Capital in the Twenty-First Century

by Thomas Piketty

As a typical case—a “pure” service benefiting from no major technological innovation over the centuries—one often takes the example of barbers: a haircut takes just as long now as it did a century ago, so that the price of a haircut has increased by the same factor as the barber’s pay, which has itself progressed at the same rate as the average wage and average income (to a first approximation).

once 70–80 percent of the workforce in the developed countries found itself working in the service sector, the category ceased to have the same meaning: it provided little information about the nature of the trades and services produced in a given society.

it is important to recall that past growth, as spectacular as it was, almost always occurred at relatively slow annual rates, generally no more than 1–1.5 percent per year. The only historical examples of noticeably more rapid growth—3–4 percent or more—occurred in countries that were experiencing accelerated catch-up with other countries.

between 1990 and 2012, per capita output grew at a rate of 1.6 percent in Western Europe, 1.4 percent in North America, and 0.7 percent in Japan.21 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 continental Europe and especially France, people quite naturally continue to look on the first three postwar decades—a period of strong state intervention in the economy—as a period blessed with rapid growth, and many regard the liberalization of the economy that began around 1980 as the cause of a slowdown.

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. Even today, many people in both countries believe that the conservative revolution was remarkably successful, because their growth rates once again matched continental European and Japanese levels.

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

inflation is largely a twentieth-century phenomenon. Before that, up to World War I, inflation was zero or close to it.

everyone knew that a pound sterling was worth about 5 dollars, 20 marks, and 25 francs. The value of money had not changed for decades, and no one saw any reason to think it would be different in the future.

Writers frequently described the income and wealth of their characters in francs or pounds, not to overwhelm us with numbers but because these quantities established a character’s social status in the mind of the reader. Everyone knew what standard of living these numbers represented.

Until World War I, money had meaning, and novelists did not fail to exploit it, explore it, and turn it into a literary subject.

The process of financial intermediation (whereby individuals deposit money in a bank, which then invests it elsewhere) has become so complex that people are often unaware of who owns what. To be sure, we are in debt. How can we possibly forget it, when the media remind us every day?

By the middle of the twentieth century, capital had largely disappeared. A little more than half a century later, it seems about to return to levels equal to those observed in the eighteenth and nineteenth centuries. Wealth is once again flourishing. Broadly speaking, it was the wars of the twentieth century that wiped away the past to create the illusion that capitalism had been structurally transformed.

In other words, the rest of the world worked to increase consumption by the colonial powers and at the same time became more and more indebted to those same powers.

The advantage of owning things is that one can continue to consume and accumulate without having to work, or at any rate continue to consume and accumulate more than one could produce on one’s own.

private wealth in 2010 accounts for virtually all of national wealth in both countries: more than 99 percent in Britain and roughly 95 percent in France,

Second, it is also quite clear that, all things considered, this very high level of public debt served the interests of the lenders and their descendants quite well, at least when compared with what would have happened if the British monarchy had financed its expenditures by making them pay taxes.

the compensation to those who lent to the government was quite high in the nineteenth century: inflation was virtually zero from 1815 to 1914, and the interest rate on government bonds was generally around 4–5 percent; in particular, it was significantly higher than the growth rate.

in the nineteenth century, lenders were handsomely reimbursed, thereby increasing private wealth; in the twentieth century, debt was drowned by inflation and repaid with money of decreasing value.

What is distinctive about the French trajectory is that public ownership, having thrived from 1950 to 1980, dropped to very low levels after 1980, even as private wealth—both financial and real estate—rose to levels even higher than Britain’s: nearly six years of national income in 2010, or 20 times the value of public wealth. Following a period of state capitalism after 1950, France became the promised land of the new private-ownership capitalism of the twenty-first century.

The memory of the Great Depression and subsequent disasters had faded. The “stagflation” of the 1970s demonstrated the limits of the postwar Keynesian consensus.

The deregulation movement began with the “conservative revolutions” of 1979–1980 in the United States and Britain, as both countries increasingly chafed at being overtaken by others (even though the catch-up was a largely inevitable process, as noted in Chapter 2). Meanwhile, the increasingly obvious failure of statist Soviet and Chinese models in the 1970s led both communist giants to begin a gradual liberalization of their economic systems in the 1980s by introducing new forms of private property in firms.

In this way, France totally transformed its national capital structure at two different points in time without really understanding why.

Next, we must insist on the fact that the fall in the capital/income ratio between 1914 and 1945 is explained to only a limited extent by the physical destruction of capital (buildings, factories, infrastructure, etc.) due to the two world wars.

The United States had become capitalist, but wealth continued to have less influence than in Belle Époque Europe, at least if we consider the vast US territory as a whole. If we limit our gaze to the East Coast, the gap is smaller still.

When it came to progressive taxation, the United States went much farther than Europe, possibly demonstrating that the goal there was more to reduce inequality than to eradicate private property.

Expressed in years of income or output, capital in the United States seems to have achieved virtual stability from the turn of the twentieth century on—so much so that a stable capital/income or capital/output ratio is sometimes treated as a universal law in US textbooks

This is fairly well explained by the lower rate of economic and especially demographic growth in Europe compared with the United States, leading automatically to increased influence of wealth accumulated in the past,

the key fact is that the United States enjoyed a much more stable capital/income ratio than Europe in the twentieth century, perhaps explaining why Americans seem to take a more benign view of capitalism than Europeans.

The number more than quadrupled again between 1800 and the census of 1860, which counted more than 4 million slaves: in other words, the number of slaves had increased tenfold in less than a century. The slave economy was growing rapidly when the Civil War broke out in 1861, leading ultimately to the abolition of slavery in 1865.

In the North we find a relatively egalitarian society in which capital was indeed not worth very much, because land was so abundant that anyone could became a landowner relatively cheaply, and also because recent immigrants had not had time to accumulate much capital. In the South we find a world where inequalities of ownership took the most extreme and violent form possible, since one half of the population owned the other half: here, slave capital largely supplanted and surpassed landed capital.

Again, however, there is no certainty that the largest fortunes are the ones most affected by inflation or that relying on inflation to reduce the influence of wealth accumulated in the past is the best way of attaining that goal.

In all civilizations, capital fulfills two economic functions: first, it provides housing (more precisely, capital produces “housing services,” whose value is measured by the equivalent rental value of dwellings, defined as the increment of well-being due to sleeping and living under a roof rather than outside), and second, it serves as a factor of production in producing other goods and services (in processes of production that may require land, tools, buildings, offices, machinery, infrastructure, patents, etc.).

Both conservative and liberal economists were keen to show that growth benefited everyone and thus were very attached to the idea that the capital-labor split was perfectly stable, even if believing this sometimes meant neglecting data or periods that suggested an increase in the share of income going to capital.

Some people think that capital has lost its importance and that we have magically gone from a civilization based on capital, inheritance, and kinship to one based on human capital and talent.

the two world wars, and the public policies that followed from them, played a central role in reducing inequalities in the twentieth century.

I will also show that inequality began to rise sharply again since the 1970s and 1980s, albeit with significant variation between countries, again suggesting that institutional and political differences played a key role.

the wealthiest French people could attain greatly exceeded that to which one could aspire on the basis of income from labor alone. Under such conditions, why work? And why behave morally at all? Since social inequality was in itself immoral and unjustified, why not be thoroughly immoral and appropriate capital by whatever means are available?

To give a preliminary idea of the order of magnitude in question, the upper 10 percent of the labor income distribution generally receives 25–30 percent of total labor income, whereas the top 10 percent of the capital income distribution always owns more than 50 percent of all wealth (and in some societies as much as 90 percent). Even more strikingly, perhaps, the bottom 50 percent of the wage distribution always receives a significant share of total labor income (generally between one-quarter and one-third, or approximately as much as the top 10 percent), whereas the bottom 50 percent of the wealth distribution owns nothing at all, or almost nothing (always less than 10 percent and generally less than 5 percent of total wealth, or one-tenth as much as the wealthiest 10 percent).

Inequalities with respect to labor usually seem mild, moderate, and almost reasonable (to the extent that inequality can be reasonable—this point should not be overstated). In comparison, inequalities with respect to capital are always extreme.

In other words, and contrary to a widespread belief, intergenerational warfare has not replaced class warfare.

In the United States, the most recent survey by the Federal Reserve, which covers the same years, indicates that the top decile own 72 percent of America’s wealth, while the bottom half claim just 2 percent.

Indeed, the methodological decision to ignore the top end is hardly neutral: the official reports of national and international agencies are supposed to inform public debate about the distribution of income and wealth, but in practice they often give an artificially rosy picture of inequality.

what happened in France is that rentiers (or at any rate nine-tenths of them) fell behind managers; managers did not race ahead of rentiers.

They are interesting (like all economic and social statistics) mainly as indicators of orders of magnitude and should be taken as low estimates of the actual level of inequality.

In every country the history of inequality is political—and chaotic.

In economic booms, the share of profits in national income tends to increase, and pay at the top end of the scale (including incentives and bonuses) often increases more than wages toward the bottom and middle. Conversely, during economic slowdowns or recessions (of which war can be seen as an extreme form), various noneconomic factors, especially political ones, ensure that these movements do not depend solely on the economic cycle.

The bulk of the growth of inequality came from “the 1 percent,” whose share of national income rose from 9 percent in the 1970s to about 20 percent in 2000–2010 (with substantial year-to-year variation due to capital gains)—an increase of 11 points.

Among the members of these upper income groups are US academic economists, many of whom believe that the economy of the United States is working fairly well and, in particular, that it rewards talent and merit accurately and precisely. This is a very comprehensible human reaction.

one consequence of increasing inequality was virtual stagnation of the purchasing power of the lower and middle classes in the United States, which inevitably made it more likely that modest households would take on debt,