Capital in the Twenty-First Century

by Thomas Piketty

The communist revolution did indeed take place, but in the most backward country in Europe, Russia, where the Industrial Revolution had scarcely begun, whereas the most advanced European countries explored other, social democratic avenues

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.

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). It had little to do with the tranquil process of intersectoral mobility described by Kuznets.

Over a long period of time, the main force in favor of greater equality has been the diffusion of knowledge and skills.

the high price of real estate or petroleum may contribute to structural divergence.

I was only too aware of the fact that I knew nothing at all about the world’s economic problems. My thesis consisted of several relatively abstract mathematical theorems. Yet the profession liked my work. I quickly realized that there had been no significant effort to collect historical data on the dynamics of inequality since Kuznets, yet the profession continued to churn out purely theoretical results without even knowing what facts needed to be explained. And it expected me to do the same. When I returned to France, I set out to collect the missing data.

Then one must add net income received from abroad (or subtract net income paid to foreigners, depending on each country’s situation). For example, a country whose firms and other capital assets are owned by foreigners may well have a high domestic product but a much lower national income, once profits and rents flowing abroad are deducted from the total.

In this book, capital is defined as the sum total of nonhuman assets that can be owned and exchanged on some market. Capital includes all forms of real property (including residential real estate) as well as financial and professional capital (plants, infrastructure, machinery, patents, and so on) used by firms and government agencies.

Public wealth in most developed countries is currently insignificant (or even negative, where the public debt exceeds public assets). As I will show, private wealth accounts for nearly all of national wealth almost everywhere. This has not always been the case, however, so it is important to distinguish clearly between the two notions.

Income is a flow. It corresponds to the quantity of goods produced and distributed in a given period (which we generally take to be a year). Capital is a stock. It corresponds to the total wealth owned at a given point in time. This stock comes from the wealth appropriated

This type of rent tends to rise until the return on capital is around 4 percent (which in this example would correspond to a rent of 3,000–3,500 euros per month, or 40,000 per year). Hence this tenant’s rent is likely to rise in the future. The landlord’s annual return on investment may eventually be enhanced by a long-term capital gain on the value of the apartment. Smaller apartments yield a similar or perhaps slightly higher return.

For example, take a firm that uses capital valued at 5 million euros (including offices, infrastructure, machinery, etc.) to produce 1 million euros worth of goods annually, with 600,000 euros going to pay workers and 400,000 euros in profits.16 The capital / income ratio of this company is β = 5 (its capital is equivalent to five years of output), the capital share α is 40 percent, and the rate of return on capital is r = 8 percent.

Regardless of what measure is used, the world clearly seems to have entered a phase in which rich and poor countries are converging in income.

Conversely, countries owned by other countries, whether in the colonial period or in Africa today, have been less successful, most notably because they have tended to specialize in areas without much prospect of future development and because they have been subject to chronic political instability.

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.

Over a period of one year, 1 percent growth seems very low, almost imperceptible. People living at the time might not notice any change at all. To them, such growth might seem like complete stagnation, in which each year is virtually identical to the previous one. Growth might therefore seem like a fairly abstract notion, a purely mathematical and statistical construct.

All in all, and leaving aside the prodigious improvement in the quality and safety of the product, purchasing power in terms of bicycles rose by a factor of 40 between 1890 and 1970.15

All of these examples show how futile and reductive it is to try to sum up all these changes with a single index, as in “the standard of living increased tenfold between date A and date B.” When family budgets and lifestyles change so radically and purchasing power varies so much from one good to another, it makes little sense to take averages, because the result depends heavily on the weights and measures of quality one chooses, and these are fairly uncertain, especially when one is attempting comparisons across several centuries.

The details are unimportant. 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. If we look at the last few decades, we find even lower growth rates in the wealthiest countries: between 1990 and 2012, per capita output grew at a rate of 1.6 percent in Western Europe, 1.4 percent in North America, and 0.7 percent in Japan.21 It is important to bear this reality in mind as I proceed, because many people think that growth ought to be at least 3 or 4 percent per year. As noted, both history and logic show this to be illusory.

What this means is that today’s societies are very different from the societies of the past, when growth was close to zero, or barely 0.1 percent per year, as in the eighteenth century. A society in which growth is 0.1–0.2 percent per year reproduces itself with little or no change from one generation to the next: the occupational structure is the same, as is the property structure. A society that grows at 1 percent per year, as the most advanced societies have done since the turn of the nineteenth century, is a society that undergoes deep and permanent change.

Ultimately, a government bond is nothing more than a claim of one portion of the population (those who receive interest) on another (those who pay taxes): it should therefore be excluded from national wealth and included solely in private wealth.

Although this historical episode was relatively brief, it is important for understanding the complex attitude of the French people toward private capitalism even today. Throughout the Trente Glorieuses, during which the country was rebuilt and economic growth was strong (stronger that at any other time in the nation’s history), France had a mixed economy, in a sense a capitalism without capitalists, or at any rate a state capitalism in which private owners no longer controlled the largest firms.

United States (or at any rate will tend to do so as long as the US demographic growth rate remains higher than the European, which probably will not be forever).

First, it is important to be clear that the second fundamental law of capitalism, β = s/g, is applicable only if certain crucial assumptions are satisfied. First, this is an asymptotic law, meaning that it is valid only in the long run: if a country saves a proportion s of its income indefinitely, and if the rate of growth of its national income is g permanently, then its capital / income ratio will tend closer and closer to β = s/g and stabilize at that level. This won’t happen in a day, however: if a country saves a proportion s of its income for only a few years, it will not be enough to achieve a capital / income ratio of β = s/g.

The first principle to bear in mind is, therefore, that the accumulation of wealth takes time: it will take several decades for the law β = s/g to become true.

It is important to realize that the law α = r × β is actually a pure accounting identity, valid at all times in all places, by construction. Indeed, one can view it as a definition of the share of capital in national income (or of the rate of return on capital, depending on which parameter is easiest to measure) rather than as a law. By contrast, the law β = s/g is the result of a dynamic process: it represents a state of equilibrium toward which an economy will tend if the savings rate is s and the growth rate g, but that equilibrium state is never perfectly realized in practice.

The argument is elementary. Let me illustrate it with an example. In concrete terms: if a country is saving 12 percent of its income every year, and if its initial capital stock is equal to six years of income, then the capital stock will grow at 2 percent a year,4 thus at exactly the same rate as national income, so that the capital / income ratio will remain stable.

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.

Once again, the Japanese case is emblematic. If one tries to understand the enormous increase in the capital / income ratio in the 1980s and the sharp drop in the early 1990s, it is clear that the dominant phenomenon was the formation of a bubble in real estate and stocks, which then collapsed. But if one seeks to understand the evolution observed over the entire period 1970–2010, it is clear that volume effects outweighed price effects: the fact that private wealth in Japan rose from three years of national income in 1970 to six in 2010 is predicted almost perfectly by the flow of savings.10

Italian national wealth did indeed rise significantly, from around two and a half years of national income in 1970 to about six in 2010, but this was a smaller increase than in private wealth, whose exceptional growth was to some extent misleading, since nearly a quarter of it reflected a growing debt that one portion of the Italian population owed to another. Instead of paying taxes to balance the government’s budget, the Italians—or at any rate those who had the means—lent money to the government by buying government bonds or public assets, which increased their private wealth without increasing the national wealth.

That is why, in practice, one always observes enormous variations in the ratio of the market value to the book value of individual firms. This ratio, which is also known as “Tobin’s Q” (for the economist James Tobin, who was the first to define it), varied from barely 20 percent to more than 340 percent for French firms listed in the CAC 40 in 2012.23 It is more difficult

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.).

any case, the inflation rate must be deducted from the interest rate if one wants to know the real return on a nominal asset.

The price of real estate, like the price of shares of stock or parts of a company or investments in a mutual fund, generally rises at least as rapidly as the consumer price index. In other words, not only must we not subtract inflation from the annual rents or dividends received on such assets, but we often need to add to the annual return the capital gains earned when the asset is sold (or subtract the capital loss, as the case may be).

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 any case, the potential impact of inflation on the average return on capital is fairly limited and much smaller than the apparent nominal effect.

from capital may be greater than inequality of capital itself, if individuals with large fortunes somehow manage to obtain a higher return than those with modest to middling fortunes.

Two points need to be clarified at once. First, we find this regularity in all countries in all periods for which data are available, without exception, and the magnitude of the phenomenon is always quite striking.

To be sure, older individuals are certainly richer on average than younger ones. But the concentration of wealth is actually nearly as great within each age cohort as it is for the population as a whole. In other words, and contrary to a widespread belief, intergenerational warfare has not replaced class warfare.

For example, if the average pay in a country is 2,000 euros per month, then this distribution implies that the top 10 percent earn 4,000 euros a month on average, the bottom 50 percent 1,400 euros a month, and the middle 40 percent 2,250 a month.6 This intermediate group may be regarded as a vast “middle class” whose standard of living is determined by the average wage of the society in question.

For example, many people belong to the upper class in terms of labor income but to the lower class in terms of wealth, and vice versa. Social inequality is multidimensional, just like political conflict.

If the trend observed in the United States were to continue, then by 2030 the top 10 percent of earners will be making 9,000 euros a month (and the top 1 percent, 34,000 euros), the middle 40 percent will earn 1,750, and the bottom 50 percent just 800 a month. The top 10 percent could therefore use a small portion of their incomes to hire many of the bottom 50 percent as domestic servants.10

Nearly everyone in the top decile owns his or her own home, but the importance of real estate decreases sharply as one moves higher in the wealth hierarchy. In the “9 percent” group, at around 1 million euros, real estate accounts for half of total wealth and for some individuals more than three-quarters. In the top centile, by contrast, financial

and business assets clearly predominate over real estate. In particular, shares of stock or partnerships constitute nearly the totality of the largest fortunes.

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.

This was historically important, because the extreme concentration of wealth in Europe around 1900 was in fact characteristic of the entire nineteenth century.

If, for example, the top decile appropriates 90 percent of each year’s output (and the top centile took 50 percent just for itself, as in the case of wealth), a revolution will likely occur, unless some peculiarly effective repressive apparatus exists to keep it from happening.

The first of these two ways of achieving such high inequality is through a “hyperpatrimonial society” (or “society of rentiers”): a society in which inherited wealth is very important and where the concentration of wealth attains extreme levels

Indeed, it is impossible to summarize a multidimensional reality with a unidimensional index without unduly simplifying matters and mixing up things that should not be treated together.

There was no gradual, consensual, conflict-free evolution toward greater equality. In the twentieth century it was war, and not harmonious democratic or economic rationality, that erased the past and enabled society to begin anew with a clean slate.

Because workers share certain perceptions of social justice and norms of fairness, an effort is made to prevent the purchasing power of the least well-off from dropping too sharply, while their better-off comrades are asked to postpone their demands until the war is over.