Capital in the Twenty-First Century

by Thomas Piketty

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.

Indeed, the distribution of wealth is too important an issue to be left to economists, sociologists, historians, and philosophers.

Given this dialogue of the deaf, in which each camp justifies its own intellectual laziness by pointing to the laziness of the other, there is a role for research that is at least systematic and methodical if not fully scientific.

It is quite difficult to say where this trajectory would have led without the major economic and political shocks initiated by the war. With the aid of historical analysis and a little perspective, we can now see those shocks as the only forces since the Industrial Revolution powerful enough to reduce inequality.

What was the good of industrial development, what was the good of all the technological innovations, toil, and population movements if, after half a century of industrial growth, the condition of the masses was still just as miserable as before, and all lawmakers could do was prohibit factory labor by children under the age of eight?

In the last third of the nineteenth century, wages finally began to increase: the improvement in the purchasing power of workers spread everywhere, and this changed the situation radically, even if extreme inequalities persisted and in some respects continued to increase until World War I.

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.

Turning from the nineteenth-century analyses of Ricardo and Marx to the twentieth-century analyses of Simon Kuznets, we might say that economists’ no doubt overly developed taste for apocalyptic predictions gave way to a similarly excessive fondness for fairy tales, or at any rate happy endings.

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

The data Kuznets had presented in his 1953 book suddenly became a powerful political weapon.15 He was well aware of the highly speculative nature of his theorizing.16 Nevertheless, by presenting such an optimistic theory in the context of a “presidential address” to the main professional association of US economists, an audience that was inclined to believe and disseminate the good news delivered by their prestigious leader, he knew that he would wield considerable influence: thus the “Kuznets curve” was born.

To avoid any misunderstanding, let me say that Kuznets’s work in establishing the first US national accounts data and the first historical series of inequality measures was of the utmost importance, and it is clear from reading his books (as opposed to his papers) that he shared the true scientific ethic.

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.

Their answers were not always satisfactory, but at least they were asking the right questions. There is no fundamental reason why we should believe that growth is automatically balanced. It is long since past the time when we should have put the question of inequality back at the center of economic analysis and begun asking questions first raised in the nineteenth century.

I have been able to put Kuznets’s findings (which are quite accurate) into a wider perspective and thus radically challenge his optimistic view of the relation between economic development and the distribution of wealth. Oddly, no one has ever systematically pursued Kuznets’s work, no doubt in part because the historical and statistical study of tax records falls into a sort of academic no-man’s-land, too historical for economists and too economistic for historians.

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

The history of the distribution of wealth has always been deeply political, and it cannot be reduced to purely economic mechanisms. In particular, the reduction of inequality that took place in most developed countries between 1910 and 1950 was above all a consequence of war and of policies adopted to cope with the shocks of war. Similarly, the resurgence of inequality after 1980 is due largely to the political shifts of the past several decades, especially in regard to taxation and finance.

The second conclusion, which is the heart of the book, is that the dynamics of wealth distribution reveal powerful mechanisms pushing alternately toward convergence and divergence. Furthermore, there is no natural, spontaneous process to prevent destabilizing, inegalitarian forces from prevailing permanently.

The governing logic is rather one of saving over the life cycle: people accumulate wealth when young in order to provide for their old age. Progress in medicine together with improved living conditions has therefore, it is argued, totally transformed the very essence of capital.

There is little evidence that labor’s share in national income has increased significantly in a very long time: “nonhuman” capital seems almost as indispensable in the twenty-first century as it was in the eighteenth or nineteenth, and there is no reason why it may not become even more so.

Over a long period of time, the main force in favor of greater equality has been the diffusion of knowledge and skills.

this spectacular increase in inequality largely reflects an unprecedented explosion of very elevated incomes from labor, a veritable separation of the top managers of large firms from the rest of the population.

these top managers by and large have the power to set their own remuneration, in some cases without limit and in many cases without any clear relation to their individual productivity, which in any case is very difficult to estimate in a large organization.

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.

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.

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.

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.

I am interested in contributing, however modestly, to the debate about the best way to organize society and the most appropriate institutions and policies to achieve a just social order. Furthermore, I would like to see justice achieved effectively and efficiently under the rule of law, which should apply equally to all and derive from universally understood statutes subject to democratic debate.

I was only too aware of the fact that I knew nothing at all about the world’s economic problems. My thesis consisted of several relatively abstract mathematical theorems. Yet the profession liked my work. I quickly realized that there had been no significant effort to collect historical data on the dynamics of inequality since Kuznets, yet the profession continued to churn out purely theoretical results without even knowing what facts needed to be explained.

To put it bluntly, the discipline of economics has yet to get over its childish passion for mathematics and for purely theoretical and often highly ideological speculation, at the expense of historical research and collaboration with the other social sciences.

There is one great advantage to being an academic economist in France: here, economists are not highly respected in the academic and intellectual world or by political and financial elites. Hence they must set aside their contempt for other disciplines and their absurd claim to greater scientific legitimacy, despite the fact that they know almost nothing about anything.

Police fired on the strikers with live ammunition. Thirty-four miners were killed.1 As often in such strikes, the conflict primarily concerned wages: the miners had asked for a doubling of their wage from 500 to 1,000 euros a month.

This episode reminds us, if we needed reminding, that the question of what share of output should go to wages and what share to profits—in other words, how should the income from production be divided between labor and capital?—has always been at the heart of distributional conflict.

For a long time, the idea accepted by most economists and uncritically repeated in textbooks was that the relative shares of labor and capital in national income were quite stable over the long run, with the generally accepted figure being two-thirds for labor and one-third for capital.5 Today, with the advantage of greater historical perspective and newly available data, it is clear that the reality was quite a bit more complex.

The most fruitful way to understand these changes is to analyze the evolution of the capital/income ratio (that is, the ratio of the total stock of capital to the annual flow of income) rather than focus exclusively on the capital-labor split (that is, the share of income going to capital and labor, respectively). In the past, scholars have mainly studied the latter, largely owing to the lack of adequate data to do anything else.

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.

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.

None of the Asian countries that have moved closer to the developed countries of the West in recent years has benefited from large foreign investments, whether it be Japan, South Korea, or Taiwan and more recently China. In essence, all of these countries themselves financed the necessary investments in physical capital and, even more, in human capital, which the latest research holds to be the key to long-term growth.35

The country is thus caught in an endless alternation between revolutionary governments (whose success in improving actual living conditions for their citizens is often limited) and governments dedicated to the protection of existing property owners, thereby laying the groundwork for the next revolution or coup.

To sum up, historical experience suggests that the principal mechanism for convergence at the international as well as the domestic level is the diffusion of knowledge. In other words, the poor catch up with the rich to the extent that they achieve the same level of technological know-how, skill, and education, not by becoming the property of the wealthy.

The central thesis of this book is precisely that an apparently small gap between the return on capital and the rate of growth can in the long run have powerful and destabilizing effects on the structure and dynamics of social inequality.

It is important to understand that we are just emerging from this period of open-ended demographic acceleration.

The global demographic growth rate would then have followed a gigantic bell curve in the period 1700–2100, with a spectacular peak of close to 2 percent in the period 1950–1990 (see Figure 2.2).

The Chinese population, which was roughly 50 percent greater than India’s when this radical policy was adopted, is now close to being surpassed by that of its neighbor. According to the United Nations, India will be the most populous country in the world by 2020.

Fertility rates in Germany, Italy, Spain, and Poland fell below 1.5 children per woman in the 2000s, and only an increase in life expectancy coupled with a high level of immigration prevented a rapid decrease of population.

The same is true for UN predictions for Asia and other regions: the generations being born now in Japan and China are roughly one-third smaller than the generations born in the 1990s. The demographic transition is largely complete.

Other things being equal, strong demographic growth tends to play an equalizing role because it decreases the importance of inherited wealth: every generation must in some sense construct itself.

a stagnant or, worse, decreasing population increases the influence of capital accumulated in previous generations. The same is true of economic stagnation.

Capital-dominated societies in the past, with hierarchies largely determined by inherited wealth (a category that includes both traditional rural societies and the countries of nineteenth-century Europe) can arise and subsist only in low-growth regimes.

Not only in Europe but everywhere, improvements in purchasing power and standard of living over the long run depend primarily on a transformation of the structure of consumption: a consumer basket initially filled mainly with foodstuffs gradually gave way to a much more diversified basket of goods, rich in manufactured products and services.

An average worker could afford slightly less than ten kilos of carrots per day at the turn of the twentieth century, while he could afford nearly sixty kilos per day at the turn of the twenty-first century.14 For other foodstuffs, however, such as milk, butter, eggs, and dairy products in general, major technological advances in processing, manufacturing, conservation, and so on led to relative price decreases and thus to increases in purchasing power greater than sixfold.