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.

Ricardo: The Principle of Scarcity

society. This was true in particular of David Ricardo and Karl Marx, who were surely the two most influential economists of the nineteenth century and who both believed that a small social group—landowners for Ricardo, industrial capitalists for Marx—would inevitably claim a steadily increasing share of output and income.

For Ricardo, who published his Principles of Political Economy and Taxation in 1817, the chief concern was the long-term evolution of land prices and land rents.

The landlords will therefore claim a growing share of national income, as the share available to the rest of the population decreases, thus upsetting the social equilibrium.

This long phase of wage stagnation,

“The development of Modern Industry, therefore, cuts from under its feet the very foundation on which the bourgeoisie produces and appropriates products. What the bourgeoisie therefore produces, above all, are its own gravediggers. Its fall and the victory of the proletariat are equally inevitable.”

Adam Smith’s image of “the invisible hand” and Jean-Baptiste Say’s “law” that production creates its own demand),

“principle of infinite accumulation,” that is, the inexorable tendency for capital to accumulate and become concentrated in ever fewer hands, with no natural limit to the process.

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

In the last third of the nineteenth century, wages finally began to increase: the improvement in the purchasing power of workers spread everywhere, and this changed the situation radically, even if extreme inequalities persisted and in some respects continued to increase until World War I.

avenues—fortunately for their citizens. 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.

According to Kuznets’s theory, income inequality would automatically decrease

in advanced phases of capitalist development, regardless of economic policy choices or other differences between countries, until eventually it stabilized at an acceptable level.

Kuznets,

“Growth is a rising tide that lifts all boats.”

It is crucial to recognize that even where there is no income tax, there are still all sorts of statistics concerning whatever tax basis exists at a given point in time (for example, the distribution of the number of doors and windows by département in nineteenth-century France, which is not without interest), but these data tell us nothing about incomes.

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.

Malthus, Ricardo, Marx, and many others had been talking about inequalities for decades without citing any sources whatsoever or any methods for comparing one era with another or deciding between competing hypotheses. Now, for the first time, objective data were available.

And besides that, Kuznets was the bearer of good news: inequality was shrinking. The Kuznets Curve: Good News in the Midst of the Cold War

According to this theory, inequality everywhere can be expected to follow a “bell curve.” In other words, it should first increase and then decrease over the course of industrialization and economic development. According to Kuznets, a first phase of naturally increasing inequality associated with the early stages of industrialization, which in the United States meant, broadly speaking, the nineteenth century, would be followed by a phase of sharply decreasing inequality, which in the United States allegedly began in the first half of the twentieth century.

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.

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

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

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 Fundamental Force for Divergence: r > g

This fundamental inequality, which I will write as r > g (where r stands for the average annual rate of return on capital, including profits, dividends, interest, rents, and other income from capital, expressed as a percentage of its total value, and g stands for the rate of growth of the economy, that is, the annual increase in income or output), will play a crucial role in this book. In a sense, it sums up the overall logic of my conclusions.

When the rate of return on capital significantly exceeds the growth rate of the economy (as it did through much of history until the nineteenth century and as is likely to be the case again in the twenty-first century), then it logically follows that inherited wealth grows faster than output and income.

In particular, their history is indispensable for studying what has been called the “first globalization” of finance and trade (1870–1914),

By contrast, the population of the United States at the time of the Declaration of Independence was barely 3 million. By 1900 it was 100 million, and today it is above 300 million. When a country goes from a population of 3 million to a population of 300 million (to say nothing of the radical increase in territory owing to westward expansion in the nineteenth century), it is clearly no longer the same country.

Economists are all too often preoccupied with petty mathematical problems of interest only to themselves. This obsession with mathematics is an easy way of acquiring the appearance of scientificity without having to answer the far more complex questions posed by the world we live in.

economists are not highly respected in the academic and intellectual world or by political and financial elites.

The most fruitful way to understand these changes is to analyze the evolution of the capital / income ratio (that is, the ratio of the total stock of capital to the annual flow of income) rather than focus exclusively on the capital-labor split (that is, the share of income going to capital and labor, respectively). In the past, scholars have mainly studied the latter, largely owing to the lack of adequate data to do anything else.

National income is defined as the sum of all income available to the residents of a given country in a given year, regardless of the legal classification of that income.

In order to calculate national income, one must first subtract from GDP the depreciation of the capital that made this production possible: in other words, one must deduct wear and tear on buildings, infrastructure, machinery, vehicles, computers, and other items during the year in question. This depreciation is substantial, today on the order of 10 percent of GDP in most countries, and it does not correspond to anyone’s income: before wages are distributed to workers or dividends to stockholders, and before genuinely new investments are made, worn-out capital must be replaced or repaired. If this is not done, wealth is lost, resulting in negative income for the owners. 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.

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. Conversely, a country that owns a large portion of the capital of...

the colonial era, when Europe effectively owned much of the rest of the world. A key question of this research is the following: Under what conditions is this type of situation likely to recur in the twenty-first century, possibly in some novel geographic configuration? For example, Europe, rather than being the owner, may find itself owned. Such fears are currently widespread in the Old World—perhaps too widespread. We shall see.

In France as in the United States, Germany as well as Great Britain, China as well as Brazil, and Japan as well as Italy, national income is within 1 or 2 percent of domestic product. In all these countries, in other words, the inflow of profits, interest, dividends, rent, and so on is more or less balanced by a comparable outflow.

In wealthy countries, net income from abroad is generally slightly positive. To a first approximation, the residents of these countries own as much in foreign real estate and financial instruments as foreigners own of theirs. Contrary to a tenacious myth, France is not owned by California pension funds or the Bank of China, any more than the United States belongs to Japanese and German investors. The fear of getting into such a predicament is so strong today that fantasy often outstrips reality. The reality is that inequality with respect to capital is a far greater domestic issue than it is an international one. Inequality in the ownership of capital brings the rich and poor within each country into conflict with one another far more than it pits one country against another. This has not always been the case, however, and it is perfectly legitimate to ask whether our future may not look more like our past, particularly since certain countries—Japan, Germany, the

Global income = global output7

National income = capital income + labor income

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.

“national capital” as the total market value of everything owned by the residents and government of a given country at a given point in time, provided that it can be traded on some market.8

National wealth = private wealth + public wealth

National wealth = national capital = domestic capital + net foreign capital

The most natural and useful way to measure the capital stock in a particular country is to divide that stock by the annual flow of income. This gives us the capital / income ratio, which I denote by the Greek letter β.

In the developed countries today, the capital / income ratio generally varies between 5 and 6, and the capital stock consists almost entirely of private capital. In France and Britain, Germany and Italy, the United States and Japan, national income was roughly 30,000–35,000 euros per capita in 2010, whereas total private wealth (net of debt) was typically on the order of 150,000–200,000 euros per capita, or five to six times annual national income.