Capital in the Twenty-First Century

by Thomas Piketty

In 1982–1983, therefore, the government decided to “turn toward austerity”: wages were frozen, and the policy of annual boosts to the minimum wage was definitively abandoned. The results were soon apparent: the share of profits in national income skyrocketed during the remainder of the 1980s, while wage inequalities once again increased, and income inequalities even more so (see Figures 8.1 and 8.2). The break was as sharp as that of 1968, but in the other direction.

the long-term evolution of the capital/income ratio, which by 2010 had returned to virtually the same level it had achieved in France on the eve of World War I.

The share of wages going to the top centile, which was less than 6 percent in the 1980s and 1990s, began to increase in the late 1990s and reached 7.5–8 percent of the total by the early 2010s.

The most striking fact is that the United States has become noticeably more inegalitarian than France (and Europe as a whole) from the turn of the twentieth century until now, even though the United States was more egalitarian at the beginning of this period.

Clearly, this does not mean that American society in 1900–1910 embodied the mythical ideal of an egalitarian society of pioneers. In fact, American society was already highly inegalitarian, much more than Europe today,

Income inequality increased quite sharply in the United States during the 1920s, however, peaking on the eve of the 1929 crash with more than 50 percent of national income going to the top decile—a level slightly higher than in Europe at the same time, as a result of the substantial shocks to which European capital had already been subjected since 1914.

Inequality reached its lowest ebb in the United States between 1950 and 1980: the top decile of the income hierarchy claimed 30 to 35 percent of US national income, or roughly the same level as in France today.

Since 1980, however, income inequality has exploded in the United States. The upper decile’s share increased from 30–35 percent of national income in the 1970s to 45–50 percent in the 2000s—an

if change continues at the same pace, for example, the upper decile will be raking in 60 percent of national income by 2030.

By comparing various available sources, it is possible to estimate that the upper decile’s share slightly exceeded 50 percent of US national income on the eve of the financial crisis of 2008 and then again in the early 2010s.

This is a crucial point: the facts show quite clearly that the financial crisis as such cannot be counted on to put an end to the structural increase of inequality in the United States.

percent, the next 4 percent, and the bottom 5 percent (see Figure 8.6). 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

of the 15 additional points of national income going to the top decile, around 11 points, or nearly three-quarters of the total, went to “the 1 percent” (those making more than $352,000 a year in 2010), of which roughly half went to “the 0.1 percent” (those making more than $1.5 million a year).

As I have just shown, the financial crisis as such seems not to have had an impact on the structural increase of inequality.

What about the reverse causality? Is it possible that the increase of inequality in the United States helped to trigger the financial crisis of 2008? Given the fact that the share of the upper decile in US national income peaked twice in the past century, once in 1928 (on the eve of the crash of 1929) and again in 2007 (on the eve of the crash of 2008), the question is difficult to avoid. In my view, there is absolutely no doubt that the increase of inequality in the United States contributed to the nation’s financial instability. The reason is simple: 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, especially since unscrupulous banks and financial intermediaries, freed from regulation and eager to earn good yields on the enormous savings injected into the system by the well-to-do, offered credit on increasingly generous terms.32 In support of this thesis, it is important

the considerable transfer of US national income—on the order of 15 points—from the poorest 90 percent to the...

we consider the total growth of the US economy in the thirty years prior to the crisis, that is, from 1977 to 2007, we find that the richest 10 percent appropriated three-quarters of the growth. The richest 1 percent alone absorbed nearly 60 pe...

if the increase in inequality had been accompanied by exceptionally strong growth of the US economy, things would look quite different. Unfortunately, this was not the case: the economy grew rather more slowly than in previous decades, so that the increase in inequality led to virtual stagnation of low and medium incomes.

Note, too, that this internal transfer between social groups (on the order of fifteen points of US national income) is nearly four times larger than the impressive trade deficit the United States ran in the 2000s

it would be altogether too much to claim that the increase of inequality in the United States was the sole or even primary cause of the financial crisis of 2008 or, more generally, of the chronic instability of the global financial system.

The rise of income inequality since the 1970s is largely due to the rise of wage inequality.

In fact, a very substantial and growing inequality of capital income since 1980 accounts for about one-third of the increase in income inequality in the United States—a

the increase in the proportion of high-earning Americans is explained primarily by the skyrocketing pay packages of top managers of large firms in the nonfinancial as well as financial sectors.

we in the developed countries have gone from a society of rentiers to a society of managers

In other words, the democratization of the educational system did not eliminate educational inequality and therefore did not reduce wage inequality.

In particular, the wage gap, which decreased fairly regularly until the 1970s, suddenly begins to widen in the 1980s, at precisely the moment when for the first time the number of college graduates stops growing, or at any rate grows much more slowly than before.

The lessons of French and US experience thus point in the same direction. In the long run, the best way to reduce inequalities with respect to labor as well as to increase the average productivity of the labor force and the overall growth of the economy is surely to invest in education. If the purchasing power of wages increased fivefold in a century, it was because the improved skills of the workforce, coupled with technological progress, increased output per head fivefold. Over the long run, education and technology are the decisive determinants of wage levels.

We are free to imagine an ideal society in which all other tasks are almost totally automated and each individual has as much freedom as possible to pursue the goods of education, culture, and health for the benefit of herself and others.

patient. As noted in Chapter 2, we are to some extent already on this path: a characteristic feature of modern growth is the considerable share of both output and employment devoted to education, culture, and medicine.

also called attention to the importance of changes in the minimum wage for explaining the evolution of wage inequalities in France since 1950, with three clearly identified subperiods: 1950–1968, during which the minimum wage was rarely adjusted and the wage hierarchy expanded; 1968–1983, during which the minimum wage rose very rapidly and wage inequalities decreased sharply; and finally 1983–2012, during which the minimum wage increased relatively slowly and the wage hierarchy tended to expand.4 At the beginning of 2013, the minimum wage in France stood at 9.43 euros per hour.

the minimum wage reached its maximum level nearly half a century ago, in 1969, at $1.60 an hour (or $10.10 in 2013 dollars,

beginning of 2013 it stood at $7.25 an hour, or barely 6 euros, which is a third below the French minimum wage, the opposite of the situation that obtained in the early 1980s

Inequalities at the bottom of the US wage distribution have closely followed the evolution of the minimum wage: the gap between the bottom 10 percent of the wage distribution and the overall average wage widened significantly in the 1980s, then narrowed in the 1990s, and finally increased again in the 2000s. Nevertheless, inequalities at the top of the distribution—for example, the share of total wages going to the top 10 percent—increased steadily throughout this period. Clearly, the minimum wage has an impact at the bottom of the distribution but much less influence at the top, where other forces are at work.

The United States used the minimum wage to increase lower-end wages in the 1950s and 1960s but abandoned this tool in the 1970s. In France, it was exactly the opposite:

The most striking failure of the theory of marginal productivity and the race between education and technology is no doubt its inability to adequately explain the explosion of very high incomes from labor observed in the United States since 1980.

The second difficulty—and no doubt the major problem confronting the marginal productivity theory—is that the explosion of very high salaries occurred in some developed countries but not others. This suggests that institutional differences between countries rather than general and a priori universal causes such as technological change played a central role.

To a first approximation, we can say that the upper centile’s share in the United States increased roughly twice as much as in Britain and Canada and about three times as much as in Australia and New Zealand.14 If the rise of the supermanager were a purely technological phenomenon, it would be difficult to understand why such large differences exist between otherwise quite similar countries.

Simply put, wage inequalities increased rapidly in the United States and Britain because US and British corporations became much more tolerant of extremely generous pay packages after 1970.

I noted earlier that the “conservative revolution” that gripped the United States and Great Britain in the 1970s and 1980s, and that led to, among other things, greater tolerance of very high executive pay, was probably due in part to a feeling that these countries were being overtaken by others (even though the postwar period of high growth in Europe and Japan was in reality an almost mechanical consequence of the shocks of the period 1914–1945).

If executive pay were determined by marginal productivity, one would expect its variance to have little to do with external variances and to depend solely or primarily on nonexternal variances. In fact, we observe just the opposite: it is when sales and profits increase for external reasons that executive pay rises most rapidly.

the decrease in the top marginal income tax rate led to an explosion of very high incomes, which then increased the political influence of the beneficiaries of the change in the tax laws, who had an interest in keeping top tax rates low or even decreasing them further and who could use their windfall to finance political parties, pressure groups, and think tanks.

The top decile of the wealth hierarchy already owned between 80 and 85 percent of all wealth at the beginning of the nineteenth century; by the turn of the twentieth, it owned nearly 90 percent. The top centile alone owned 45–50 percent of the nation’s wealth in 1800–1810; its share surpassed 50 percent in 1850–1860 and reached 60 percent in 1900–1910.

Yet all signs are that inequality of private wealth decreased slightly between 1780 and 1810 owing to redistribution of agricultural land and cancellation of public debt during the Revolution, together with other shocks to aristocratic fortunes. It is possible that the top decile’s share attained or even slightly exceeded 90 percent of total wealth on the eve of 1789 and that the upper centile’s share attained or exceeded 60 percent.

As just shown, the Revolution also had relatively little effect on the distribution of wealth. In 1810–1820, the epoch of Père Goriot, Rastignac, and Mademoiselle Victorine, wealth was probably slightly less unequally distributed than during the Ancien Régime, but the difference was really rather minimal: both before and after the Revolution, France was a patrimonial society characterized by a hyperconcentration of capital, in which inheritance and marriage played a key role and inheriting or marrying a large fortune could procure a level of comfort not obtainable through work or study.

Probate records also enable us to observe that the decrease in the upper decile’s share of national wealth in the twentieth century benefited the middle 40 percent of the population exclusively, while the share of the poorest 50 percent hardly increased at all (it remained less than 5 percent of total wealth).

Père Goriot belonged to this vast group, dying as he did abandoned by his daughters and in abject poverty: his landlady, Madame Vauquer, dunned Rastignac for what the old man owed her, and he also had to pay the cost of burial, which exceeded the value of the deceased’s meager personal effects. Roughly half of all French people in the nineteenth century died in similar circumstances, without any wealth to convey to heirs, or with only negative net wealth, and this proportion barely budged in the twentieth century.

Note, moreover, that we also find the same extremely high concentration of wealth—with 80 to 90 percent of capital owned by the top decile and 50–60 percent by the top centile—in most societies prior to the nineteenth century, and in particular in traditional agrarian societies in the modern era, as well as in the Middle Ages and antiquity.

every case, we find that what the wealthiest 10 percent lost mainly benefited the “patrimonial middle class” (defined as the middle 40 percent of the wealth hierarchy) and did not go to the poorest half of the population, whose share of total wealth has always been minuscule (generally around 5 percent),

it appears that inequality of wealth in the United States around 1800 was not much higher than in Sweden in 1970–1980.

The data nevertheless leave much to be desired, and there is some variation between the northern states (where estimates suggest a level of inequality lower than that of Sweden in 1970–1980) and southern states (where inequality was closer to contemporary European levels).12