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The First Fundamental Law of Capitalism: α = r × β
In other words, if national wealth represents the equivalent of six years of national income, and if the rate of return on capital is 5 percent per year, then capital’s share in national income is 30 percent.
make losses (negative rate of return). 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,
Concretely, this means that the current per capita national income of 30,000 euros per year in rich countries breaks down as 21,000 euros per year income from labor (70 percent) and 9,000 euros income from capital (30 percent). Each citizen owns an average of 180,000 euros of capital, and the 9,000 euros of income from capital thus corresponds to an average annual return on capital of 5 percent.
return on land in rural societies is typically on the order of 4–5 percent.
For example, in 2010, a large apartment in Paris, valued at 1 million euros, typically rents for slightly more than 2,500 euros per month, or annual rent of 30,000 euros, which corresponds to a return on capital of only 3 percent per year from the landlord’s point of view.
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. An apartment valued at 100,000 euros may yield 400 euros a month in rent, or nearly 5,000 per year (5 percent). A person who owns such an apartment and chooses to live in it can save the rental equivalent and devote that money to other uses, which yields a similar return on investment.
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 (see Figures 1.1 and 1.2).
The population of the planet is close to 7 billion in 2012, and global output is slightly greater than 70 trillion euros, so that global output per capita is almost exactly 10,000 euros.
If we subtract 10 percent for capital depreciation and divide by 12, we find that this yields an average per capita monthly income of 760 euros, which may
Global Inequality: From 150 Euros per Month to 3,000 Euros per Month
The global average, which is roughly equal to the Chinese average, is around 600–800 euros per month.
The Global Distribution of Income Is More Unequal Than the Distribution of Output
and output only at the global level and not at the national or continental level. Generally speaking, the global income distribution is more unequal than the output distribution, because the countries with the highest per capita output are also more likely to own part of the capital of other countries and therefore to receive a positive flow of income from capital originating in countries with a lower level of per capita output.
The only continent not in equilibrium is Africa, where a substantial share of capital is owned by foreigners.
the income of Africans is roughly 5 percent less than the continent’s output (and as high as 10 percent lower in some individual countries).33 With capital’s share of income at about 30 percent, this means that nearly 20 percent of African capital is owned by foreigners:
Part of the reason for that instability may be the following. When a country is largely owned by foreigners, there is a recurrent and almost irrepressible social demand for expropriation. Other political actors respond that investment and development are possible only if existing property rights are unconditionally protected. The country is thus caught in an endless alternation between revolutionary governments (whose success in improving actual living conditions for their citizens is often limited) and governments dedicated to the protection of existing property owners, thereby laying the
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Japan, South Korea, and Taiwan all financed investment out of savings.
In order to understand this argument better, it may be helpful to pause a moment to consider what might be called “the law of cumulative growth,” which holds that a low annual growth rate over a very long period of time gives rise to considerable progress.
The central thesis of this book is precisely that an apparently small gap between the return on capital and the rate of growth can in the long run have powerful and destabilizing effects on the structure and dynamics of social inequality.
The United States thus went from a population of less than 3 million in 1780 to 100 million in 1910 and more than 300 million in 2010, or more than a hundredfold increase in just over two centuries, as mentioned earlier.
“one consequence of the industrial regime is to destroy artificial inequalities, but this only highlights natural inequalities all the more clearly.” For Dunoyer, natural inequalities included differences in physical, intellectual, and moral capabilities, differences that were crucial to the new economy of growth and innovation that he saw wherever he looked.
Average global per capita income is currently around 760 euros per month; in 1700, it was less than 70 euros per month, roughly equal to income in the poorest countries of Sub-Saharan Africa in 2012.9
French purchasing power expressed in terms of oranges increased tenfold, and expressed in terms of bananas, twentyfold. Conversely, purchasing power measured in kilos of bread or meat rose less than fourfold, although there was a sharp increase in the quality and variety of products on offer.
Take the bicycle. In France in the 1880s, the cheapest model listed in catalogs and sales brochures cost the equivalent of six months of the average worker’s wage. And this was a relatively rudimentary bicycle, “which had wheels covered with just a strip of solid rubber and only one brake that pressed directly against the front rim.” Technological progress made it possible to reduce the price to one month’s wages by 1910. Progress continued, and
by the 1960s one could buy a quality bicycle (with “detachable wheel, two brakes, chain and mud guards, saddle bags, lights, and reflector”) for less than a week’s average wage. 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
The consequence of this is that a country that privatized its health and education services would see its GDP rise artificially, even if the services produced and the wages paid to employees remained exactly the same.19
The best available estimates suggest that global per capita income increased by a factor of more than 10 between 1700 and 2012 (from 70 euros to 760 euros per month) and by a factor of more than 20 in the wealthiest countries (from 100 to 2,500 euros per month).
United States, and may sink below 0.5 percent per year between 2050 and 2100.22 Gordon’s analysis is based on a comparison of the various waves of innovation that have succeeded one another since the invention of the steam engine and introduction of electricity, and on the finding that the most recent waves—including the revolution in information technology—have a much lower growth potential than earlier waves, because they are less disruptive to modes of production and do less to improve productivity across the economy.
Over a period of thirty years, a growth rate of 1 percent per year corresponds to cumulative growth of more than 35 percent. A growth rate of 1.5 percent per year corresponds to cumulative growth of more than 50 percent. In practice, this implies major changes in lifestyle and employment. Concretely, per capita output growth in Europe, North America, and Japan over the past thirty years has ranged between 1 and 1.5 percent, and people’s lives have been subjected to major changes. In 1980 there was no Internet or cell phone network, most people did not travel by air, most of the advanced
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have been profound. These changes have also had a powerful impact on the structure of employment: when output per head increases by 35 to 50 percent in thirty years, that means that a very large fraction—between a quarter and a third—of what is produced today, and therefore between a quarter and a third of occupations and jobs, did not exist thirty years ago.
barely 0.1 percent per year, as in the eighteenth century. A society in which growth is 0.1–0.2
Trente Glorieuses, the thirty years from the late 1940s to the late 1970s during which economic growth was unusually rapid.
Europe had fallen far behind the United States over the period 1914–1945 but rapidly caught up during the Trente Glorieuses.
output grew at roughly the same rate of 1.5–2 percent per year throughout the period 1820–2012.
(with a growth rate of just over 0.5 percent) and then leapt ahead to more than 4 percent from 1950 to 1970, before falling sharply to just slightly above US levels (a little more than 2 percent) in the period 1970–1990 and to barely 1.5 percent between 1990 and 2012.
in Ricardo’s theory based on the principle of scarcity: if certain prices, such as those for land, buildings, or gasoline, rise to very high levels for a prolonged period of time, this can permanently alter the distribution of wealth in favor of those who happen to be the initial owners of those scarce resources.
price increases over the periods 1700–1820 and 1820–1913, we find that inflation was insignificant in France, Britain, the United States, and Germany: at most 0.2–0.3 percent per year.
Indeed, a half century later, in the 1850s, the average income was barely 40–50 pounds a year. Readers probably found the amounts mentioned by Jane Austen somewhat too small to live comfortably but were not totally confused by them. By the turn of the twentieth century, the average income in Great Britain had risen to 80–90 pounds a year. The increase was noticeable, but annual incomes of 1,000 pounds or more—the kind that Austen talked about—still marked a significant divide.
As early as August 1914, the principal belligerents ended the convertibility of their currency into gold. After the war, all countries resorted to one degree or another to the printing press to deal with their enormous public debts.
Attempts to reintroduce the gold standard in the 1920s did not survive the crisis of the 1930s: Britain abandoned the gold standard in 1931, the United States in 1933, France in 1936. The post–World War II gold standard would prove to be barely more robust: established in 1946, it ended in 1971 when the dollar ceased to be convertible into gold.
Between 1913 and 1950, inflation in France exceeded 13 percent per year (so that prices rose by a factor of 100), and inflation in Germany was 17 percent per year (so t...
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In Britain and the United States, which suffered less damage and less political destabilization from the two wars, the rate of inflation was significantly lower: barely 3 percent per year in the period 1913–1950. Yet this still means that prices were multiplied by ...
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What is more, they built a monetary zone, the Eurozone, that is based almost entirely on the principle of combating inflation.
Specific references to wealth and income were omnipresent in the literature of all countries before 1914; these references gradually dropped out of sight between 1914 and 1945 and never truly reemerged.
In Snow, Pamuk even has his hero, a novelist like himself, say that there is nothing more tiresome for a novelist than to speak about money or discuss last year’s prices and incomes.
