Capital in the Twenty-First Century

by Thomas Piketty

alimentary

This is the basis of Marx’s prediction of an apocalyptic end to capitalism: either the rate of return on capital would steadily diminish (thereby killing the engine of accumulation and leading to violent conflict among capitalists), or capital’s share of national income would increase indefinitely (which sooner or later would unite the workers in revolt).

Like his predecessors, Marx totally neglected the possibility of durable technological progress and steadily increasing productivity, which is a force that can to some extent serve as a counterweight to the process of accumulation and concentration of private capital.

He probably suffered as well from having decided on his conclusions in 1848, before embarking on the research needed to justify them.

What is more, he devoted little thought to the question of how a society in which private capital had been totally abolished would be organized politically and economically—a complex issue if ever there was one, as shown by the tragic totalitarian experiments undertaken in states where private capital was abolished.

Marx’s analysis remains relevant in several respects. First, he began with an important question (concerning the unprecedented concentration of wealth during the Industrial Revolution) and tried to answer it with the means at his disposal:

Even more important, the principle of infinite accumulation that Marx proposed...

In other words, low growth cannot adequately counterbalance the Marxist principle of infinite accumulation:

Accumulation ends at a finite level, but that level may be high enough to be destabilizing. In particular, the very high level of private wealth that has been attained since the 1980s and 1990s in the wealthy countries of Europe and in Japan, measured in years of national income, directly reflects the Marxian logic.

Taxation is not only a way of requiring all citizens to contribute to the financing of public expenditures and projects and to distribute the tax burden as fairly as possible; it is also useful for establishing classifications and promoting knowledge as well as democratic transparency.

Kuznets himself was well aware that the compression of high US incomes between 1913 and 1948 was largely accidental. It stemmed in large part from multiple shocks triggered by the Great Depression and World War II and had little to do with any natural or automatic process.

The sharp reduction in income inequality that we observe in almost all the rich countries between 1914 and 1945 was due above all to the world wars and the violent economic and political shocks they entailed (especially for people with large fortunes).

Ultimately, the World Top Incomes Database (WTID), which is based on the joint work of some thirty researchers around the world, is the largest historical database available concerning the evolution of income inequality;

The first is that one should be wary of any economic determinism in regard to inequalities of wealth and income.

the distribution of wealth has always been deeply political, and it cannot be reduced to purely economic mechanisms.

The history of inequality is shaped by the way economic, social, and political actors view what is just and what is not, as well as by the relative power of those actors and the collective choices that result.

The second conclusion, which is the heart of the book, is that the dynamics of wealth distribution reveal powerful mechanisms pushing alternately toward convergence and divergence. Furthermore, there is no natural, spontaneous process to prevent destabilizing, inegalitarian forces from prevailing permanently.

The main forces for convergence are the diffusion of knowledge and investment in training and skills. The law of supply and demand, as well as the mobility of capital and labor, which is a variant of that law, may always tend toward convergence as well, but the influence of this economic law is less powerful than the diffusion of knowledge and skill

Knowledge and skill diffusion is the key to overall productivity growth as well as the reduction of inequality both within and between countries.

this spectacular increase in inequality largely reflects an unprecedented explosion of very elevated incomes from labor, a veritable separation of the top managers of large firms from the rest of the population.

Another explanation, which to me seems more plausible and turns out to be much more consistent with the evidence, is that these top managers by and large have the power to set their own remuneration, in some cases without limit and in many cases without any clear relation to their individual productivity, which in any case is very difficult to estimate in a large organization.

In slowly growing economies, past wealth naturally takes on disproportionate importance, because it takes only a small flow of new savings to increase the stock of wealth steadily and substantially.

People with inherited wealth need save only a portion of their income from capital to see that capital grow more quickly than the economy as a whole. Under such conditions, it is almost inevitable that inherited wealth will dominate wealth amassed from a lifetime’s labor by a wide margin, and the concentration of capital will attain extremely high levels—levels potentially incompatible with the meritocratic values and principles of social justice fundamental to modern democratic societies.

Or, even more important, the average effective rate of return on capital may be higher when the individual’s initial capital endowment is higher (as appears to be increasingly common).

The Revolution is the reason why French estate records are probably the richest in the world over the long run.

It has been the demographic growth of the New World that has ensured that inherited wealth has always played a smaller role in the United States than in Europe. This factor also explains why the structure of inequality in the United States has always been so peculiar, and the same can be said of US representations of inequality and social class.

In a way, the French Revolution of 1789 was more ambitious. It abolished all legal privileges and sought to create a political and social order based entirely on equality of rights and opportunities. The Civil Code guaranteed absolute equality before the laws of property as well as freedom of contract (for men, at any rate).

The data show, however, that the concentration of wealth was as large at that time in France as in Britain, which clearly demonstrates that equality of rights in the marketplace cannot ensure equality of rights tout court.

There is one great advantage to being an academic economist in France: here, economists are not highly respected in the academic and intellectual world or by political and financial elites. Hence they must set aside their contempt for other disciplines and their absurd claim to greater scientific legitimacy, despite the fact that they know almost nothing about anything.

Inequality of wealth—and of the consequent income from capital—is in fact always much greater than inequality of income from labor.

The importance of capital in the wealthy countries today is primarily due to a slowing of both demographic growth and productivity growth, coupled with political regimes that objectively favor private capital.

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.

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

From 1900 to 1980, 70–80 percent of the global production of goods and services was concentrated in Europe and America, which incontestably dominated the rest of the world. By 2010, the European–American share had declined to roughly 50 percent, or approximately the same level as in 1860.

Europe attained its maximal economic weight on the eve of World War I, when it accounted for nearly 50 percent of global output, and it has declined steadily since then, whereas America attained its peak in the 1950s, when it accounted for nearly 40 percent of global output.

Broadly speaking, global inequality is best analyzed in terms of regional blocs rather than continental blocs.

Indeed, exchange rates reflect not only the supply and demand for the goods and services of different countries but also sudden changes in the investment strategies of international investors and volatile estimates of the political and / or financial stability of this or that country, to say nothing of unpredictable changes in monetary policy.

In other words, the rich countries are doubly wealthy: they both produce more at home and invest more abroad, so that their national income per head is greater than their output per head. The opposite is true for poor countries.

None of the Asian countries that have moved closer to the developed countries of the West in recent years has benefited from large foreign investments, whether it be Japan, South Korea, or Taiwan and more recently China. In essence, all of these countries themselves financed the necessary investments in physical capital and, even more, in human capital, which the latest research holds to be the key to long-term growth.

Other things being equal, strong demographic growth tends to play an equalizing role because it decreases the importance of inherited wealth: every generation must in some sense construct itself.

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. By contrast, constant growth, even if it is only 0.5 or 1 or 1.5 percent per year, means that new functions are constantly being created and new skills are needed in every generation.

In fact, neither the economic liberalization that began around 1980 nor the state interventionism that began in 1945 deserves such praise or blame. France, Germany, and Japan would very likely have caught up with Britain and the United States following their collapse of 1914–1945 regardless of what policies they had adopted

The most one can say is that state intervention did no harm.

Broadly speaking, the US and British policies of economic liberalization appear to have had little effect on this simple reality, since they neither increased growth nor decreased it.

the first crucial fact to bear in mind is that inflation is largely a twentieth-century phenomenon. Before that, up to World War I, inflation was zero or close to it.

At this stage, I merely want to stress the fact that the loss of stable monetary reference points in the twentieth century marks a significant rupture with previous centuries, not only in the realms of economics and politics but also in regard to social, cultural, and literary matters.

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.

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.

To put it simply, we can see that over the very long run, agricultural land has gradually been replaced by buildings, business capital, and financial capital invested in firms and government organizations.

First, there is no doubt that Britain’s high level of public debt enhanced the influence of private wealth in British society. Britons who had the necessary means lent what the state demanded without appreciably reducing private investment: