Capital in the Twenty-First Century

by Thomas Piketty

Modern economic growth and the diffusion of knowledge have made it possible to avoid the Marxist apocalypse but have not modified the deep structures of capital and inequality—or in any case not as much as one might have imagined in the optimistic decades following World War II.

When the rate of return on capital exceeds the rate of growth of output and income, as it did in the nineteenth century and seems quite likely to do again in the twenty-first, capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based.

For Thomas Malthus, who in 1798 published his Essay on the Principle of Population, there could be no doubt: the primary threat was overpopulation.

Nevertheless, Young’s account, published in 1792, also bears the traces of nationalist prejudice and misleading comparison.

This was the task Marx set himself. In 1848, on the eve of the “spring of nations” (that is, the revolutions that broke out across Europe that spring), he published The Communist Manifesto, a short, hard-hitting text whose first chapter began with the famous words “A specter is haunting Europe—the specter of communism.”6 The text ended with the equally famous prediction of revolution: “The development of Modern Industry, therefore, cuts from under its feet the very foundation on which the bourgeoisie produces and appropriates products. What the bourgeoisie therefore produces, above all, are its own gravediggers. Its fall and the victory of the proletariat are equally inevitable.

In fact, his principal conclusion was what one might call the “principle of infinite accumulation,” that is, the inexorable tendency for capital to accumulate and become concentrated in ever fewer hands, with no natural limit to the process.

This is the basis of Marx’s prediction of an apocalyptic end to capitalism: either the rate of return on capital would steadily diminish (thereby killing the engine of accumulation and leading to violent conflict among capitalists), or capital’s share of national income would increase indefinitely (which sooner or later would unite the workers in revolt). In either case, no stable socioeconomic or political equilibrium was possible.

The communist revolution did indeed take place, but in the most backward country in Europe, Russia, where the Industrial Revolution had scarcely begun, whereas the most advanced European countries explored other, social democratic avenues—fortunately for their citizens.

Like his predecessors, Marx totally neglected the possibility of durable technological progress and steadily increasing productivity, which is a force that can to some extent serve as a counterweight to the process of accumulation and concentration of private capital.

According to Kuznets’s theory, income inequality would automatically decrease in advanced phases of capitalist development, regardless of economic policy choices or other differences between countries, until eventually it stabilized at an acceptable level. Proposed in 1955, this was really a theory of the magical postwar years referred to in France as the “Trente Glorieuses,” the thirty glorious years from 1945 to 1975.

The philosophy of the moment was summed up in a single sentence: “Growth is a rising tide that lifts all boats.

The sharp reduction in income inequality that we observe in almost all the rich countries between 1914 and 1945 was due above all to the world wars and the violent economic and political shocks they entailed (especially for people with large fortunes). It had little to do with the tranquil process of intersectoral mobility described by Kuznets.

Indeed, income consists of two components: income from labor (wages, salaries, bonuses, earnings from nonwage labor, and other remuneration statutorily classified as labor related) and income from capital (rent, dividends, interest, profits, capital gains, royalties, and other income derived from the mere fact of owning capital in the form of land, real estate, financial instruments, industrial equipment, etc., again regardless of its precise legal classification).

In the first place, just as income tax returns allow us to study changes in income inequality, estate tax returns enable us to study changes in the inequality of wealth.26

The data on wealth and inheritance also enable us to study changes in the relative importance of inherited wealth and savings in the constitution of fortunes and the dynamics of wealth inequality.

Inequality is not necessarily bad in itself: the key question is to decide whether it is justified, whether there are reasons for it.

I have no interest in denouncing inequality or capitalism per se—especially since social inequalities are not in themselves a problem as long as they are justified, that is, “founded only upon common utility,” as article 1 of the 1789 Declaration of the Rights of Man and the Citizen proclaims.

At this stage, the orders of magnitude given above (β = 600%, α = 30%, r = 5%) may be taken as typical.

Now, at the beginning of the twenty-first century, we find roughly the same return on real estate, 4–5 percent, sometimes a little less, especially where prices have risen rapidly without dragging rents upward at the same rate.

Capital invested in businesses is of course at greater risk, so the average return is often higher. The stock-market capitalization of listed companies in various countries generally represents 12 to 15 years of annual profits, which corresponds to an annual return on investment of 6–8 percent (before taxes).

Imagine another company that uses less capital (3 million euros) to produce the same output (1 million euros), but using more labor (700,000 euros in wages, 300,000 in profits). For this company, β = 3, α = 30 percent, and r = 10 percent. The second firm is less capital intensive than the first, but it is more profitable (the rate of return on its capital is significantly higher).

The growth rate of world population was above 1 percent per year from 1950 to 2012 and should return toward 0 percent by the end of the twenty-first century.

Average global per capita income is currently around 760 euros per month; in 1700, it was less than 70 euros per month, roughly equal to income in the poorest countries of Sub-Saharan Africa in 2012.9

Globally, the average growth of per capita output of 0.8 percent over the period 1700–2012 breaks down as follows: growth of barely 0.1 percent in the eighteenth century, 0.9 percent in the nineteenth century, and 1.6 percent in the twentieth century (see Table 2.1).

The decomposition of the economy into three sectors—primary, secondary, and tertiary—was an idea of the mid-twentieth century in societies where each sector included similar, or at any rate comparable, fractions of economic activity and the workforce (see Table 2.4).

Consider first services in health and education, which by themselves account for more than 20 percent of total employment in the most advanced countries (or as much as all industrial sectors combined).

The number of jobs in retail; hotels, cafés, and restaurants; and culture and leisure activities also increased rapidly, typically accounting for 20 percent of total employment.

Services to firms (consulting, accounting, design, data processing, etc.) combined with real estate and financial services (real estate agencies, banks, insurance, etc.) and transportation add another 20 percent of the job total.

If you then add government and security services (general administration, courts, police, armed forces, etc.), which account for nearly 10 percent of total employment in most countries, you reach th...

As indicated in Table 2.1, we find the same average growth rate—0.8 percent—when we look at world population 1700

Table 2.5 shows the economic growth rates for each century and each continent separately. In Europe, per capita output grew at a rate of 1.0 percent 1820–1913 and 1.9 percent 1913–2012. In America, growth reached 1.5 percent 1820–1913 and 1.5 percent again 1913

It is important to bear this reality in mind as I proceed, because many people think that growth ought to be at least 3 or 4 percent per year. As noted, both history and logic show this to be illusory.

In my view, the most important point—more important than the specific growth rate prediction (since, as I have shown, any attempt to reduce long-term growth to a single figure is largely illusory)—is that a per capita output growth rate on the order of 1 percent is in fact extremely rapid, much more rapid than many people think.

Over a period of thirty years, a growth rate of 1 percent per year corresponds to cumulative growth of more than 35 percent.

Concretely, per capita output growth in Europe, North America, and Japan over the past thirty years has ranged between 1 and 1.5 percent, and people’s lives have been subjected to major changes. In 1980 there was no Internet or cell phone network, most people did not travel by air, most of the advanced medical technologies in common use today did not yet exist, and only a minority attended college.

In fact, when viewed in historical perspective, the thirty postwar years were the exceptional period, quite simply because Europe had fallen far behind the United States over the period 1914–1945 but rapidly caught up during the Trente Glorieuses.

If we looked only at continental Europe, we would find an average per capita output growth rate of 5 percent between 1950 and 1970—a level well beyond that achieved in other advanced countries over the past two centuries.

In Great Britain and the United States, postwar history is interpreted quite differently. Between 1950 and 1980, the gap between the English-speaking countries and the countries that had lost the war closed rapidly. By the late 1970s, US magazine covers often denounced the decline of the United States and the success of German and Japanese industry.

Margaret Thatcher in Britain and Ronald Reagan in the United States promised to “roll back the welfare state” that had allegedly sapped the animal spirits of Anglo-Saxon entrepreneurs and thus to return to pure nineteenth-century capitalism, which would allow the United States and Britain to regain the upper hand.

In fact, neither the economic liberalization that began around 1980 nor the state interventionism that began in 1945 deserves such praise or blame.

To recapitulate, global growth over the past three centuries can be pictured as a bell curve with a very high peak. In regard to both population growth and per capita output growth, the pace gradually accelerated over the course of the eighteenth and nineteenth centuries, and especially the twentieth, and is now most likely returning to much lower levels for the remainder of the twenty-first century.

If we look at the curve for population growth, we see that the rise began much earlier, in the eighteenth century, and the decrease also began much earlier.

The rate of global population growth peaked in the period 1950–1970 at nearly 2 percent per year and since then has decreased steadily.

Global growth in per capita output exceeded 2 percent between 1950 and 1990, notably thanks to European catch-up, and again between 1990 and 2012, thanks to Asian and especially Chinese catch-up, with growth in China exceeding 9 percent per year in that period, according to official statistics (a level never before observed).24

Until 1950, this had always been less than 2 percent per year, before leaping to 4 percent in the period 1950–1990, an exceptionally high level that reflected both the highest demographic growth rate in history and the highest growth rate in output per head. The rate of growth of global output then began to fall, dropping below 3.5 percent in the period 1990–2012, despite extremely high growth rates in emerging countries, most notably China.

first, because it assumes that productivity growth in the wealthy countries will continue at a rate of more than 1 percent per year (which assumes significant technological progress, especially in the area of clean energy),

second, perhaps more important, because it assumes that emerging economies will continue to converge with the rich economies, without major political or military impediments, until the process is complete, around 2050, which is very rapid.

To back up a bit: the first crucial fact to bear in mind is that inflation is largely a twentieth-century phenomenon. Before that, up to World War I, inflation was zero or close to it.

The net assets these two countries owned in the rest of the world increased steadily during the eighteenth and nineteenth centuries and attained an extremely high level on the eve of World War I, before literally collapsing in the period 1914–1945 and stabilizing at a relatively low level since then, as Figures 3.1 and 3.2 show.

Foreign possessions first became important in the period 1750–1800, as we know, for instance, from Sir Thomas’s investments in the West Indies in Jane Austen’s Mansfield Park.