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National income is also called “net national product” (as opposed to “gross national product” [GNP], which includes the depreciation of capital). I will use the expression “national income,” which is simpler and more intuitive. Net income from abroad is defined as the difference between income received from abroad and income paid out to foreigners. These opposite flows consist primarily of income from capital but also include income from labor and unilateral transfers (such as remittances by immigrant workers to their home countries). See the online appendix for details.
World income is naturally defined as the sum of national income in different countries, and world output as the sum of domestic output in different countries.
I prefer “rate of return on capital” to “rate of profit” in part because profit is only one of the legal forms that income from capital may take and in part because the expression “rate of profit” has often been used ambiguously, sometimes referring to the rate of return and other times (mistakenly) to the share of profits in income or output (that is, to denote what I am calling α rather than r, which is quite different). Sometimes the expression “marginal rate” is used to denote the share of profits α.
Interest is a very special form of the income from capital, much less representative than profits, rents, and dividends (which account for much larger sums than interest, given the typical composition of capital). The “rate of interest” (which, moreover, varies widely depending on the identity of the borrower) is therefore not representative of the average rate of return on capital and is often much lower. This idea will prove useful when it comes to analyzing the public debt.
Value added measures the firm’s contribution to the domestic product. By definition, value added also measures the sum available to the firm to pay the labor and capital used in production. I refer here to value added net of capital depreciation (that is, after deducting the cost of wear and tear on capital and infrastructure) and profits net of depreciation.
A global convergence process in which emerging countries are catching up with developed countries seems well under way today, even though substantial inequalities between rich and poor countries remain. There is, moreover, no evidence that this catch-up process is primarily a result of investment by the rich countries in the poor. Indeed, the contrary is true: past experience shows that the promise of a good outcome is greater when poor countries are able to invest in themselves.
growth always includes a purely demographic component and a purely economic component, and only the latter allows for an improvement in the standard of living.
In 2013–2014, for example, global economic growth will probably exceed 3 percent, thanks to very rapid progress in the emerging countries. But global population is still growing at an annual rate close to 1 percent, so that global output per capita is actually growing at a rate barely above 2 percent (as is global income per capita).
growth on the order of 1 percent a year in both population and per capita output, if continued over a very long period of time, as was the case after 1700, is extremely rapid, especially when compared with the virtually zero growth rate that we observe in the centuries prior to the Industrial Revolution.
The reason is quite simple: higher growth rates would imply, implausibly, that the world’s population at the beginning of the Common Era was minuscule, or else that the standard of living was very substantially below commonly accepted levels of subsistence. For the same reason, growth in the centuries to come is likely to return to very low levels, at least insofar as the demographic component is concerned.
The Law of Cumulative Growth In order to understand this argument better, it may be helpful to pause a moment to consider what might be called “the law of cumulative growth,” which holds that a low annual growth rate over a very long period of time gives rise to considerable progress.
Growth might therefore seem like a fairly abstract notion, a purely mathematical and statistical construct. But if we expand the time frame to that of a generation, that is, about thirty years, which is the most relevant time scale for evaluating change in the society we live in, the same growth rate results in an increase of about a third, which represents a transformation of quite substantial magnitude.
The law of cumulative growth is essentially identical to the law of cumulative returns, which says that an annual rate of return of a few percent, compounded over several decades, automatically results in a very large increase of the initial capital, provided that the return is constantly reinvested, or at a minimum that only a small portion of it is consumed by the owner of the capital (small in comparison with the growth rate of the society in question).
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.
Egypt had a population of slightly more than 10 million at the turn of the twentieth century but now numbers more than 80 million. Nigeria and Pakistan each had scarcely more than 20 million people, but today each has more than 160 million.
it is not the purpose of this book to make demographic predictions but rather to acknowledge these various possibilities and analyze their implications for the evolution of the wealth distribution.
In particular, inherited wealth will make a comeback—a long-term phenomenon whose effects are already being felt in Europe and that could extend to other parts of the world as well. That is why it is important for present purposes to become familiar with the history of demographic and economic growth.
When growth is zero or very low, the various economic and social functions as well as types of professional activity, are reproduced virtually without change from generation to generation.
One sometimes hears the same thought expressed today in the idea that the new information economy will allow the most talented individuals to increase their productivity many times over. The plain fact is that this argument is often used to justify extreme inequalities and to defend the privileges of the winners without much consideration for the losers, much less for the facts, and without any real effort to verify whether this very convenient principle can actually explain the changes we observe.
Economic development begins with the diversification of ways of life and types of goods and services produced and consumed. It is thus a multidimensional process whose very nature makes it impossible to sum up properly with a single monetary index.
It was not until the twentieth century that economic growth became a tangible, unmistakable reality for everyone. Around the turn of the twentieth century, average per capita income in Europe stood at just under 400 euros per month, compared with 2,500 euros in 2010.
Foodstuffs is a sector in which productivity has increased continuously and crucially over the very long run (thereby allowing a greatly increased population to be fed by ever fewer hands, liberating a growing portion of the workforce for other tasks), even though the increase in productivity has been less rapid in the agricultural sector than in the industrial sector, so that food prices have evolved at roughly the same rate as the average of all prices. Finally, productivity growth in the service sector has generally been low (or even zero in some cases, which explains why this sector has
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When family budgets and lifestyles change so radically and purchasing power varies so much from one good to another, it makes little sense to take averages, because the result depends heavily on the weights and measures of quality one chooses, and these are fairly uncertain, especially when one is attempting comparisons across several centuries.
Quite the contrary: the material conditions of life have clearly improved dramatically since the Industrial Revolution, allowing people around the world to eat better, dress better, travel, learn, obtain medical care, and so on. It remains interesting to measure growth rates over shorter periods such as a generation or two.
the diversity of services is so extreme that the very notion of a service sector makes little sense. The decomposition of the economy into three sectors—primary, secondary, and tertiary—was an idea of the mid-twentieth century in societies where each sector included similar, or at any rate comparable, fractions of economic activity and the workforce
In order to find our way through this vast aggregate of activities, whose growth accounts for much of the improvement in living conditions since the nineteenth century, it will be useful to distinguish several subsectors.
Instead of living in societies where the life expectancy was barely forty years and nearly everyone was illiterate, we now live in societies where it is common to reach the age of eighty and everyone has at least minimal access to culture.
In national accounts, the value of public services available to the public for free is always estimated on the basis of the production costs assumed by the government, that is, ultimately, by taxpayers.
The method used to compute national accounts has the virtue of correcting this bias. Still, it is not perfect. In particular, there is no objective measure of the quality of services rendered (although various correctives for this are under consideration).
Some economists, such as Robert Gordon, believe that the rate of growth of per capita output is destined to slow in the most advanced countries, starting with the United States, and may sink below 0.5 percent per year between 2050 and 2100.22
A society in which growth is 0.1–0.2 percent per year reproduces itself with little or no change from one generation to the next: the occupational structure is the same, as is the property structure. A society that grows at 1 percent per year, as the most advanced societies have done since the turn of the nineteenth century, is a society that undergoes deep and permanent change.
Growth can create new forms of inequality: for example, fortunes can be amassed very quickly in new sectors of economic activity. At the same time, however, growth makes inequalities of wealth inherited from the past less apparent, so that inherited wealth becomes less decisive.
Economic growth is quite simply incapable of satisfying this democratic and meritocratic hope, which must create specific institutions for the purpose and not rely solely on market forces or technological progress.
People still do not understand what evil spirit condemned them to such a low rate of growth beginning in the late 1970s. Even today, many people believe that the last thirty (soon to be thirty-five or forty) “pitiful years” will soon come to an end, like a bad dream, and things will once again be as they were before.
What will happen after 2012? In Figure 2.4 I have indicated a “median” growth prediction. In fact, this is a rather optimistic forecast, since I have assumed that the richest countries (Western Europe, North America, and Japan) will grow at a rate of 1.2 percent from 2012 to 2100 (markedly higher than many other economists predict), while poor and emerging countries will continue the convergence process without stumbling, attaining growth of 5 percent per year from 2012 to 2030 and 4 percent from 2030 to 2050.
One particularly emblematic case was that of the French Revolution. Late in 1789, the revolutionary government issued its famous assignats, which became a true circulating currency and medium of exchange by 1790 or 1791. It was one of the first historical examples of paper money. This gave rise to high inflation (measured in assignats) until 1794 or 1795. The important point, however, is that the return to metal coinage, after creation of the franc germinal, took place at the same parity as the currency of the Ancien Régime. The law of 18 germinal, Year III (April 7, 1795), did away with the
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In Great Britain, the average income was on the order of 30 pounds a year in the early 1800s, when Jane Austen wrote her novels.30 The same average income could have been observed in 1720 or 1770. Hence these were very stable reference points, with which Austen had grown up. She knew that to live comfortably and elegantly, secure proper transportation and clothing, eat well, and find amusement and a necessary minimum of domestic servants, one needed—by her lights—at least twenty to thirty times that much. The characters in her novels consider themselves free from need only if they dispose of
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Attempts to reintroduce the gold standard in the 1920s did not survive the crisis of the 1930s: Britain abandoned the gold standard in 1931, the United States in 1933, France in 1936. The post–World War II gold standard would prove to be barely more robust: established in 1946, it ended in 1971 when the dollar ceased to be convertible into gold.
Between 1913 and 1950, inflation in France exceeded 13 percent per year (so that prices rose by a factor of 100), and inflation in Germany was 17 percent per year (so that prices rose by a factor of more than 300). In Britain and the United States, which suffered less damage and less political destabilization from the two wars, the rate of inflation was significantly lower: barely 3 percent per year in the period 1913–1950.
It is also interesting to note that Germany and France, the two countries that resorted most to inflation in the twentieth century, and more specifically between 1913 and 1950, today seem to be the most hesitant when it comes to using inflationary policy. What is more, they built a monetary zone, the Eurozone, that is based almost entirely on the principle of combating inflation.
Specific references to wealth and income were omnipresent in the literature of all countries before 1914; these references gradually dropped out of sight between 1914 and 1945 and never truly reemerged. This is true not only of European and American novels but also of the literature of other continents. The novels of Naguib Mahfouz, or at any rate those that unfold in Cairo between the two world wars, before prices were distorted by inflation, lavish attention on income and wealth as a way of situating characters and explaining their anxieties.
In 2012, the average per capita GDP in Sub-Saharan Africa was about 2,000 euros, implying an average monthly income of 150 euros per person (cf. Chapter 1, Table 1.1). But the poorest countries (such as Congo-Kinshasa, Niger, Chad, and Ethiopia) stand at one-third to one-half that level, while the richest (such as South Africa) are two to three times better off (and close to North African levels).
In the classic novels of the nineteenth century, wealth is everywhere, and no matter how large or small the capital, or who owns it, it generally takes one of two forms: land or government bonds.
Indeed, the characters in nineteenth-century novels often seem like archetypes of the rentier, a suspect figure in the modern era of democracy and meritocracy. Yet what could be more natural to ask of a capital asset than that it produce a reliable and steady income: that is in fact the goal of a “perfect” capital market as economists define it.
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.
Jane Austen’s heroes were more rural than Balzac’s. Prosperous landowners all, they were nevertheless wiser than Balzac’s characters in appearance only. In Mansfield Park, Fanny’s uncle, Sir Thomas, has to travel out to the West Indies for a year with his eldest son for the purpose of managing his affairs and investments.
Père Goriot’s pasta may have become Steve Jobs’s tablet, and investments in the West Indies in 1800 may have become investments in China or South Africa in 2010, but has the deep structure of capital really changed? Capital is never quiet: it is always risk-oriented and entrepreneurial, at least at its inception, yet it always tends to transform itself into rents as it accumulates in large enough amounts—that is its vocation, its logical destination.
In both Britain and France, the total value of national capital fluctuated between six and seven years of national income throughout the eighteenth and nineteenth centuries, up to 1914. Then, after World War I, the capital / income ratio suddenly plummeted, and it continued to fall during the Depression and World War II, to the point where national capital amounted to only two or three years of national income in the 1950s.
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.
Domestic capital measures the value of the capital stock (buildings, firms, etc.) located within the territory of the country in question. Net foreign capital (or net foreign assets) measures the wealth of the country in question with respect to the rest of the world, that is, the difference between assets owned by residents of the country in the rest of the world and assets owned by the rest of the world in the country in question (including assets in the form of government bonds).
