Capital in the Twenty-First Century

by Thomas Piketty

Concretely, if gifts prior to death were not included, we would find that average wealth at death in 2000–2010 was just over 20 percent higher than average wealth of the living. But this is simply a reflection of the fact that the dead have already passed on nearly half of their assets. If we include gifts made prior to death, we find that the (corrected) value of μ is actually greater than 220 percent: the corrected wealth of the dead is nearly twice as great as that of the living. We are once again living in a golden age of gift giving, much more so than in the nineteenth century.

But among the minority with some fortune, the aging of wealth is quite impressive. Quite clearly, the spectacular enrichment of octogenarians cannot be explained by income from labor or entrepreneurial activity: it is hard to imagine people in their eighties creating a new startup every morning.

Regardless of whether the wealth a person holds at age fifty or sixty is inherited or earned, the fact remains that beyond a certain threshold, capital tends to reproduce itself and accumulates exponentially.

The fact that a person has good ideas at age thirty or forty does not imply that she will still be having them at seventy or eighty, yet her wealth will continue to increase by itself. Or it can be passed on to the next generation and continue to increase there. Nineteenth-century French economic elites were creative and dynamic entrepreneurs, but the crucial fact remains that their efforts ultimately—and largely unwittingly—reinforced and perpetuated a society of rentiers owing to the logic of r > g.

The war reset all counters to zero, or close to zero, and inevitably resulted in a rejuvenation of wealth. In this respect, it was indeed the two world wars that wiped the slate clean in the twentieth century and created the illusion that capitalism had been overcome.

In 1950–1960, as capital was once again accumulated and the capital / income ratio β rose, fortunes began to age once more, so that the ratio μ between average wealth at death and average wealth of the living also increased. Growing wealth went hand in hand with aging wealth, thereby laying the groundwork for an even stronger comeback of inherited wealth. By 1960, the profile observed in 1947 was already a memory: sexagenarians and septuagenarians were slightly wealthier than people in their fifties (see Table 11.1). The octogenarians’ turn came in the 1980s. In 1990–2000 the graph of wealth against age was increasing even more steeply. By 2010, the average wealth of people in their eighties was more than 30 percent higher than that of people in their fifties.

In the abstract, it is perfectly possible to imagine a world in which all people would choose to convert all of their wealth into annuities and die with nothing. If such behavior were suddenly to become predominant in the twenty-first century, inheritance flows would obviously shrink to virtually zero, regardless of the growth rate or return on capital.

Uncertainties notwithstanding, it is therefore natural to think that these simulations provide a useful guide for the future. Theoretically, one can show that for a large class of savings behaviors, when growth is low compared to the return on capital, the increase in μ nearly exactly balances the decrease in the mortality rate m, so that the product μ × m is virtually independent of life expectancy and is almost entirely determined by the duration of a generation.

In an aging society, heirs come into their inheritances later in life but inherit larger amounts (at least for those who inherit anything), so the overall importance of inherited wealth remains unchanged.

The orders of magnitude to bear in mind are the following. In the nineteenth and early twentieth centuries, when the annual inheritance flow was 20–25 percent of national income, inherited wealth accounted for nearly all private wealth: somewhere between 80 and 90 percent, with an upward trend.

When the inheritance flow is 20–25 percent of national income, as it was in the nineteenth century, then the amounts received each year as bequests and gifts are more than twice as large as the flow of new savings. If we add that a part of the new savings comes from the income of inherited capital (indeed, this was the major part of saving in the nineteenth century), it is clearly inevitable that inherited wealth will largely predominate over saved wealth.

the top centile is a relatively broad elite that plays a central role in shaping the economic, political, and symbolic structure of society.31 In all traditional societies (remember that the aristocracy represented 1–2 percent of the population in 1789), and in fact down to the Belle Époque (despite the hopes kindled by the French Revolution), this group was always dominated by inherited capital.

Nineteenth-century novelists obviously did not use the same categories we do to describe the social structures of their time, but they depicted the same deep structures: those of a society in which a truly comfortable life required the possession of a large fortune. It is striking to see how similar the inegalitarian structures, orders of magnitude, and amounts minutely specified by Balzac and Austen were on both sides of the English Channel, despite the differences in currency, literary style, and plot.

For both writers, the material and psychological threshold was about 30 times the average income of the day. Below that level, a Balzacian or Austenian hero found it difficult to live a dignified life. It was quite possible to cross that threshold if one was among the wealthiest 1 percent (and even better if one approached the top 0.5 or even 0.1 percent) of French or British society in the nineteenth century. This was a well-defined and fairly numerous social group—a minority, to be sure, but a large enough minority to define the structure of society and sustain a novelistic universe.

One of the main conclusions of her study was that in both countries, the “educated elite” placed primary emphasis on their personal merit and moral qualities, which they described using terms such as rigor, patience, work, effort, and so on (but also tolerance, kindness, etc.).49 The heroes and heroines in the novels of Austen and Balzac would never have seen the need to compare their personal qualities to those of their servants (who go unmentioned in their texts).

In Dirty Sexy Money we see decadent young heirs and heiresses with little merit or virtue living shamelessly on family money. But these are the exceptions that prove the rule, and any character who lives on wealth accumulated in the past is normally depicted in a negative light, if not frankly denounced, whereas such a life is perfectly natural in Austen and Balzac and necessary if there are to be any true feelings among the characters.

Need to see reruns. I loved watching Dirty Sexy Money.

In other words, we have moved from a society with a small number of very wealthy rentiers to one with a much larger number of less wealthy rentiers: a society of petits rentiers if you will.

It is the percentage of individuals in each cohort who inherit (as bequest or gift) amounts larger than the least well paid 50 percent of the population earn in a lifetime. This amount changes over time: at present, the average annual wage of the bottom half of the income distribution is around 15,000 euros, or a total of 750,000 euros over the course of a fifty-year career (including retirement).

This belief and this hope play a very crucial role in modern society, for a simple reason: in a democracy, the professed equality of rights of all citizens contrasts sharply with the very real inequality of living conditions, and in order to overcome this contradiction it is vital to make sure that social inequalities derive from rational and universal principles rather than arbitrary contingencies. Inequalities must therefore be just and useful to all, at least in the realm of discourse and as far as possible in reality as well.

It is particularly interesting to note that the word “rent” is often used nowadays in a very different sense: to denote an imperfection in the market (as in “monopoly rent”), or, more generally, to refer to any undue or unjustified income. At times, one almost has the impression that “rent” has become synonymous with “economic ill.” Rent is the enemy of modern rationality and must be eliminated root and branch by striving for ever purer and more perfect competition.

today’s global growth rate includes a large demographic component, and wealthy people from emerging economies are rapidly joining the ranks of the wealthiest people in the world. This gives the impression that the ranks of the wealthiest are changing rapidly, while leading many people in the wealthy countries to feel an oppressive and growing sense that they are falling behind. The resulting anxiety sometimes outweighs all other concerns. Yet in the long run, if and when the poor countries have caught up with the rich ones and global growth slows, the inequality of returns on capital should be of far greater concern. In the long run, unequal wealth within nations is surely more worrisome than unequal wealth between nations.

Economists as a general rule do not have much respect for the wealth rankings published by magazines such as Forbes in the United States and other weeklies in many countries around the world. Indeed, such rankings suffer from important biases and serious methodological problems (to put it mildly).

It is important, moreover, to recognize that we suffer from a serious lack of reliable information about the global dynamics of wealth.

Nevertheless, no matter what years we choose, the structural rate of growth of the largest fortunes seems always to be greater than the average growth of the average fortune (roughly at least twice as great).

Every institution wants its own report, preferably on glossy paper. It is of course ironic to see institutions that make much of their money by managing fortunes filling the role of government statistical agencies by seeking to produce objective information about the global distribution of wealth. It is also important to note that these reports must often rely on heroic hypotheses and approximations, not all of them convincing, in order to arrive at anything like a “global” view of wealth. In any case, they rarely cover anything more than the past few years, a decade at most, and are unfortunately useless for studying long-term evolutions or even reliably detecting trends in global inequality, given the extremely piecemeal nature of the data used.

If we look at the investment strategies of different universities, we find highly diversified portfolios at all levels, with a clear preference for US and foreign stocks and private sector bonds (government bonds, especially US Treasuries, which do not pay well, account for less than 10 percent of all these portfolios and are almost totally absent from the largest endowments). The higher we go in the endowment hierarchy, the more often we find “alternative investment strategies,” that is, very high yield investments such as shares in private equity funds and unlisted foreign stocks (which require great expertise), hedge funds, derivatives, real estate, and raw materials, including energy, natural resources, and related products (these, too, require specialized expertise and offer very high potential yields).28 If we consider the importance in these various portfolios of “alternative investments,” whose only common feature is that they abandon the usual strategies of investing in stocks and bonds accessible to all, we find that they represent only 10 percent of the portfolios of institutions with endowments of less than 50 million euros, 25 percent of those with endowments between 50 and 100 million euros, 35 percent of those between 100 and 500 million euros, 45 percent of those between 500 million and 1 billion euros, and ultimately more than 60 percent of those above 1 billion euros.

The problem is that in practice the redistributions induced by inflation are always complex, multidimensional, and largely unpredictable and uncontrollable. People sometimes believe that inflation is the enemy of the rentier and that this may in part explain why modern societies like inflation. This is partly true, in the sense that inflation forces people to pay some attention to their capital. When inflation exists, anyone who is content to perch on a pile of banknotes will see that pile melt away before his eyes, leaving him with nothing even if wealth is untaxed. In this respect, inflation is indeed a tax on the idle rich, or, more precisely, on wealth that is not invested.

For most people, the simplest way to invest is to buy a home. This provides protection against inflation (since the price of housing generally rises at least as fast as the price of consumption), and it also allows the owner to avoid paying rent, which is equivalent to a real return on investment of 3–4 percent a year. But for a person with 10 to 50 thousand euros, it is not enough to decide to buy a home: the possibility may not exist. And even for a person with 100 or 200 thousand euros but who works in a big city in a job whose pay is not in the top 2 or 3 centiles of the wage hierarchy, it may be difficult to purchase a home or apartment even if one is willing to go into debt for a long period of time and pay a high rate of interest. As a result, those who start out with a small initial fortune will often remain tenants, who must therefore pay a substantial rent (affording a high return on capital to the landlord) for a long period of time, possibly for life, while their bank savings are just barely protected from inflation.

In both cases, one has to work a little harder today to obtain a given return: capital has become more “dynamic.” But these are relatively indirect and ineffective ways of combating rent: the evidence suggests that the slight decrease in the pure return on capital due to these causes is much smaller than the increase of inequality of returns on capital; in particular, it poses little threat to the largest fortunes.

To be sure, US Treasuries offer an enviable guarantee of stability in an unstable world, and it is possible that the Saudi public has little taste for alternative investments. But the political and military aspects of the choice must also be taken into account: even though it is never stated explicitly, it is not illogical for Saudia Arabia to lend at low interest to the country that protects it militarily. To my knowledge, no one has ever attempted to calculate precisely the return on such an investment, but it seems clear that it is rather high.

The dynamics of the global distribution of capital are at once economic, political, and military. This was already the case in the colonial era, when the great powers of the day, Britain and France foremost among them, were quick to roll out the cannon to protect their investments.

China and other emerging nonpetroleum countries are growing very rapidly, to be sure, but the evidence suggests that this rapid growth will end once they catch up with the leaders in terms of productivity and standard of living. The diffusion of knowledge and productive technologies is a fundamentally equalizing process: once the less advanced countries catch up with the more advanced, they cease to grow more rapidly.

Is this because one can imitate the other until both have to innovate and take each other’s best practices?

A very large share of the world’s capital stock would of course be accumulated in Asia, and especially China, in keeping with the region’s future share of global output. But according to the central scenario, the capital / income ratio would be the same on all continents, so that there would be no major imbalance between savings and investment in any region. Africa would be the only exception: in the central scenario depicted in Figures 12.4 and 12.5, the capital / income ratio is expected to be lower in Africa than in other continents throughout the twenty-first century (essentially because Africa is catching up economically much more slowly and its demographic transition is also delayed).45 If capital can flow freely across borders, one would expect to see a flow of investments in Africa from other countries, especially China and other Asian nations.

To be sure, one can easily imagine scenarios much more unbalanced than the central scenario. Nevertheless, the forces of divergence are much less obvious than in the case of the sovereign wealth funds, whose growth depends on windfalls totally disproportionate to the needs of the populations benefiting from them (especially where those populations are tiny). This leads to endless accumulation, which the inequality r > g transforms into a permanent divergence in the global capital distribution. To sum up, petroleum rents might well enable the oil states to buy the rest of the planet (or much of it) and to live on the rents of their accumulated capital.

The simplest way to measure the change in the government’s role in the economy and society is to look at the total amount of taxes relative to national income.

The first similarity is that taxes consumed less than 10 percent of national income in all four countries during the nineteenth century and up to World War I. This reflects the fact that the state at that time had very little involvement in economic and social life. With 7–8 percent of national income, it is possible for a government to fulfill its central “regalian” functions (police, courts, army, foreign affairs, general administration, etc.) but not much more. After paying to maintain order, enforce property rights, and sustain the military (which often accounts for more than half of total expenditures), not much remained in the government’s coffers.2 States in this period also paid for some roads and other infrastructure, as well as schools, universities, and hospitals, but most people had access only to fairly rudimentary educational and health services.

Between 1920 and 1980, the share of national income that the wealthy countries chose to devote to social spending increased considerably. In just half a century, the share of taxes in national income increased by a factor of at least 3 or 4 (and in the Nordic countries more than 5). Between 1980 and 2010, however, the tax share stabilized everywhere. This stabilization took place at different levels in each country, however: just over 30 percent of national income in the United States, around 40 percent in Britain, and between 45 and 55 percent on the European continent (45 percent in Germany, 50 percent in France, and nearly 55 percent in Sweden).

First, it should be clear why the question of whether or not there has been a “return to the state” in the present crisis is misleading: the role of the government is greater than ever. In order to fully appreciate the state’s role in economic and social life, other indicators of course need to be considered. The state also intervenes by setting rules, not just by collecting taxes to pay its expenses.

To be sure, in the face of an aging population, advances in medical technology, and constantly growing educational needs, the mere fact of having stabilized the tax bill as a percentage of national income is in itself no mean feat: cutting the government budget is always easier to promise in opposition than to achieve once in power.

In all the developed countries, public spending covers much of the cost of education and health services: about three-quarters in Europe and half in the United States. The goal is to give equal access to these basic goods: every child should have access to education, regardless of his or her parents’ income, and everyone should have access to health care, even, indeed especially, when circumstances are difficult.

If we look at the poorest countries around the world in 1970–1980, we find that governments generally took 10–15 percent of national income, both in Sub-Saharan Africa and in South Asia (especially India). Turning to countries at an intermediate level of development in Latin America, North Africa, and China, we find governments taking 15–20 percent of national income, lower than in the rich countries at comparable levels of development. The most striking fact is that the gap between the rich and the not-so-rich countries has continued to widen in recent years. Tax levels in the rich countries rose (from 30–35 percent of national income in the 1970s to 35–40 percent in the 1980s) before stabilizing at today’s levels, whereas tax levels in the poor and intermediate countries decreased significantly. In Sub-Saharan Africa and South Asia, the average tax bite was slightly below 15 percent in the 1970s and early 1980s but fell to a little over 10 percent in the 1990s.

in all the developed countries in the world today, building a fiscal and social state has been an essential part of the process of modernization and economic development.

Today’s developed countries reduced their tariffs over the course of the nineteenth and twentieth centuries at a pace they judged to be reasonable and with clear alternatives in mind. They were fortunate enough not to have anyone tell them what they ought to be doing instead.

This illustrates a more general phenomenon: the tendency of the rich countries to use the less developed world as a field of experimentation, without really seeking to capitalize on the lessons of their own historical experience.49 What we see in the poor and emerging countries today is a wide range of different tendencies.

In any case, the question of what kind of fiscal and social state will emerge in the developing world is of the utmost importance for the future of the planet.

Taxation is not a technical matter. It is preeminently a political and philosophical issue, perhaps the most important of all political issues. Without taxes, society has no common destiny, and collective action is impossible. This has always been true. At the heart of every major political upheaval lies a fiscal revolution.

progressive taxation is today under serious threat, both intellectually (because its various functions have never been fully debated) and politically (because tax competition is allowing entire categories of income to gain exemption from the common rules).

The progressive tax thus represents an ideal compromise between social justice and individual freedom. It is no accident that the United States and Britain, which throughout their histories have shown themselves to value individual liberty highly, adopted more progressive tax systems than many other countries.

The issue of financial transparency and information sharing is closely related to the ideal tax on capital. Without a clear idea of what all the information is to be used for, current data-sharing proposals are unlikely to achieve the desired result. To my mind, the objective ought to be a progressive annual tax on individual wealth—that is, on the net value of assets each person controls. For the wealthiest people on the planet, the tax would thus be based on individual net worth—the kinds of numbers published by Forbes and other magazines.

Disincentivizing individuals from accumulating wealth doesn’t sound like such a good idea, but I see why. I prefer taxation on income and capital gains better.

The primary purpose of the capital tax is not to finance the social state but to regulate capitalism. The goal is first to stop the indefinite increase of inequality of wealth, and second to impose effective regulation on the financial and banking system in order to avoid crises. To achieve these two ends, the capital tax must first promote democratic and financial transparency: there should be clarity about who owns what assets around the world.