Capital in the Twenty-First Century

by Thomas Piketty

Domestic capital can in turn be broken down into three categories: farmland, housing (including the value of the land on which buildings stand), and other domestic capital, which covers the capital of firms and government organizations (including buildings used for business and the associated land, infrastructure, machinery, computers, patents, etc.).

The nature of capital has changed: it once was mainly land but has become primarily housing plus industrial and financial assets. Yet it has lost none of its importance.

What about foreign capital? In Britain and France, it evolved in a very distinctive way, shaped by the turbulent history of these two leading colonial powers over the past three centuries.

This may seem shocking. But it is essential to realize that the goal of accumulating assets abroad by way of commercial surpluses and colonial appropriations was precisely to be in a position later to run trade deficits. There would be no interest in running trade surpluses forever. 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.

Between 1950 and 2010, the net foreign asset holdings of France and Britain varied from slightly positive to slightly negative while remaining quite close to zero, at least when compared with the levels observed previously.

Public capital is the difference between the assets and liabilities of the state (including all public agencies), and private capital is of course the difference between the assets and liabilities of private individuals.

Governments can own shares in firms, in which they can have a majority or minority stake. These firms may be located within the nation’s borders or abroad.

In practice, the boundary between financial and nonfinancial assets need not be fixed.

Since the public debt of both countries amounts to about one year’s national income, net public wealth (or capital) is close to zero.

Although no country has sustained debt levels as high as Britain’s for a longer period of time, Britain never defaulted on its debt. Indeed, the latter fact explains the former: if a country does not default in one way or another, either directly by simply repudiating its debt or indirectly through high inflation, it can take a very long time to pay off such a large public debt.

In order to finance its war with the American revolutionaries as well as its many wars with France in the revolutionary and Napoleonic eras, the British monarchy chose to borrow without limit. The public debt consequently rose to 100 percent of national income in the early 1770s and to nearly 200 percent in the 1810s—10 times France’s debt in the same period. It would take a century of budget surpluses to gradually reduce Britain’s debt to under 30 percent of national income in the 1910s

Hence it is no surprise that wealth is ubiquitous in Jane Austen’s novels: traditional landlords were joined by unprecedented numbers of government bondholders. (These were largely the same people, if literary sources count as reliable historical sources.) The result was an exceptionally high level of overall private wealth.

From the standpoint of people with the means to lend to the government, it is obviously far more advantageous to lend to the state and receive interest on the loan for decades than to pay taxes without compensation.

Concretely, imagine a government that runs deficits on the order of 5 percent of GDP every year for twenty years (to pay, say, the wages of a large number of soldiers from 1795 to 1815) without having to increase taxes by an equivalent amount. After twenty years, an additional public debt of 100 percent of GDP will have been accumulated. Suppose that the government does not seek to repay the principal and simply pays the annual interest due on the debt. If the interest rate is 5 percent, it will have to pay 5 percent of GDP every year to the owners of this additional public debt, and must continue to do so until the end of time.

Similarly, when John Maynard Keynes wrote in 1936 about “the euthanasia of the rentier,” he was also deeply impressed by what he observed around him: the pre–World War I world of the rentier was collapsing, and there was in fact no other politically acceptable way out of the economic and budgetary crisis of the day. In particular, Keynes clearly felt that inflation, which the British were still reluctant to accept because of strong conservative attachment to the pre-1914 gold standard, would be the simplest though not necessarily the most just way to reduce the burden of public debt and the influence of accumulated wealth.

The case of France is emblematic. To understand it, we can look back in time. Not only in France but in countries around the world, faith in private capitalism was greatly shaken by the economic crisis of the 1930s and the cataclysms that followed.

Another key difference between the history of capital in America and Europe is that foreign capital never had more than a relatively limited importance in the United States. This is because the United States, the first colonized territory to have achieved independence, never became a colonial power itself.

Throughout the nineteenth century, the United States’ net foreign capital position was slightly negative: what US citizens owned in the rest of the world was less than what foreigners, mainly British, owned in the United States. The difference was quite small, however, at most 10–20 percent of the US national income, and generally less than 10 percent between 1770 and 1920.

human capital is the leading form of capital in the enchanted world of the twenty-first century. In reality, this conclusion is perfectly obvious and would also have been true in the eighteenth century: whenever more than half of national income goes to labor and one chooses to capitalize the flow of labor income at the same or nearly the same rate as the flow of income to capital, then by definition the value of human capital is greater than the value of all other forms of capital.

Attributing a monetary value to the stock of human capital makes sense only in societies where it is actually possible to own other individuals fully and entirely—societies that at first sight have definitively ceased to exist.

a country that saves a lot and grows slowly will over the long run accumulate an enormous stock of capital (relative to its income), which can in turn have a significant effect on the social structure and distribution of wealth.

Let me put it another way: in a quasi-stagnant society, wealth accumulated in the past will inevitably acquire disproportionate importance. The return to a structurally high capital / income ratio in the twenty-first century, close to the levels observed in the eighteenth and nineteenth centuries, can therefore be explained by the return to a slow-growth regime. Decreased growth—especially demographic growth—is thus responsible for capital’s comeback.

In one respect, this is good news: capital is potentially useful to everyone, and provided that things are properly organized, everyone can benefit from it. In another respect, however, what this means is that the owners of capital—for a given distribution of wealth—potentially control a larger share of total economic resources. In any event, the economic, social, and political repercussions of such a change are considerable.

if the growth rate increases to 3 percent, then β = s/g will fall to just four years of national income. If the savings rate simultaneously decreases slightly to s = 9 percent, then the long-run capital / income ratio will decline to 3. These effects are all the more significant because the growth rate that figures in the law β = s/g is the overall rate of growth of national income, that is, the sum of the per capita growth rate and the population growth rate.3 In other words, for a savings rate on the order of 10–12 percent and a growth rate of national income per capita on the order of 1.5–2 percent a year, it follows immediately that a country that has near-zero demographic growth and therefore a total growth rate close to 1.5–2 percent, as in Europe, can expect to accumulate a capital stock worth six to eight years of national income, whereas a country with demographic growth on the order of 1 percent a year and therefore a total growth rate of 2.5–3 percent, as in the United States, will accumulate a capital stock worth only three to four years of national income.

The first principle to bear in mind is, therefore, that the accumulation of wealth takes time: it will take several decades for the law β = s/g to become true. Now we can understand why it took so much time for the shocks of 1914–1945 to fade away, and why it is so important to take a very long historical view when studying these questions. At the individual level, fortunes are sometimes amassed very quickly, but at the country level, the movement of the capital / income ratio described by the law β = s/g is a long-run phenomenon.

Hence there is a crucial difference between this law and the law α = r × β, which I called the first fundamental law of capitalism in Chapter 1. According to that law, the share of capital income in national income, α, is equal to the average rate of return on capital, r, times the capital / income ratio, β.

By contrast, the law β = s/g is the result of a dynamic process: it represents a state of equilibrium toward which an economy will tend if the savings rate is s and the growth rate g, but that equilibrium state is never perfectly realized in practice.

Second, the law β = s/g is valid only if one focuses on those forms of capital that human beings can accumulate.

Finally, the law β = s/g is valid only if asset prices evolve on average in the same way as consumer prices. If the price of real estate or stocks rises faster than other prices, then the ratio β between the market value of national capital and the annual flow of national income can again be quite high without the addition of any new savings.

In the short run, variations (capital gains or losses) of relative asset prices (i.e., of asset prices relative to consumer prices) are often quite a bit larger than volume effects (i.e., effects linked to new savings).

This point bears emphasizing: the law β = s/g is totally independent of the reasons why the residents of a particular country—or their government—accumulate wealth. In practice, people accumulate capital for all sorts of reasons: for instance, to increase future consumption (or to avoid a decrease in consumption after retirement), or to amass or preserve wealth for the next generation, or again to acquire the power, security, or prestige that often come with wealth.

The point I want to stress is that the law β = s/g applies in all cases, regardless of the exact reasons for a country’s savings rate. This is due to the simple fact that β = s/g is the only stable capital / income ratio in a country that saves a fraction s of its income, which grows at a rate g.

In concrete terms: if a country is saving 12 percent of its income every year, and if its initial capital stock is equal to six years of income, then the capital stock will grow at 2 percent a year,4 thus at exactly the same rate as national income, so that the capital / income ratio will remain stable.

if the capital stock is less than six years of income, then a savings rate of 12 percent will cause the capital stock to grow at a rate greater than 2 percent a year and therefore faster than income, so that the capital / income ratio will increase until it attains its equilibrium level.

To sum up: the law β = s/g does not explain the short-term shocks to which the capital / income ratio is subject, any more than it explains the existence of world wars or the crisis of 1929—events that can be taken as examples of extreme shocks—but it does allow us to understand the potential equilibrium level toward which the capital / income ratio tends in the long run, when the effects of shocks and crises have dissipated.

It is always very difficult to set a price on capital, in part because it is objectively complex to foresee the future demand for the goods and services generated by a firm or by real estate and therefore to predict the future flows of profit, dividends, royalties, rents, and so on that the assets in question will yield, and in part because the present value of a building or corporation depends not only on these fundamental factors but also on the price at which one can hope to sell these assets if the need arises (that is, on the anticipated capital gain or loss).

as long as one can hope to sell an asset for more than one paid for it, it may be individually rational to pay a good deal more than the fundamental value of that asset (especially since the fundamental value is itself uncertain), thus giving in to the general enthusiasm for that type of asset, even though it may be excessive. That is why speculative bubbles in real estate and stocks have existed as long as capital itself; they are consubstantial with its history.

During the 1980s, the value of private wealth shot up in Japan from slightly more than four years of national income at the beginning of the decade to nearly seven at the end.

At the beginning of the 1970s, the total value of private wealth (net of debt) stood between two and three and a half years of national income in all the rich countries, on all continents.6 Forty years later, in 2010, private wealth represented between four and seven years of national income in all the countries under study.7 The general evolution is clear: bubbles aside, what we are witnessing is a strong comeback of private capital in the rich countries since 1970, or, to put it another way, the emergence of a new patrimonial capitalism.

This structural evolution is explained by three sets of factors, which complement and reinforce one another to give the phenomenon a very significant amplitude.

The most important factor in the long run is slower growth, especially demographic growth, which, together with a high rate of saving, automatically gives rise to a structural increase in the long-run capital / income ratio, owing to the law β = s/g. This mechanism is the dominant force in the very long run but should not be allowed to obscure the two other factors that have substantially reinforced its effects over the last few decades: first, the gradual privatization and transfer of public wealth into private hands in the 1970s and 1980s, and second, a long-term catch-up phenomenon affecting real estate and stock market prices, wh...

the rate of growth of per capita national income (or the virtually identical growth rate of per capita domestic product) has been quite similar in all the developed countries over the last few decades. If comparisons are made over periods of a few years, the differences can be significant, and these often spur national pride or jealousy.

Given the imperfections of the available statistical measures (especially price indices), it is by no means certain that such small differences are statistically significant.

As noted, there are many reasons why one might choose to save more or less, and it comes as no surprise that many factors (linked to, among other things, culture, perceptions of the future, and distinctive national histories) come into play, just as they do in regard to decisions concerning childbearing and immigration, which ultimately help to determine the demographic growth rate.

If one now combines variations in growth rates with variations in savings rate, it is easy to explain why different countries accumulate very different quantities of capital, and why the capital / income ratio has risen sharply since 1970. One particularly clear case is that of Japan: with a savings rate close to 15 percent a year and a growth rate barely above 2 percent, it is hardly surprising that Japan has over the long run accumulated a capital stock worth six to seven years of national income.

In other words, movements in real estate and stock market prices always dominate in the short and even medium run but tend to balance out over the long run, where volume effects appear generally to be decisive.

it is clear that the dominant phenomenon was the formation of a bubble in real estate and stocks, which then collapsed. But if one seeks to understand the evolution observed over the entire period 1970–2010, it is clear that volume effects outweighed price effects: the fact that private wealth in Japan rose from three years of national income in 1970 to six in 2010 is predicted almost perfectly by the flow of savings.

it is true that stock prices tend to rise more quickly than consumption prices over the long run, but the reason for this is essentially that retained earnings allow firms to increase their size and capital (so that we are looking at a volume effect rather than a price effect). If retained earnings are included in private savings, however, the price effect largely disappears.

To sum up: the very considerable growth of private wealth in Russia and Eastern Europe between the late 1980s and the present, which led in some cases to the spectacularly rapid enrichment of certain individuals (I am thinking mainly of the Russian “oligarchs”), obviously had nothing to do with saving or the dynamic law β = s/g. It was purely and simply the result of a transfer of ownership of capital from the government to private individuals. The privatization of national wealth in the developed countries since 1970 can be regarded as a very attenuated form of this extreme case.

it is important to stress that the price of capital, leaving aside the perennial short- and medium-term bubbles and possible long-term structural divergences, is always in part a social and political construct: it reflects each society’s notion of property and depends on the many policies and institutions that regulate relations among different social groups, and especially between those who own capital and those who do not.