Capital in the Twenty-First Century

by Thomas Piketty

When the rate of return on capital exceeds the rate of growth of output and income, as it did in the nineteenth century and seems quite likely to do again in the twenty-first, capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based.

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.

before the requirement to declare one’s income to the tax authorities was enacted in law, people were often unaware of the amount of their own income.

sharp reduction in income inequality in the United States between 1913 and 1948.

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).

Since the 1970s, income inequality has increased significantly in the rich countries, especially the United States,

the resurgence of inequality after 1980 is due largely to the political shifts of the past several decades, especially in regard to taxation and finance.

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.

The main forces for convergence are the diffusion of knowledge and investment in training and skills.

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.

Capital’s share can be quite large: often as much as one-quarter of total output and sometimes as high as one-half in capital-intensive sectors such as mining, or even more where local monopolies allow the owners of capital to demand an even larger share.

if all the company’s earnings from its output went to paying wages and nothing to profits, it would probably be difficult to attract the capital needed to finance new investments, at least as our economies are currently organized

it is not necessarily just to deny any remuneration to those who choose to save more than others—assuming, of course, that differences in saving are an important reason for the inequality of wealth.

When depreciation is subtracted from GDP, one obtains the “net domestic product,”

capital is defined as the sum total of nonhuman assets that can be owned and exchanged on some market.

it is not always easy to distinguish the value of buildings from the value of the land on which they are built.

Residential real estate can be seen as a capital asset that yields “housing services,” whose value is measured by their rental equivalent.

Public wealth in most developed countries is currently insignificant (or even negative, where the public debt exceeds public assets).

The average long-run rate of return on stocks is 7–8 percent in many countries.

Investments in real estate and bonds frequently return 3–4 percent, while the real rate of interest on public debt is sometimes much lower.

The stock-market capitalization of listed companies in various countries generally represents 12 to 15 years of annual profits, which corresponds to an annual return on investment of 6–8 percent (before taxes).

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. In all probability, it will continue to fall and may go as low as 20–30 percent at some point in the twenty-first century. This was the level maintained up to the turn of the nineteenth century and would be consistent with the European–American share of the world’s population

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.

Furthermore, both Europe and the Americas can be broken down into two highly unequal subregions: a hyperdeveloped core and a less developed periphery. Broadly speaking, global inequality is best analyzed in terms of regional blocs rather than continental blocs.

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.

the poor catch up with the rich to the extent that they achieve the same level of technological know-how, skill, and education, not by becoming the property of the wealthy.

demographic transition: the continual increase in life expectancy is no longer enough to compensate for the falling birth rate, and the pace of population growth slowly reverts to a lower level.

services in health and education, which by themselves account for more than 20 percent of total employment in the most advanced countries (or as much as all industrial sectors combined). There is every reason to think that this fraction will continue to increase, given the pace of medical progress and the steady growth of higher education.

an important part of these services, especially in health and education, is generally financed by taxes and provided free of charge.

The key point is that there is no historical example of a country at the world technological frontier whose growth in per capita output exceeded 1.5 percent over a lengthy period of time.

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.

if the governments of both countries decided to sell off all their assets in order to immediately pay off their debts, nothing would be left in Britain and very little in France.

In France after World War II, public debts were canceled, and a large public sector was created; the same was true to a lesser extent in Britain during the same period.

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.

accumulation of significant public assets in the industrial and financial sectors in the period 1950–1980, followed by major waves of privatization of the same assets after 1980.

Capital in the New World took some quite unusual and specific forms, in the first place because land was so abundant that it did not cost very much; second, because of the existence of slavery; and finally, because this region of perpetual demographic growth tended to accumulate structurally smaller amounts of capital (relative to annual income and output) than Europe did.

the recourse to inflation was so extreme and so violently destabilized German society and economy, especially during the hyperinflation of the 1920s, that the German public came away from these experiences with a strongly antiinflationist attitude.

the low price of real estate in Germany compared to other European countries, which can be explained in part by the fact that the sharp price increases seen everywhere else after 1990 were checked in Germany by the effects of German reunification, which brought a large number of low-cost houses onto the market.

the gap arises not from the low valuation of German real estate but rather from the low stock market valuation of German firms.

the postwar period, housing prices stood at historic lows, owing primarily to rent control policies that were adopted nearly everywhere in periods of high inflation such as the early 1920s and especially the 1940s.

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.

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. Nonwage

the annual rental value of housing, which accounts for half of total national wealth, is generally 3–4 percent of the value of the property.

the rental yield on small apartments is as high as 5 percent.

Capital income absorbs between 15 percent and 25 percent of national income in rich countries in 1970, and between 25 percent and 30 percent in 2000–2010.

The dynamic inconsistency that Marx pointed out thus corresponds to a real difficulty, from which the only logical exit is structural growth, which is the only way of balancing the process of capital accumulation (to a certain extent).

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.

inequality with respect to capital is always greater than inequality with respect to labor.

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).