Capital in the Twenty-First Century

by Thomas Piketty

it generally takes one of two forms: land or government bonds.

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):

Capital is never quiet: it is always risk-oriented and entrepreneurial,

The capital / income ratio then began to climb and has continued to do so ever since. In both countries, the total value of national capital in 2010 is roughly five to six years’ worth of national income, indeed a bit more than six in France, compared with less than four in the 1980s and barely more than two in the 1950s. The measurements are of course not perfectly precise, but the general shape of the curve is clear.

To put it simply, we can see that over the very long run, agricultural land has gradually been replaced by buildings, business capital, and financial capital invested in firms and government organizations. Yet the overall value of capital, measured in years of national income, has not really changed.

This collapse in the value of farmland (proportionate to national income and national capital) was counterbalanced on the one hand by a rise in the value of housing, which rose from barely one year of national income in the eighteenth century to more than three years today, and on the other hand by an increase in the value of other domestic capital, which rose by roughly the same amount (actually slightly less, from 1.5 years of national income in the eighteenth century to a little less

In other words, the rest of the world worked to increase consumption by the colonial powers and at the same time became more and more indebted to those same powers. This may seem shocking. But it is essential to realize that the goal of accumulating assets abroad by way of commercial surpluses and colonial appropriations was precisely to be in a position later to run trade deficits.

In the 1950s, both France and Great Britain found themselves with net foreign asset holdings close to zero, which means that their foreign assets were just enough to balance the assets of the two former colonial powers owned by the rest of the world.

we find that net foreign assets play a negligible role in both periods, and that the real long-run structural change is to be found in the gradual replacement of farmland by real estate and working capital, while the total capital stock has remained more or less unchanged relative to national income.

The current per capita national income in Britain and France is on the order of 30,000 euros per year, and national capital is about 6 times national income, or roughly 180,000 euros per head.

each citizen has about 90,000 euros in housing (for his or her own use or for rental to others) and about 90,000 euros worth of other domestic capital (primarily in the form of capital invested in firms by way of financial instruments).

Concretely, public assets take two forms. They can be nonfinancial (meaning essentially public buildings, used for government offices or for the provision of public services, primarily in health and education: schools, universities, hospitals, etc.) or financial. Governments can own shares in firms, in which they can have a majority or minority stake. These firms may be located within the nation’s borders or abroad. In recent years, for instance, so-called sovereign wealth funds have arisen to manage the substantial portfolios of foreign financial assets that some states have acquired. In practice, the boundary between financial and nonfinancial assets need not be fixed.

very high level of public debt served the interests of the lenders and their descendants quite well, at least when compared with what would have happened if the

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. Furthermore, the fact that the government’s deficits increased the overall demand for private wealth inevitably increased the return on that wealth, thereby serving the interests of those whose prosperity depended on the return on their investment in government bonds.

Concretely, imagine a government that runs deficits on the order of 5 percent of GDP every year for twenty years (to pay, say, the wages of a large number of soldiers from 1795 to 1815) without having to increase taxes by an equivalent amount. After twenty years, an additional public debt of 100 percent of GDP will have been accumulated. Suppose that the government does not seek to repay the principal and simply pays the annual interest due on the debt. If the interest rate is 5 percent, it will have to pay 5 percent of GDP every year to the owners of this additional public debt, and must continue to do so until the end of time.

It is interesting to recall that redistribution via inflation was much more significant in France than in Britain. As noted in Chapter 2, French inflation in the period 1913–1950 averaged more than 13 percent a year, which multiplied prices by a factor of 100. When Proust published Swann’s Way in 1913, government bonds seemed as indestructible as the Grand Hotel in Cabourg, where the novelist spent his summers. By 1950, the purchasing power of those bonds was a hundredth of what it had been, so that the rentiers of 1913

Once inflation becomes permanent, lenders will demand a higher nominal interest rate, and the higher price will not have the desired effects. Furthermore, high inflation tends to accelerate constantly, and once the process is under way, its consequences can be difficult to master: some social groups saw their incomes rise considerably, while others did not. It was in the late 1970s—a decade marked by a mix of inflation, rising unemployment, and relative economic stagnation (“stagflation”)—that a new consensus formed around the idea of low inflation. I will return to this issue later.

Furthermore, the fact that the Soviet Union joined the victorious Allies in World War II enhanced the prestige of the statist economic system the Bolsheviks had put in place. Had not that system allowed the Soviets to lead a notoriously backward country, which in 1917 had only just emerged from serfdom, on a forced march to industrialization? In 1942, Joseph Schumpeter

believed that socialism would inevitably triumph over capitalism. In 1970, when Paul Samuelson published the eighth edition of his famous textbook, he was still predicting that the GDP of the Soviet Union might outstrip that of the United States sometime between 1990 and 2000.17

The Renault factories were punitively seized after their owner, Louis Renault, was arrested as a collaborator in September 1944. The provisional government nationalized the

firm in January 1945.18

Despite these converging international currents, French voters in 1981 displayed a certain desire to sail against the wind. Every country has its own history, of course, and its own political timetable. In France, a coalition of Socialists and Communists won a majority on a platform that promised to continue the nationalization of the industrial and banking sectors begun in 1945. This proved to be a brief intermezzo, however, since in 1986 a liberal majority initiated a very important wave of privatization in all sectors. This initiative was then continued and

The main reason for this is of course that Germany had no colonial empire, a fact that was the source of some very powerful political and military tensions: think, for example, of the Moroccan crises of 1905 and 1911, when the Kaiser sought to challenge French supremacy in Morocco. The heightened competition among European powers for colonial assets obviously contributed to the climate that ultimately led to the declaration of war in the summer of 1914: one need not subscribe to all of Lenin’s theses in Imperialism, the Highest Stage of Capitalism (1916) to share this conclusion.

Despite running large deficits during both world wars (the public debt briefly exceeded 100 percent of GDP in 1918–1920 and 150 percent of GDP in 1943–1944), inflation made it possible in both instances to shrink the debt very rapidly to very low levels: barely 20 percent of GDP in 1930 and again in 1950 (see Figure 4.2).1 Yet 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.2

That is why the following paradoxical situation exists today: Germany, the country that made the most dramatic use of inflation to rid itself of debt in the twentieth century, refuses to countenance any rise in prices greater than 2 percent a year,

Britain, whose government has always paid its debts, even more than was reasonable, has a more flexible attitude and sees nothing wrong with allowing its central bank to buy a substantial portion of its ...

The first factor to consider is 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. To explain the discrepancy over the long term, however, we would need more durable factors, such as stricter rent control.

In other words, the gap arises not from the low valuation of German real estate but rather from the low stock market valuation of German firms. If, in measuring total private wealth, we used not stock market value but book value (obtained by subtracting a firm’s debt from the cumulative value of its investments), the German paradox would disappear: German private wealth would immediately rise to French and British levels (between five and six years of national income rather than four). These complications may appear to be purely matters of accounting but are in fact highly political.

“Rhenish capitalism” or “the stakeholder model,” that is, an economic model in which firms are owned not only by shareholders but also by certain other interested parties

known as “stakeholders,” starting with representatives of the firms’ workers (who sit on the boards of directors of German firms not merely in a consultative capacity but as active participants in deliberations, even though they may not be shareholders), as well as representatives of regional governments, consumers’ associations, environmental groups, and so on.

later waned, in part no doubt because the German economic model seemed to be losing steam in the years after reunification (between 1998 and 2002, Germany was often presented as the sick man of Europe). In view of Germany’s relatively good health in the midst of the global financial crisis (2007–2012), it is not out of the question that this debate will be revived in the years to come.6

In fact, the budgetary and political shocks of two wars proved far more destructive to capital than combat itself. In addition to physical destruction, the main factors that explain the dizzying fall in the capital / income ratio between 1913 and 1950 were on the one hand the collapse of foreign portfolios and the very low savings rate characteristic of the time (together, these two factors, plus physical destruction, explain two-thirds to three-quarters of the drop) and on the other the low asset prices that obtained in the new postwar political context of mixed ownership and regulation (which accounted for one-quarter to one-third of the drop).

Owing to low growth and repeated recessions, the period 1914–1945 was a dark one for all Europeans but especially for the wealthy, whose income dwindled considerably in comparison with the Belle Époque. Private savings rates were therefore relatively low (especially if we deduct the amount of reparations and replacement of war-damaged property), and some people consequently chose to maintain their standard of living by gradually selling off part of their capital. When the Depression came in the 1930s, moreover, many stock- and bondholders were ruined as firm after firm went bankrupt.

Savers lent massively to their governments, in some cases selling their foreign assets, only to be ultimately expropriated by inflation, very quickly in France and Germany and more slowly in Britain, which created the illusion that private wealth in Britain was faring better in 1950 than private wealth on the continent. In fact, national wealth was equally affected in both places (see Figures 4.4 and 4.5). At times governments borrowed directly from abroad: that is how the United States went from a negative position on the eve of World War I to a positive position in the 1950s. But the effect on the national wealth of Britain or France was the same.8

Ultimately, the decline in the capital / income ratio between 1913 and 1950 is the history of Europe’s suicide, and in particular of the euthanasia of European capitalists.

Remember that all forms of wealth are evaluated in terms of market prices at a given point in time.

Farmland was valued at between one and one and a half years of national income (see Figure 4.6).

The crucial point is that the number of hectares per person was obviously far greater in North America than in old Europe.

Make no mistake: the low capital / income ratio in America reflected a fundamental difference in the structure of social inequalities compared with Europe. The fact that total wealth amounted to barely three years of national income in the United States compared with more than seven in Europe signified in a very concrete way that the influence of landlords and accumulated wealth was less important in the New World.

With a few years of work, the new arrivals were able to close the initial gap between themselves and their wealthier predecessors—or at any rate it was possible to close the wealth gap more rapidly than in Europe.

When it came to progressive taxation, the United States went much farther than Europe, possibly demonstrating that the goal there was more to reduce inequality than to eradicate private property. No sweeping policy of nationalization was attempted, although major public investments were initiated in the 1930s and 1940s, especially in infrastructures. Inflation and growth eventually returned public debt to a modest level in the 1950s and 1960s, so that public wealth was distinctly positive in 1970 (see Figure 4.7). In the end, American private wealth decreased from nearly five years of national income in 1930 to less than three and a half in 1970, a not insignificant decline (see Figure 4.8).

This is because the United States, the first colonized territory to have achieved independence, never became a colonial power itself.

it is never easy to be owned by foreigners.

it is fairly difficult to imagine that nineteenth-century US citizens would have tolerated a situation in which one-quarter of the country was owned by its former colonizer.13

The Importance of Slavery

to US soil after 1808.

to the abolition of slavery in 1865.

In 1800, slaves represented nearly 20 percent of the population of the United

States: roughly 1 million slaves out of a total popula...