real estate) as well as financial and professional capital (plants, infrastructure,
machinery, patents, and so on) used by firms and government agencies.

There are many reasons for excluding human capital from our definition of capital.
The most obvious is that human capital cannot be owned by another person or traded
on a market (not permanently, at any rate). This is a key difference from other forms
of capital. One can of course put one’s labor services up for hire under a labor contract
of some sort. In all modern legal systems, however, such an arrangement has to be
limited in both time and scope. In slave societies, of course, this is obviously not
true: there, a slaveholder can fully and completely own the human capital of another
person and even of that person’s offspring. In such societies, slaves can be bought
and sold on the market and conveyed by inheritance, and it is common to include slaves
in calculating a slaveholder’s wealth. I will show how this worked when I examine
the composition of private capital in the southern United States before 1865. Leaving
such special (and for now historical) cases aside, it makes little sense to attempt
to add human and nonhuman capital. Throughout history, both forms of wealth have played
fundamental and complementary roles in economic growth and development and will continue
to do so in the twenty-first century. But in order to understand the growth process
and the inequalities it engenders, we must distinguish carefully between human and
nonhuman capital and treat each one separately.

Nonhuman capital, which in this book I will call simply “capital,” includes all forms
of wealth that individuals (or groups of individuals) can own and that can be transferred
or traded through the market on a permanent basis. In practice, capital can be owned
by private individuals (in which case we speak of “private capital”) or by the government
or government agencies (in which case we speak of “public capital”). There are also
intermediate forms of collective property owned by “moral persons” (that is, entities
such as foundations and churches) pursuing specific aims. I will come back to this.
The boundary between what private individuals can and cannot own has evolved considerably
over time and around the world, as the extreme case of slavery indicates. The same
is true of property in the atmosphere, the sea, mountains, historical monuments, and
knowledge. Certain private interests would like to own these things, and sometimes
they justify this desire on grounds of efficiency rather than mere self-interest.
But there is no guarantee that this desire coincides with the general interest. Capital
is not an immutable concept: it reflects the state of development and prevailing social
relations of each society.

To simplify the text, I use the words “capital” and “wealth” interchangeably, as if
they were perfectly synonymous. By some definitions, it would be better to reserve
the word “capital” to describe forms of wealth accumulated by human beings (buildings,
machinery, infrastructure, etc.) and therefore to exclude land and natural resources,
with which humans have been endowed without having to accumulate them. Land would
then be a component of wealth but not of capital. The problem is that it is not always
easy to distinguish the value of buildings from the value of the land on which they
are built. An even greater difficulty is that it is very hard to gauge the value of
“virgin” land (as humans found it centuries or millennia ago) apart from improvements
due to human intervention, such as drainage, irrigation, fertilization, and so on.
The same problem arises in connection with natural resources such as petroleum, gas,
rare earth elements, and the like, whose pure value is hard to distinguish from the
value added by the investments needed to discover new deposits and prepare them for
exploitation. I therefore include all these forms of wealth in capital. Of course,
this choice does not eliminate the need to look closely at the origins of wealth,
especially the boundary line between accumulation and appropriation.

Some definitions of “capital” hold that the term should apply only to those components
of wealth directly employed in the production process. For instance, gold might be
counted as part of wealth but not of capital, because gold is said to be useful only
as a store of value. Once again, this limitation strikes me as neither desirable nor
practical (because gold can be a factor of production, not only in the manufacture
of jewelry but also in electronics and nanotechnology). Capital in all its forms has
always played a dual role, as both a store of value and a factor of production. I
therefore decided that it was simpler not to impose a rigid distinction between wealth
and capital.

Similarly, I ruled out the idea of excluding residential real estate from capital
on the grounds that it is “unproductive,” unlike the “productive capital” used by
firms and government: industrial plants, office buildings, machinery, infrastructure,
and so on. The truth is that all these forms of wealth are useful and productive and
reflect capital’s two major economic functions. Residential real estate can be seen
as a capital asset that yields “housing services,” whose value is measured by their
rental equivalent. Other capital assets can serve as factors of production for firms
and government agencies that produce goods and services (and need plants, offices,
machinery, infrastructure, etc. to do so). Each of these two types of capital currently
accounts for roughly half the capital stock in the developed countries.

To summarize, I define “national wealth” or “national capital” as the total market
value of everything owned by the residents and government of a given country at a
given point in time, provided that it can be traded on some market.
⁸
It consists of the sum total of nonfinancial assets (land, dwellings, commercial
inventory, other buildings, machinery, infrastructure, patents, and other directly
owned professional assets) and financial assets (bank accounts, mutual funds, bonds,
stocks, financial investments of all kinds, insurance policies, pension funds, etc.),
less the total amount of financial liabilities (debt).
⁹
If we look only at the assets and liabilities of private individuals, the result
is private wealth or private capital. If we consider assets and liabilities held by
the government and other governmental entities (such as towns, social insurance agencies,
etc.), the result is public wealth or public capital. By definition, national wealth
is the sum of these two terms:

National wealth
=
private wealth
+
public wealth

Public wealth in most developed countries is currently insignificant (or even negative,
where the public debt exceeds public assets). As I will show, private wealth accounts
for nearly all of national wealth almost everywhere. This has not always been the
case, however, so it is important to distinguish clearly between the two notions.

To be clear, although my concept of capital excludes human capital (which cannot be
exchanged on any market in nonslave societies), it is not limited to “physical” capital
(land, buildings, infrastructure, and other material goods). I include “immaterial”
capital such as patents and other intellectual property, which are counted either
as nonfinancial assets (if individuals hold patents directly) or as financial assets
(when an individual owns shares of a corporation that holds patents, as is more commonly
the case). More broadly, many forms of immaterial capital are taken into account by
way of the stock market capitalization of corporations. For instance, the stock market
value of a company often depends on its reputation and trademarks, its information
systems and modes of organization, its investments, whether material or immaterial,
for the purpose of making its products and services more visible and attractive, and
so on. All of this is reflected in the price of common stock and other corporate financial
assets and therefore in national wealth.

To be sure, the price that the financial markets sets on a company’s or even a sector’s
immaterial capital at any given moment is largely arbitrary and uncertain. We see
this in the collapse of the Internet bubble in 2000, in the financial crisis that
began in 2007–2008, and more generally in the enormous volatility of the stock market.
The important fact to note for now is that this is a characteristic of all forms of
capital, not just immaterial capital. Whether we are speaking of a building or a company,
a manufacturing firm or a service firm, it is always very difficult to set a price
on capital. Yet as I will show, total national wealth, that is, the wealth of a country
as a whole and not of any particular type of asset, obeys certain laws and conforms
to certain regular patterns.

One further point: total national wealth can always be broken down into domestic capital
and foreign capital:

National wealth
=
national capital
=
domestic capital
+
net foreign capital

Domestic capital is the value of the capital stock (buildings, firms, etc.) located
within the borders of the country in question. Net foreign capital—or net foreign
assets—measures the country’s position vis-à-vis the rest of the world: more specifically,
it is the difference between assets owned by the country’s citizens in the rest of
the world and assets of the country owned by citizens of other countries. On the eve
of World War I, Britain and France both enjoyed significant net positive asset positions
vis-à-vis the rest of the world. One characteristic of the financial globalization
that has taken place since the 1980s is that many countries have more or less balanced
net asset positions, but those positions are quite large in absolute terms. In other
words, many countries have large capital stakes in other countries, but those other
countries also have stakes in the country in question, and the two positions are more
or less equal, so that net foreign capital is close to zero. Globally, of course,
all the net positions must add up to zero, so that total global wealth equals the
“domestic” capital of the planet as a whole.

Now that income and capital have been defined, I can move on to the first basic law
tying these two ideas together. I begin by defining the capital/income ratio.

Income is a flow. It corresponds to the quantity of goods produced and distributed
in a given period (which we generally take to be a year).

Capital is a stock. It corresponds to the total wealth owned at a given point in time.
This stock comes from the wealth appropriated or accumulated in all prior years combined.

The most natural and useful way to measure the capital stock in a particular country
is to divide that stock by the annual flow of income. This gives us the capital/income
ratio, which I denote by the Greek letter
β
.

For example, if a country’s total capital stock is the equivalent of six years of
national income, we write
β
=
6 (or
β
=
600%).

In the developed countries today, the capital/income ratio generally varies between
5 and 6, and the capital stock consists almost entirely of private capital. In France
and Britain, Germany and Italy, the United States and Japan, national income was roughly
30,000–35,000 euros per capita in 2010, whereas total private wealth (net of debt)
was typically on the order of 150,000–200,000 euros per capita, or five to six times
annual national income. There are interesting variations both within Europe and around
the world. For instance,
β
is greater than 6 in Japan and Italy and less than 5 in the United States and Germany.
Public wealth is just barely positive in some countries and slightly negative in others.
And so on. I examine all this in detail in the next few chapters. At this point, it
is enough to keep these orders of magnitude in mind, in order to make the ideas as
concrete as possible.
¹⁰