Capital in the Twenty-First Century

by Thomas Piketty

In fact, we observe just the opposite: it is when sales and profits increase for external reasons that executive pay rises most rapidly.

In all known societies, at all times, the least wealthy half of the population own virtually nothing (generally little more than 5 percent of total wealth);

This is still a fairly high level of inequality, however, and, what is more, inequality in Sweden has increased significantly since 1980–1990 (and in 2010 was just slightly lower than in France). It is worth stressing, moreover, that Swedish wealth was as concentrated as French and British wealth in 1900–1910.

Several important differences between the European and US trajectories stand out. First, it appears that inequality of wealth in the United States around 1800 was not much higher than in Sweden in 1970–1980.

In addition, the composition of the largest fortunes left them (on average) more exposed to losses due to the two world wars. In particular, the probate records show that foreign assets made up as a much as a quarter of the largest fortunes on the eve of World War I, nearly half of which consisted of the sovereign debt of foreign governments (especially Russia, which was on the verge of default).

In both France and Britain, foreign assets virtually disappeared after the two world wars. The importance of this factor should not be overstated, however, since the wealthiest individuals were often in a good position to reallocate their portfolios at the most profitable moment.

Until World War I there was no tax on capital income or corporate profits. In the rare cases in which such taxes did exist, they were assessed at very low rates. Hence conditions were ideal for the accumulation and transmission of considerable fortunes and for living on the income of those fortunes.

tautology,

In fact, however, the younger generations, which in any case did not have much to lose, recovered more quickly from these wartime shocks than their elders did. A person who was sixty years old in 1940 and lost everything he owned in a bombardment, expropriation, or bankruptcy had little hope of recovering.

In other words, Liliane Bettencourt, who never worked a day in her life, saw her fortune grow exactly as fast as that of Bill Gates, the high-tech pioneer, whose wealth has incidentally continued to grow just as rapidly since he stopped working.

Note, in particular, that once a fortune passes a certain threshold, size effects due to economies of scale in the management of the portfolio and opportunities for risk are reinforced by the fact that nearly all the income on this capital can be plowed back into investment.

if we allow for the methodological biases that lead to underestimating the size of inherited fortunes, it seems fairly clear that inherited wealth accounts for more than half of the total amount of the largest fortunes worldwide. An estimate of 60–70 percent seems fairly realistic

The problem is simply that the entrepreneurial argument cannot justify all inequalities of wealth, no matter how extreme.

Another important point is that wealthy people are constantly coming up with new and ever more sophisticated legal structures to house their fortunes. Trust funds, foundations, and the like often serve to avoid taxes, but they also constrain the freedom of future generations to do as they please with the associated assets.

At the heart of every major political upheaval lies a fiscal revolution. The Ancien Régime was swept away when the revolutionary assemblies voted to abolish the fiscal privileges of the nobility and clergy and establish a modern system of universal taxation.

In other words, the reduction of top marginal income tax rates and the rise of top incomes do not seem to have stimulated productivity (contrary to the predictions of supply-side theory) or at any rate did not stimulate productivity enough to be statistically detectable at the macro level.

it may be useful to recall that the US economy was much more innovative in 1950–1970 than in 1990–2010, to judge by the fact that productivity growth was nearly twice as high in the former period as in the latter, and since the United States was in both periods at the world technology frontier, this difference must be related to the pace of innovation.

The inequality r > g implies that wealth accumulated in the past grows more rapidly than output and wages. This inequality expresses a fundamental logical contradiction. The entrepreneur inevitably tends to become a rentier, more and more dominant over those who own nothing but their labor. Once constituted, capital reproduces itself faster than output increases. The past devours the future.