Capital in the Twenty-First Century

by Thomas Piketty

In a more complex economy, where there are many more diverse uses of capital—one can invest 100 euros not only in farming but also in housing or in an industrial or service firm—the marginal productivity of capital may be difficult to determine. In theory, this is the function of the system of financial intermediation (banks and financial markets): to find the best possible uses for capital, such that each available unit of capital is invested where it is most productive (at the opposite ends of the earth, if need be) and pays the highest possible return to the investor.

I will also analyze, from both a historical and a theoretical point of view, the evolution of the relative importance of inherited wealth versus income from labor over the very long run. Many people believe that modern growth naturally favors labor over inheritance and competence over birth. What is the source of this widespread belief, and how sure can we be that it is correct?

I begin by noting that in all societies, income inequality can be decomposed into three terms: inequality in income from labor; inequality in the ownership of capital and the income to which it gives rise; and the interaction between these two terms.

day. In substance, Vautrin explains to Rastignac that it is illusory to think that social success can be achieved through study, talent, and effort. He paints a detailed portrait of the various possible careers that await his young friend if he pursues studies in law or medicine, fields in which professional competence counts more than inherited wealth.

This is too much for Rastignac: although he is quite amenable to Vautrin’s arguments concerning the merits of inheritance over study, he is not prepared to commit murder.

The detailed income figures Vautrin gives are unimportant (although quite realistic): the key fact is that in nineteenth-century France and, for that matter, into the early twentieth century, work and study alone were not enough to achieve the same level of comfort afforded by inherited wealth and the income derived from it.