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The central fact—and the essential difference from the twentieth century—is that the compensation to those who lent to the government was quite high in the nineteenth century: inflation was virtually zero from 1815 to 1914, and the interest rate on government bonds was generally around 4–5 percent;
The French government incurred large debts in 1815–1816 to pay for an indemnity to the occupying forces and then again in 1825 to finance the notorious “émigrés’ billion,” a sum paid to aristocrats who fled France during the Revolution
Owing to low growth and repeated recessions, the period 1914–1945 was a dark one for all Europeans but especially for the wealthy, whose income dwindled considerably in comparison with the Belle Époque.
Make no mistake: the low capital / income ratio in America reflected a fundamental difference in the structure of social inequalities compared with Europe. The fact that total wealth amounted to barely three years of national income in the United States compared with more than seven in Europe signified in a very concrete way that the influence of landlords and accumulated wealth was less important in the New World. With a few years of work, the new arrivals were able to close the initial gap between themselves and their wealthier predecessors—or at any rate it was possible to close the wealth
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After World War II, real estate and stock prices stood at historic lows. When it came to progressive taxation, the United States went much farther than Europe, possibly demonstrating that the goal there was more to reduce inequality than to eradicate private property.
In any case, the key fact is that the United States enjoyed a much more stable capital / income ratio than Europe in the twentieth century, perhaps explaining why Americans seem to take a more benign view of capitalism than Europeans.
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.
In other words, the United States was 98 percent US-owned and 2 percent foreign-owned. The net foreign asset position was close to balanced, especially when compared to the enormous foreign assets held by Europeans: between one and two years of national income in France and Britain and half a year in Germany.
the world of 1913 was one in which Europe owned a large part of Africa, Asia, and Latin America, while the United States owned itself.
In the 1950s and 1960s in particular, the net foreign capital held by the United States was still fairly limited (barely 5 percent of national income,
The investments of US multinational corporations in Europe and the rest of the world attained levels that seemed considerable at the time, especially to Europeans, who were accustomed to owning the world and who chafed at the idea of owing their reconstruction in part to Uncle Sam and the Marshall Plan. In fact, despite these national traumas, US investments in Europe would always be fairly limited compared to the investments the former colonial powers had held around the globe a few decades earlier.
The net foreign capital position of the United States turned slightly negative in the 1980s and then increasingly negative in the 1990s and 2000s as a result of accumulating trade deficits. Nevertheless, US investments abroad continued to yield a far better return than the nation paid on its foreign-held debt—such is the privilege due to confidence in the dollar.
In other words, the United States is more than 95 percent American owned and less than 5 percent foreign owned. To sum up, the net foreign asset position of the United States has at times been slightly negative, at other times slightly positive, but these positions were always of relatively limited importance compared with the total stock of capital owned by US citizens (always less than 5 percent and generally less than 2 percent).
in other words, the number of slaves had increased tenfold in less than a century. The slave economy was growing rapidly when the Civil War broke out in 1861, leading ultimately to the abolition of slavery in 1865.
All told, southern slave owners in the New World controlled more wealth than the landlords of old Europe. Their farmland was not worth very much, but since they had the bright idea of owning not just the land but also the labor force needed to work that land, their total capital was even greater.
In fact, the New World combined two diametrically opposed realities. In the North we find a relatively egalitarian society in which capital was indeed not worth very much, because land was so abundant that anyone could became a landowner relatively cheaply, and also because recent immigrants had not had time to accumulate much capital. In the South we find a world where inequalities of ownership took the most extreme and violent form possible, since one half of the population owned the other half: here, slave capital largely supplanted and surpassed landed capital.
Let me put it another way: in a quasi-stagnant society, wealth accumulated in the past will inevitably acquire disproportionate importance.
Decreased growth—especially demographic growth—is thus responsible for capital’s comeback.
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.
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, which also accelerated in the 1980s and 1990s in a political context that was on the whole more favorable to private wealth than that of the immediate postwar decades.
The variation between countries with respect to the proportion of retained earnings in total private savings can be explained, moreover, largely by differences in legal and tax systems; these are accounting differences rather than actual economic differences.
In other words, the Catholic Church owned more property in Ancien Régime France (relative to the total private wealth of the era) than prosperous US foundations own today.
The same general pattern exists on all continents. At the global level, the most extensive privatization in recent decades, and indeed in the entire history of capital, obviously took place in the countries of the former Soviet bloc.
was 2 to 3 percent
On the books of such a corporation, there is a clear distinction between remuneration of labor (wages, salaries, bonuses, and other payments to employees, including managers, who contribute labor to the company’s activities) and remuneration of capital (dividends, interest, profits reinvested to increase the value of the firm’s capital, etc.).
Today, around 10 percent of domestic production in the rich countries is due to nonwage workers in individually owned businesses, which is roughly equal to the proportion of nonwage workers in the active population.
At this stage, let me note simply that inflation primarily plays a role—sometimes desirable, sometimes not—in redistributing wealth among those who have it.
In all civilizations, capital fulfills two economic functions: first, it provides housing (more precisely, capital produces “housing services,” whose value is measured by the equivalent rental value of dwellings, defined as the increment of well-being due to sleeping and living under a roof rather than outside), and second, it serves as a factor of production in producing other goods and services
Historically, the earliest forms of capital accumulation involved both tools and improvements to land (fencing, irrigation, drainage, etc.) and rudimentary dwellings (caves, tents, huts, etc.).
the key fact is that in nineteenth-century France and, for that matter, into the early twentieth century, work and study alone were not enough to achieve the same level of comfort afforded by inherited wealth and the income derived from it.
One of the few exceptions to this rule was the United States, or at any rate the various “pioneer” microsocieties in the northern and western states, where inherited capital had little influence in the eighteenth and nineteenth centuries—a situation that did not last long, however.
The first regularity we observe when we try to measure income inequality in practice is that inequality with respect to capital is always greater than inequality with respect to labor.
To give a preliminary idea of the order of magnitude in question, the upper 10 percent of the labor income distribution generally receives 25–30 percent of total labor income, whereas the top 10 percent of the capital income distribution always owns more than 50 percent of all wealth (and in some societies as much as 90 percent).
In other words, and contrary to a widespread belief, intergenerational warfare has not replaced class warfare. The very high concentration of capital is explained mainly by the importance of inherited wealth and its cumulative effects:
The top 10 percent or bottom 50 percent of the labor income distribution are not the same people who constitute the top 10 percent or bottom 50 percent of the wealth distribution.
To my knowledge, no society has ever existed in which ownership of capital can reasonably be described as “mildly” inegalitarian, by which I mean a distribution in which the poorest half of society would own a significant share (say, one-fifth to one-quarter) of total wealth.
Housing is the favorite investment of the middle class and moderately well-to-do, but true wealth always consists primarily of financial and business assets.
To go back a century in time, to the decade 1900–1910: in all the countries of Europe, the concentration of capital was then much more extreme than it is today.
Thus the labor market was totally transformed over the past century, but the structure of wage inequality across the market barely changed over the long run, with “the 9 percent” just below the top and the 50 percent at the bottom still drawing about the same shares of income from labor over a very considerable period of time.
The severe deflation France suffered in this period (prices fell by 25 percent between 1929 and 1935, as both trade and production collapsed) played a key role in the process: individuals lucky enough to hold on to their jobs and their nominal compensation—typically civil servants—enjoyed increased purchasing power in the midst of the Depression as falling prices raised their real wages.
In the 1960s, the period of the TV series Mad Men and General de Gaulle, the United States was in fact a more egalitarian society than France
The reason is simple: one consequence of increasing inequality was virtual stagnation of the purchasing power of the lower and middle classes in the United States, which inevitably made it more likely that modest households would take on debt, especially since unscrupulous banks and financial intermediaries, freed from regulation and eager to earn good yields on the enormous savings injected into the system by the well-to-do, offered credit on increasingly generous terms.
Unfortunately, this was not the case: the economy grew rather more slowly than in previous decades, so that the increase in inequality led to virtual stagnation of low and medium incomes.
That is quite possible, but it is important to be aware of the fact that the United States’ internal imbalances are four times larger than its global imbalances. This suggests that the place to look for the solutions of certain problems may be more within the United States than in China or other countries.
In particular, the wage gap, which decreased fairly regularly until the 1970s, suddenly begins to widen in the 1980s, at precisely the moment when for the first time the number of college graduates stops growing, or at any rate grows much more slowly than before.1 Goldin and Katz have no doubt that increased wage inequality in the United States is due to a failure to invest sufficiently in higher education.
The central fact is that in all the wealthy countries, including continental Europe and Japan, the top thousandth enjoyed spectacular increases in purchasing power in 1990–2010, while the average person’s purchasing power stagnated.
Note, moreover, that the United States, contrary to what many people think today, was not always more inegalitarian than Europe—far from it. Income inequality was actually quite high in Europe at the beginning of the twentieth century.
Note, too, that the very high official growth figures for developing countries (especially India and China) over the past few decades are based almost exclusively on production statistics. If one tries to measure income growth by using household survey data, it is often quite difficult to identify the reported rates of macroeconomic growth: Indian and Chinese incomes are certainly increasing rapidly, but not as rapidly as one would infer from official growth statistics.
Simply put, wage inequalities increased rapidly in the United States and Britain because US and British corporations became much more tolerant of extremely generous pay packages after 1970.
It has not always been this way—far from it: recall that in the 1950s and 1960s the United States was more egalitarian than France, especially in regard to the wage hierarchy.
