Capital in the Twenty-First Century

by Thomas Piketty

The two world wars created such a deep discontinuity in both conceptual and statistical analysis that for a while it seemed impossible to study the issue in a long-run perspective, especially from a European point of view.

First, the return to a historic regime of low growth, and in particular zero or even negative demographic growth, leads logically to the return of capital. This tendency for low-growth societies to reconstitute very large stocks of capital is expressed by the law β = s / g and can be summarized as follows: in stagnant societies, wealth accumulated in the past naturally takes on considerable importance.

As for capital’s share in national and global income, which is given by the law α = r × β, experience suggests that the predictable rise in the capital/income ratio will not necessarily lead to a significant drop in the return on capital. There are many uses for capital over the very long run, and this fact can be captured by noting that the long-run elasticity of substitution of capital for labor is probably greater than one. The most likely outcome is thus that the decrease in the rate of return will be smaller than the increase in the capital/income ratio, so that capital’s share will increase. With a capital/income ratio of seven to eight years and a rate of return on capital of 4–5 percent, capital’s share of global income could amount to 30 or 40 percent, a level close to that observed in the eighteenth and nineteenth centuries, and it might rise even higher.

Progress toward economic and technological rationality need not imply progress toward democratic and meritocratic rationality. The primary reason for this is simple: technology, like the market, has neither limits nor morality. The evolution of technology has certainly increased the need for human skills and competence. But it has also increased the need for buildings, homes, offices, equipment of all kinds, patents, and so on, so that in the end the total value of all these forms of nonhuman capital (real estate, business capital, industrial capital, financial capital) has increased almost as rapidly as total income from labor. If one truly wishes to found a more just and rational social order based on common utility, it is not enough to count on the caprices of technology.

The fact that Europe—and to some extent the entire world—have only just gotten over these shocks has given rise to the impression that patrimonial capitalism—which is flourishing in these early years of the twenty-first century—is something new, whereas it is in large part a repetition of the past and characteristic of a low-growth environment like the nineteenth 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. 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?

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

For Jane Austen’s heroes, the question of work did not arise: all that mattered was the size of one’s fortune, whether acquired through inheritance or marriage. Indeed, the same was true almost everywhere before World War I, which marked the suicide of the patrimonial societies of the past.

During the decades that followed World War II, inherited wealth lost much of its importance, and for the first time in history, perhaps, work and study became the surest routes to the top. Today, even though all sorts of inequalities have reemerged, and many beliefs in social and democratic progress have been shaken, most people still believe that the world has changed radically since Vautrin lectured Rastignac. Who today would advise a young law student to abandon his or her studies and adopt the ex-convict’s strategy for social advancement?

The first regularity we observe when we try to measure income inequality in practice is that inequality with respect to capital is always greater than inequality with respect to labor. The distribution of capital ownership (and of income from capital) is always more concentrated than the distribution of income from labor. Two points need to be clarified at once. First, we find this regularity in all countries in all periods for which data are available, without exception, and the magnitude of the phenomenon is always quite striking.

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).

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...

It is true that inequalities with respect to labor are always much smaller than inequalities with respect to capital. It would be quite wrong, however, to neglect them, first because income from labor generally accounts for two-thirds to three-quarters of national income, and second because there are quite substantial differences between countries in the distribution of income from labor, which suggests that public policies and national differences can have major consequences for these inequalities and for the living conditions of large numbers of people.

And in the most inegalitarian countries, such as the United States in the early 2010s (where, as will emerge later, income from labor is about as unequally distributed as has ever been observed anywhere), the top decile gets 35 percent of the total, whereas the bottom half gets only 25 percent.

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.

To my knowledge, no society has ever existed in which ownership of capital can reasonably be described as “mildly” inegalitarian, by which I mean a distribution in which the poorest half of society would own a significant share (say, one-fifth to one-quarter) of total wealth.13

For this half of the population, the very notions of wealth and capital are relatively abstract. For millions of people, “wealth” amounts to little more than a few weeks’ wages in a checking account or low-interest savings account, a car, and a few pieces of furniture. The inescapable reality is this: wealth is so concentrated that a large segment of society is virtually unaware of its existence, so that some people imagine that it belongs to surreal or mysterious entities.

The upper decile of the wealth distribution is itself extremely unequal, even more so than the upper decile of the wage distribution. When the upper decile claims about 60 percent of total wealth, as is the case in most European countries today, the share of the upper centile is generally around 25 percent and that of the next 9 percent of the population is about 35 percent. The members of the first group are therefore on average 25 times as rich as the average member of society, while the members of the second group are barely 4 times richer. Concretely, in the example, the average wealth of the top 10 percent is 1.2 million euros each, with 5 million euros each for the top 1 percent and a little less than 800,000 each for the next 9 percent.18

In the “9 percent” group, at around 1 million euros, real estate accounts for half of total wealth and for some individuals more than three-quarters. In the top centile, by contrast, financial and business assets clearly predominate over real estate.

Housing is the favorite investment of the middle class and moderately well-to-do, but true wealth always consists primarily of financial and business assets.

the middle 40 percent: this “middle class of wealth” owns 35 percent of total national wealth, which means that their average net wealth is fairly close to the average for society as a whole—in

To go back a century in time, to the decade 1900–1910: in all the countries of Europe, the concentration of capital was then much more extreme than it is today. It is important to bear in mind the orders of magnitude indicated in Table 7.2. In this period in France, Britain, and Sweden, as well as in all other countries for which we have data, the richest 10 percent owned virtually all of the nation’s wealth: the share owned by the upper decile reached 90 percent. The wealthiest 1 percent alone owned more than 50 percent of all wealth. The upper centile exceeded 60 percent in some especially inegalitarian countries, such as Britain. On the other hand, the middle 40 percent owned just over 5 percent of national wealth (between 5 and 10 percent depending on the country), which was scarcely more than the poorest 50 percent, who then as now owned less than 5 percent.

Basically, all the middle class managed to get its hands on was a few crumbs: scarcely more than a third of Europe’s wealth and barely a quarter in the United States. This middle group has four times as many members as the top decile yet only one-half to one-third as much wealth. It is tempting to conclude that nothing has really changed: inequalities in the ownership of capital are still extreme

None of this is false, and it is essential to be aware of these things: the historical reduction of inequalities of wealth is less substantial than many people believe.

The rise of a propertied middle class was accompanied by a very sharp decrease in the wealth share of the upper centile, which fell by more than half, going from more than 50 percent in Europe at the turn of the twentieth century to around 20–25 percent at the end of that century and beginning of the next.

That is why I indicate in Table 7.3 that the United States may set a new record around 2030 if inequality of income from labor—and to a lesser extent inequality of ownership of capital—continue to increase as they have done in recent decades. The top decile would them claim about 60 percent of national income, while the bottom half would get barely 15 percent.

The first of these two ways of achieving such high inequality is through a “hyperpatrimonial society” (or “society of rentiers”): a society in which inherited wealth is very important and where the concentration of wealth attains extreme levels (with the upper decile owning typically 90 percent of all wealth, with 50 percent belonging to the upper centile alone).

The second way of achieving such high inequality is relatively new. It was largely created by the United States over the past few decades. Here we see that a very high level of total income inequality can be the result of a “hypermeritocratic society” (or at any rate a society that the people at the top like to describe as hypermeritocratic). One might also call this a “society of superstars” (or perhaps “supermanagers,” a somewhat different characterization). In other words, this is a very inegalitarian society, but one in which the peak of the income hierarchy is dominated by very high incomes from labor rather than by inherited wealth.

The increase in inequality since 1970 has not been the same everywhere, which again suggests that institutional and political factors played a key role.

Second, the significant compression of income inequality over the course of the twentieth century was due entirely to diminished top incomes from capital.

If we ignore income from capital and concentrate on wage inequality, we find that the distribution remained quite stable over the long run.

The wage level has obviously changed a great deal over the past century, and the composition and skills of the workforce have been totally transformed, but the wage hierarchy has remained more or less the same. If top incomes from capital had not decreased, income inequality would not have diminished in the twentieth century.

To sum up: the reduction of inequality in France during the twentieth century is largely explained by the fall of the rentier and the collapse of very high incomes from capital. No generalized structural process of inequality compression (and particularly wage inequality compression) seems to have operated over the long run, contrary to the optimistic predictions of Kuznets’s theory.

In France and elsewhere, the history of inequality has always been chaotic and political, influenced by convulsive social changes and driven not only by economic factors but by countless social, political, military, and cultural phenomena as well. Socioeconomic inequalities—disparities of income and wealth between social groups—are always both causes and effects of other developments in other spheres.

The shares of both the upper decile and upper centile in total income reached their nadir in the aftermath of World War II and seem never to have recovered from the extremely violent shocks of the war years (see Figures 8.1 and 8.2). To a large extent, it was the chaos of war, with its attendant economic and political shocks, that reduced inequality in the twentieth century. There was no gradual, consensual, conflict-free evolution toward greater equality. In the twentieth century it was war, and not harmonious democratic or economic rationality, that erased the past and enabled society to begin anew with a clean slate.

But capital is far more concentrated than labor, so income from capital is substantially overrepresented in the upper decile of the income hierarchy (even more so in the upper centile). Hence there is nothing surprising about the fact that the shocks endured by capital, especially private capital, in the period 1914–1945 diminished the share of the upper decile (and upper centile), ultimately leading to a significant compression of income inequality.

The top centile occupies a very prominent place in any society. It structures the economic and political landscape. This is much less true of the top thousandth.

To a large extent, we have gone from a society of rentiers to a society of managers, that is, from a society in which the top centile is dominated by rentiers (people who own enough capital to live on the annual income from their wealth) to a society in which the top of the income hierarchy, including to upper centile, consists mainly of highly paid individuals who live on income from labor.

To sum up: 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.

The collapse of the rentier between 1914 and 1945 is the obvious part of the story. Exactly why rentiers have not come back is the more complex and in some ways more important and interesting part.

Obviously, the types of jobs and levels of skill required at this level have changed considerably over time: in the interwar years, high school teachers and even late-career grade school teachers belonged to “the 9 percent,” whereas today one has to be a college professor or researcher or, better yet, a senior government official to make the grade.8 In the past, a foreman or skilled technician came close to making it into this group. Today one has to be at least a middle manager and increasingly a top manager with a degree from a prestigious university or business school.

The same is true lower down the pay scale: once upon a time, the least well paid workers (typically paid about half the average wage, or 1,000 euros a month if the average is 2,000) were farm laborers and domestic servants. At a later point, these were replaced by less skilled industrial workers, many of whom were women in the textile and food processing industries. This group still exists today, but the lowest paid workers are now in the service sector, employed as waiters and waitresses in restaurants or as shop clerks (again, many of these are women).

Thus the labor market was totally transformed over the past century, but the structure of wage inequality across the market barely changed over the long run, with “the 9 percent” just below the top and the 50 percent at the bottom still drawing about the same...

sum up: the top decile always encompasses two very different worlds: “the 9 percent,” in which income from labor clearly predominates, and “the 1 percent,” in which income from capital becomes progressively more important (more or less rapidly and massively, depending on the period). The transition

This pattern reflects the fact that large fortunes consist primarily of financial assets (mainly stocks and shares in partnerships).

In other words, “the 1 percent” by itself accounts for roughly three-quarters of the decrease in inequality between 1914 and 1945, while “the 9 percent” explains roughly one-quarter.

By contrast, “the 9 percent” included many managers, who were the great beneficiaries of the Depression, at least when compared with other social groups. They suffered much less from unemployment than the employees who worked under them. In particular, they never experienced the extremely high rates of partial or total unemployment endured by industrial workers. They were also much less affected by the decline in company profits than those who stood above them in the income hierarchy. Within “the 9 percent,” midlevel civil servants and teachers fared particularly well. They had only recently been the beneficiaries of civil service raises granted in the period 1927–1931.

Meanwhile, private sector wages decreased by more than 50 percent between 1929 and 1935. The severe deflation France suffered in this period (prices fell by 25 percent between 1929 and 1935, as both trade and production collapsed) played a key role in the process: individuals lucky enough to hold on to their jobs and their nominal compensation—typically civil servants—enjoyed increased purchasing power in the midst of the Depression as falling prices raised their real wages.

Wages at the bottom of the wage scale generally rise, however, and are somewhat more generously protected from inflation than those at the top. This can induce significant changes in the wage distribution if inflation is high. Why are low and medium wages better indexed to inflation than higher wages? Because workers share certain perceptions of social justice and norms of fairness, an effort is made to prevent the purchasing power of the least well-off from dropping too sharply, while their better-off comrades are asked to postpone their demands until the war is over.

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.