Capital in the Twenty-First Century

by Thomas Piketty

When depreciation is subtracted from GDP, one obtains the “net domestic product,” which I will refer to more simply as “domestic output” or “domestic production,” which is typically 90 percent of GDP. Then one must add net income received from abroad (or subtract ...

Conversely, a country that owns a large portion of the capital of other countries may enjoy a national income much higher than its domestic product.

It is not an insignificant thing when one country works for another and pays out a substantial share of its output as dividends and rent to foreigners over a long period of time. In many cases, such a system can survive (to a point) only if sustained by relations of political domination, as was the case in the colonial era, when Europe effectively owned much of the rest of the world.

Under what conditions is this type of situation likely to recur in the twenty-first century, possibly in some novel geographic configuration?

In France as in the United States, Germany as well as Great Britain, China as well as Brazil, and Japan as well as Italy, national income is within 1 or 2 percent of domestic product.

In wealthy countries, net income from abroad is generally slightly positive. To a first approximation, the residents of these countries own as much in foreign real estate and financial instruments as foreigners own of theirs.

Inequality in the ownership of capital brings the rich and poor within each country into conflict with one another far more than it pits one country against another. This has not always been the case, however, and it is perfectly legitimate to ask whether our future may not look more like our past, particularly since certain countries—Japan, Germany, the oil-exporting countries, and to a lesser degree China—have in recent years accumulated substantial claims on the rest of the world (though by no means as large as the record claims of the colonial era).

The internet, through which we can see each other’s privilege.

To sum up, a country’s national income may be greater or smaller than its domestic product, depending on whether net income from abroad is positive or negative. National income = domestic output + net income from abroad6

At the global level, income received from abroad and paid abroad must balance, so that income is by definition equal to output: Global income = global output7

Conversely, all production must be distributed as income in one form or another, to either labor or capital: whether as wages, salaries, honoraria, bonuses, and so on (that is, as payments to workers and others who contributed labor to the process of production) or else as profits, dividends, interest, rents, royalties, and so on (that is, as payments to the owners of capital used in the process of production).

To recapitulate: regardless of whether we are looking at the accounts of a company, a nation, or the global economy, the associated output and income can be decomposed as the sum of income to capital and income to labor: National income = capital income + labor income

throughout this book, when I speak of “capital” without further qualification, I always exclude what economists often call (unfortunately, to my mind) “human capital,” which consists of an individual’s labor power, skills, training, and abilities.

capital is defined as the sum total of nonhuman assets that can be owned and exchanged on some market. Capital includes all forms of real property (including residential real estate) as well as financial and professional capital (plants, infrastructure, machinery, patents, and so on) used by firms and government agencies.

There are many reasons for excluding human capital from our definition of capital. The most obvious is that human capital cannot be owned by another person or trade...

One can of course put one’s labor services up for hire under a labor contract of some sort. In all modern legal systems, however, such an arrangement...

In practice, capital can be owned by private individuals (in which case we speak of “private capital”) or by the government or government agencies (in which case we speak of “public capital”). There are also intermediate forms of collective property owned by “moral persons” (that is, entities such as foundations and churches) pursuing specific aims.

Capital is not an immutable concept: it reflects the state of development and prevailing social relations of each society.

To simplify the text, I use the words “capital” and “wealth” interchangeably, as if they were perfectly synonymous. By some definitions, it would be better to reserve the word “capital” to describe forms of wealth accumulated by human beings (buildings, machinery, infrastructure, etc.) and therefore to exclude land and natural resources, with which humans have been endowed without having to accumulate them.

An even greater difficulty is that it is very hard to gauge the value of “virgin” land (as humans found it centuries or millennia ago) apart from improvements due to human intervention, such as drainage, irrigation, fertilization, and so on. The same problem arises in connection with natural resources such as petroleum, gas, rare earth elements, and the like, whose pure value is hard to distinguish from the value added by the investments needed to discover new deposits and prepare them for exploitation. I therefore include all these forms of wealth in capital. Of course, this choice does not eliminate the need to look closely at the origins of wealth, especially the boundary line between accumulation and appropriation.

For instance, gold might be counted as part of wealth but not of capital, because gold is said to be useful only as a store of value.

Capital in all its forms has always played a dual role, as both a store of value and a factor of production. I therefore decided that it was simpler not to impose a rigid distinction between wealth and capital.

I define “national wealth” or “national capital” as the total market value of everything owned by the residents and government of a given country at a given point in time, provided that it can be traded on some market.

If we look only at the assets and liabilities of private individuals, the result is private wealth or private capital. If we consider assets and liabilities held by the government and other governmental entities (such as towns, social insurance agencies, etc.), the result is public wealth or public capital. By definition, national wealth is the sum of these two terms: National wealth = private wealth + public wealth

To be clear, although my concept of capital excludes human capital (which cannot be exchanged on any market in nonslave societies), it is not limited to “physical” capital (land, buildings, infrastructure, and other material goods). I include “immaterial” capital such as patents and other intellectual property, which are counted either as nonfinancial assets (if individuals hold patents directly) or as financial assets (when an individual owns shares of a corporation that holds patents, as is more commonly the case).

Whether we are speaking of a building or a company, a manufacturing firm or a service firm, it is always very difficult to set a price on capital. Yet as I will show, total national wealth, that is, the wealth of a country as a whole and not of any particular type of asset, obeys certain laws and conforms to certain regular patterns. One further point: total national wealth can always be broken down into domestic capital and foreign capital: National wealth = national capital = domestic capital + net foreign capital

One characteristic of the financial globalization that has taken place since the 1980s is that many countries have more or less balanced net asset positions, but those positions are quite large in absolute terms. In other words, many countries have large capital stakes in other countries, but those other countries also have stakes in the country in question, and the two positions are more or less equal, so that net foreign capital is close to zero. Globally, of course, all the net positions must add up to zero, so that total global wealth equals the “domestic” capital of the planet as a whole.

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. This stock comes from the wealth appropriated or accumulated in all prior years combined.

The most natural and useful way to measure the capital stock in a particular country is to divide that stock by the annual flow of income. This gives us the capital / inco...

In the developed countries today, the capital / income ratio generally varies between 5 and 6, and the capital stock consists almost entirely of private capital. In France and Britain, Germany and Italy, the United States and Japan, national income was roughly 30,000–35,000 euros per capita in 2010, whereas total private wealth (net of debt) was typically on the order of 150,000–200,000 euros per capita, or five to six times annual national income.

The fact that national income in the wealthy countries of the world in 2010 was on the order of 30,000 euros per capita per annum (or 2,500 euros per month) obviously does not mean that everyone earns that amount. Like all averages, this average income figure hides enormous disparities. In practice, many people earn much less than 2,500 euros a month, while others earn dozens of times that much.

In other words, if national wealth represents the equivalent of six years of national income, and if the rate of return on capital is 5 percent per year, then capital’s share in national income is 30 percent.

Though tautological, it should nevertheless be regarded as the first fundamental law of capitalism, because it expresses a simple, transparent relationship among the three most important concepts for analyzing the capitalist system: the capital / income ratio, the share of capital in income, and the rate of return on capital.

The concept of the rate of return on capital also plays a central role in many other theories. In any case, the rate of return on capital measures the yield on capital over the course of a year regardless of its legal form (profits, rents, dividends, interest, royalties, capital gains, etc.), expressed as a percentage of the value of capital invested.

In the novels of Jane Austen and Honoré de Balzac, the fact that land (like government bonds) yields roughly 5 percent of the amount of capital invested (or, equivalently, that the value of capital corresponds to roughly twenty years of annual rent) is so taken for granted that it often goes unmentioned.

the second fundamental law of capitalism: the higher the savings rate and the lower the growth rate, the higher the capital / income ratio (β).

Until World War I, estimates of wealth received much more attention than estimates of income and output, and there were in any case more of them, not only in Britain and France but also in Germany, the United States, and other industrial powers. In those days, being an economist meant first and foremost being able to estimate the national capital of one’s country: this was almost a rite of initiation.

national accounts are a social construct in perpetual evolution. They always reflect the preoccupations of the era when they were conceived.

When a country’s national income per capita is said to be 30,000 euros, it is obvious that this number, like all economic and social statistics, should be regarded as an estimate, a construct, and not a mathematical certainty.

Sub-Saharan Africa, with a population of 900 million and an annual output of only 1.8 trillion euros (less than the French GDP of 2 trillion), is economically the poorest region of the world, with a per capita output of only 2,000 euros per year. India is slightly higher, while North Africa does markedly better, and China even better than that: with a per capita output of 8,000 euros per year, China in 2012 is not far below the world average. Japan’s annual per capita output is equal to that of the wealthiest European countries (approximately 30,000 euros), but its population is such a small minority in the greater Asian population that it has little influence on the continental average, which is close to that of China.

we compare the GDP of different countries on the basis of the actual purchasing power of their citizens, who generally spend their income at home rather than abroad.

The reality of inequality between countries is multidimensional, and it is misleading to say that it can all be summed up with a single index leading to an unambiguous classification, especially between countries with fairly similar average incomes.

In the poorer countries, the corrections introduced by purchasing power parity are even larger: in Africa and Asia, prices are roughly half what they are in the rich countries, so that GDP roughly doubles when purchasing power parity is used for comparisons rather than the market exchange rate. This is chiefly a result of the fact that the prices of goods and services that cannot be traded internationally are lower, because these are usually relatively labor intensive and involve relatively unskilled labor (a relatively abundant factor of production in less developed countries), as opposed to skilled labor and capital (which are relatively scarce in less developed countries).

all of the major developed countries (the United States, Japan, Germany, France, and Britain) currently enjoy a level of national income that is slightly greater than their domestic product.

Since some kinds of wealth (such as residential real estate and agricultural capital) are rarely owned by foreign investors, it follows that the foreign-owned share of Africa’s manufacturing capital may exceed 40–50 percent and may be higher still in other sectors. Despite the fact that there are many imperfections in the balance of payments data, foreign ownership is clearly an important reality in Africa today.

If the rich countries are so flush with savings and capital that there is little reason to build new housing or add new machinery (in which case economists say that the “marginal productivity of capital,” that is, the additional output due to adding one new unit of capital “at the margin,” is very low), it can be collectively efficient to invest some part of domestic savings in poorer countries abroad.

According to classical economic theory, this mechanism, based on the free flow of capital and equalization of the marginal productivity of capital at the global level, should lead to convergence of rich and poor countries and an eventual reduction of inequalities through market forces and competition.

This optimistic theory has two major defects, however. First, from a strictly logical point of view, the equalization mechanism does not guarantee global convergence of per capita income. At best it can give rise to convergence of per capita output, provided we assume perfect capital mobility and, even more important, total equality of skill levels and human capital across countries—no small assumption.

Many studies also show that gains from free trade come mainly from the diffusion of knowledge and from the productivity gains made necessary by open borders, not from static gains associated with specialization, which appear to be fairly modest.36 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 diffusion of knowledge is not like manna from heaven: it is often hastened by international openness and trade (autarky does not encourage technological transfer). Above all, knowledge diffusion depends on a country’s ability to mobilize financing as well as institutions that encourage large-scale investment in education and training of the population while guaranteeing a stable legal framework that various economic actors can reliably count on.