Capital in the Twenty-First Century

by Thomas Piketty

Gini coefficient, which mix very different things,

Capital: Always More Unequally Distributed Than Labor

To give a preliminary idea of the order of magnitude in question, 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). Even more strikingly, perhaps, the bottom 50 percent of

Scandinavian countries in the 1970s and 1980s (inequalities have increased in northern Europe since then, but these countries nevertheless remain the least inegalitarian), the distribution is roughly as follows. Looking at the entire adult population, we see that the 10 percent receiving the highest incomes from labor claim a little more

than 20 percent of the total income from labor (and in practice this means essentially wages); the least well paid 50 percent get about 35 percent of the total; and the 40 percent in the middle therefore receive roughly 45 percent of the total (see Table 7.1).5

But the beauty of deciles and centiles is precisely that they enable us to compare inequalities that would otherwise be incomparable, using a common language that should in principle be acceptable to everyone.

The top centile is a particularly interesting group to study in the context of my historical investigation. Although it constitutes (by definition) a very small minority of the population, it is nevertheless far larger than the superelites of a few dozen or hundred individuals on whom attention is sometimes focused (such as the “200 families” of France, to use the designation widely applied in the interwar years to the 200 largest stockholders of the Banque de France, or the “400 richest Americans” or similar rankings established by magazines like Forbes). In a country of almost 65 million people such as France in 2013, of whom some 50 million are adults, the top centile comprises some 500,000

people. In a country of 320 million like the United States, of whom 245 million are adults, the top centile consists of 2.6 million individuals. These are numerically quite large groups who inevitably stand out in society, especially when the individuals included in them tend to live in the same cities and even to congregate in the same neighborhoods. In every country the upper centile occupies a prominent place in the social landscape and not just in the income distribution.

The “1 percent” who earn the most are not the same as the “1 percent” who own the most.

In countries where income from labor is most equally distributed, such as the Scandinavian countries between 1970 and 1990, the top 10 percent of earners receive about 20 percent of total wages and the bottom 50 percent about 35 percent.

And in the most inegalitarian countries, such as the United States in the early 2010s (where, as will emerge later, income from labor is about as unequally distributed as has ever been observed anywhere), the top decile gets 35 percent of

the total, whereas the bottom half gets only 25 percent.

In France, according to the latest available data (for 2010–2011), the richest 10 percent command 62 percent of total wealth,

while the poorest 50 percent own only 4 percent. In the United States, the

most recent survey by the Federal Reserve, which covers the same years, indicates that the top decile own 72 percent of America’s wealth, whi...

Make no mistake: the growth of a true “patrimonial (or propertied) middle class” was the principal structural transformation of the distribution of wealth in the developed countries in the twentieth century.

The wealthiest 1 percent alone owned more than 50 percent of all wealth.

Yet such capital concentration might be tenable if the income from capital accounts for only a small part of national income: perhaps one-fourth to one-third, or sometimes a bit more, as in the Ancien Régime (which made the extreme concentration of wealth at that time particularly oppressive). But if the same level of inequality applies to the totality of national income, it is hard to imagine that those at the bottom will accept the situation permanently.

I want to insist on this point: the key issue is the justification of inequalities rather than their magnitude as such.

Here we see that a very high level of total income inequality can be the result of a “hypermeritocratic society” (or at any rate a society that the people at the top like to describe as hypermeritocratic).

The Gini coefficient—named for the Italian statistician Corrado Gini (1884–1965)—is one of the more commonly used synthetic indices of inequality, frequently found in official reports and public debate. By construction, it ranges from 0 to 1: it is equal to 0 in case of complete equality and to 1 when inequality is absolute, that is, when a very tiny group owns all available resources.

of the twentieth century was due entirely to diminished top incomes from capital. If

To sum up: the reduction of inequality in France during the twentieth century is largely explained by the fall of the rentier and the collapse of very high incomes from capital. No generalized structural process of inequality compression (and particularly wage inequality compression) seems to have operated over the long run, contrary to the optimistic predictions of Kuznets’s theory.

To a large extent, it was the chaos of war, with its attendant economic and political shocks, that reduced inequality in the twentieth century. 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.

To sum up: what happened in France is that rentiers (or at any rate nine-tenths of them) fell behind managers; managers did not race ahead of rentiers.

To sum up: the top decile always encompasses two very different worlds: “the 9 percent,” in which income from labor clearly predominates, and “the 1 percent,” in which income from capital becomes progressively more important (more or less rapidly and massively, depending on the period). The transition between the two groups is always gradual, and the frontiers are of course porous, but the differences are nevertheless clear and systematic.

This pattern reflects the fact that large fortunes consist primarily of financial assets (mainly stocks and shares in partnerships).

By contrast, “the 9 percent” included many managers, who were the great beneficiaries of the Depression, at least when compared with other social groups.

The Clash of Temporalities

It is interesting to note that the capital-labor split tends to move in the same direction as inequality in income from labor, so that the two reinforce each other in the short to medium term but not necessarily in the long run.

(that is, it moves in the same direction as the economic cycle, in contrast to “countercyclical” changes).

But that is not all. A stunning new phenomenon emerged in France in the 1990s: the very top salaries, and especially the pay packages awarded to the top executives of the largest companies and financial firms, reached astonishing heights—somewhat less astonishing in France, for the time being, than in the United States, but still, it would be wrong to neglect this new development.

To be sure, in the immediate aftermath of a stock market crash, inequality always grows more slowly, just as it always grows more rapidly in a boom.

doubt that the increase of inequality in the United States contributed to the nation’s financial instability. The reason is simple: one consequence of increasing inequality was virtual stagnation of the purchasing power of the lower and middle classes in the United States, which inevitably made it more likely that modest households would take on debt, especially since unscrupulous banks and financial intermediaries, freed from regulation and eager to earn good yields on the enormous savings injected into the system by the well-to-do, offered credit on increasingly generous terms.32

The richest 1 percent alone absorbed nearly 60 percent of the total increase of US national income in this period. Hence for the bottom 90 percent, the rate of income growth was less than 0.5 percent per year.33 These figures are incontestable, and they are striking: whatever one thinks about the fundamental legitimacy of income inequality, the numbers deserve close scrutiny.34 It is hard to imagine an economy and society that can continue functioning indefinitely with such extreme divergence between social groups.

on the one hand the wage gap between workers who graduated from college and those who had only a high school diploma, and on the other the rate of growth of the number of college degrees.

Goldin and Katz have no doubt that increased wage inequality in the United States is due to a failure to invest sufficiently in higher education.

The lessons of French and US experience thus point in the same direction. In the long run, the best way to reduce inequalities with respect to labor as well as to increase the average productivity of the labor force and the overall growth of the economy is surely to invest in education.

All signs are that the Scandinavian countries, where wage inequality is more moderate than elsewhere, owe this result in large part to the fact that their educational system is relatively egalitarian and inclusive.

Germany and Sweden have chosen to do without minimum wages at the national level, leaving it to trade unions to negotiate not only minimums but also complete wage schedules with employers in each branch of industry.

“Rhenish model” of capitalism discussed earlier, in Part Two. This is probably the most important argument in favor of fixed wage

Various studies carried out in the United States between 1980 and 2000, most notably by the economists David Card and Alan Krueger, showed that the US minimum wage had fallen to a level so low in that period that it could be raised without loss of employment, indeed at times with an increase in employment, as in the monopsony model.10

To sum up: the best way to increase wages and reduce wage inequalities in the long run is to invest in education and skills.

The Rise of the Supermanager: An Anglo-Saxon Phenomenon

A case in point is India, which ceased publishing detailed income tax data in the early 2000s, even though such data had been published without interruption since 1922. As a result, it is harder to study the evolution of top incomes in India since 2000 than over the course of the twentieth century.31

This does not mean that senior executives and compensation committees can set whatever salaries they please and always choose the highest possible figure. “Corporate governance” is subject to certain institutions and rules specific to each country. The rules are generally ambiguous and flawed, but there are certain checks and balances.

This is particularly clear in the case of US corporations: Bertrand and Mullainhatan refer to this phenomenon as “pay for luck.”35

It is possible that the top decile’s share attained or even slightly exceeded 90 percent of total wealth on the eve of 1789 and that the upper centile’s share attained or exceeded 60 percent. Conversely, the “émigré billion” (the billion francs paid to the nobility in compensation for land confiscated during the Revolution)

In the late nineteenth century, in the period known as the Gilded Age, when some US industrialists and financiers (for example John D. Rockefeller, Andrew Carnegie, and J. P. Morgan) accumulated unprecedented wealth, many US observers were alarmed by the thought that the country was losing its pioneering egalitarian spirit.

Let me pursue the logic of the argument. Are there deep reasons why the return on capital should be systematically higher than the rate of growth? To be clear, I take this to be a historical fact, not a logical necessity.