Capital in the Twenty-First Century

  2. One can either attribute to nonwage workers the same average labor income as wage workers, or one can attribute to the business capital used by nonwage workers the same average return as for other forms of capital. See the online technical appendix.

  3. In the rich countries, the share of individually owned businesses in domestic output fell from 30–40 percent in the 1950s (and from perhaps 50 percent in the nineteenth and early twentieth centuries) to around 10 percent in the 1980s (reflecting mainly the decline in the share of agriculture) and then stabilized at around that level, at times rising to about 12–15 percent in response to changing fiscal advantages and disadvantages. See the online technical appendix.

  4. The series depicted in Figures 6.1 and 6.2 are based on the historical work of Robert Allen for Britain and on my own work for France. All details on sources and methods are available in the online technical appendix.

  5. See also Supplemental Figures S6.1 and S6.2, available online, on which I have indicated upper and lower bounds for capital’s share of income in Britain and France.

  6. See in particular Chapter 12.

  7. The interest rate on the public debt of Britain and France in the eighteenth and nineteenth centuries was typically on the order of 4–5 percent. It sometimes went as low as 3 percent (for example, during the economic slowdown of the late nineteenth century) Conversely, it rose to 5–6 percent or even higher during periods of high political tension, when there was doubt about the credibility of the government budget, for example, during the decades prior to and during the French Revolution. See F. Velde and D. Weir, “The Financial Market and Government Debt Policy in France 1746–1793,” Journal of Economic History 52, no. 1 (March 1992): 1–39. See also K. Béguin, Financer la guerre au 17e siècle: La dette publique et les rentiers de l’absolutisme (Seyssel: Champ Vallon, 2012). See online appendix.

  8. The French “livret A” savings account paid a nominal interest of barely 2 percent in 2013, for a real return of close to zero.

  9. See the online technical appendix. In most countries, checking account deposits earn interest (but this is forbidden in France).

  10. For example, a nominal interest rate of 5 percent with an inflation rate of 10 percent corresponds to a real interest rate of −5 percent, whereas a nominal interest rate of 15 percent and an inflation rate of 5 percent corresponds to a real interest rate of +10 percent.

  11. Real estate assets alone account for roughly half of total assets, and among financial assets, real assets generally account for more than half of the total and often more than three-quarters. See the online technical appendix.

  12. As I explained in Chapter 5, however, this approach includes in the return of capital the structural capital gain due to capitalization of retained earnings as reflected in the stock price, which is an important component of the return on stocks over the long run.

  13. In other words, an increase of inflation from 0 to 2 percent in a society where the return on capital is initially 4 percent is certainly not equivalent to a 50 percent tax on income from capital, for the simple reason that the price of real estate and stocks will begin to increase at 2 percent a year, so that only a small proportion of the assets owned by households—broadly speaking, cash deposits and some nominal assets—will pay the inflation tax. I will return to this question in Chapter 12.

  14. See P. Hoffman, Gilles Postel-Vinay, and Jean-Laurent Rosenthal, Priceless Markets: The Political Economy of Credit in Paris 1660–1870 (Chicago: University of Chicago Press, 2000).

  15. In the extreme case of zero elasticity, the return on capital and therefore the capital share of income fall to zero if there is even a slight excess of capital.

  16. In the extreme case of infinite elasticity, the return on capital does not change, so that the capital share of income increases in the same proportion as the capital/income ratio.

  17. It can be shown that the Cobb-Douglas production function takes the mathematical form Y = F (K, L) = KαL1 − α, where Y is output, K is capital, and L is labor. There are other mathematical forms to represent the cases where the elasticity of substitution is greater than one or less than one. The case of infinite elasticity corresponds to a linear production function: output is given Y = F (K, L) = rK + vL (so that the return on capital r does not depend on the quantities of capital and labor involved, nor does the return on labor v, which is just the wage rate, also fixed in this example). See the online technical appendix.

  18. See Charles Cobb and Paul Douglas, “A Theory of Production,” American Economic Review 18, no. 1 (March 1928): 139–65.

  19. According to Bowley’s calculations, capital’s share of national income throughout the period was about 37 percent and labor’s share about 63 percent. See Arthur Bowley, The Change in the Distribution of National Income, 1880–1913 (Oxford: Clarendon Press, 1920). These estimates are consistent with my findings for this period. See the online technical appendix.

  20. See Jürgen Kuczynski, Labour Conditions in Western Europe 1820 to 1935 (London: Lawrence and Wishart, 1937). That same year, Bowley extended his work from 1920: see Arthur Bowley, Wages and Income in the United Kingdom since 1860 (Cambridge: Cambridge University Press, 193). See also Jürgen Kuczynski, Geschichte der Lage der Arbeiter unter dem Kapitalismus, 38 vols. (Berlin, 1960–72). Volumes 32, 33, and 34 are devoted to France. For a critical analysis of Kuczynski’s series, which remain a valuable historical source despite their lacunae, see Thomas Piketty, Les hauts revenus en France au 20e siècle: Inégalités et redistribution 1901–1998 (Paris: Grasset, 2001), 677–681. See the online technical appendix for additional references.

  21. See Frederick Brown, “Labour and Wages,” Economic History Review 9, no. 2 (May 1939): 215–17.

  22. See J.M. Keynes, “Relative Movement of Wages and Output,” Economic Journal 49 (1939): 48. It is interesting to note that in those days the proponents of a stable capital-labor split were still unsure about the supposedly stable level of this split. In this instance Keynes insisted on the fact that the share of income going to “manual labor” (a category difficult to define over the long run) seemed stable at 40 percent of national income between 1920 and 1930.

  23. See the online technical appendix for a complete bibliography.

  24. See the online technical appendix.

  25. This might take the form of an increase in the exponent 1 − α in the Cobb-Douglas production function (and a corresponding decrease in α) or similar modifications to the more general production functions in which elasticities of substitution are greater or smaller than one. See the online technical appendix.

  26. See the online technical appendix.

  27. See Jean Bouvier, François Furet, and M. Gilet, Le mouvement du profit en France au 19e siècle: Matériaux et études (Paris: Mouton, 1965).

  28. See François Simiand, Le salaire, l’évolution sociale et la monnaie (Paris: Alcan,1932); Ernest Labrousse, Esquisse du mouvement des prix et des revenus en France au 18e siècle (Paris: Librairie Dalloz, 1933). The historical series assembled by Jeffrey Williamson and his colleagues on the long-term evolution of land rents and wages also suggest an increase in the share of national income going to land rent in the eighteenth and early nineteenth centuries. See the online technical appendix.

  29. See A. Chabert, Essai sur les mouvements des prix et des revenus en France de 1798 à 1820, 2 vols. (Paris: Librairie de Médicis, 1945–49). See also Gilles Postel-Vinay, “A la recherche de la révolution économique dans les campagnes (1789–1815),” Revue économique, 1989.

  30. A firm’s “value added” is defined as the difference between what it earns by selling goods and services (called “sales revenue” in English) and what it pays other firms for its purchases (called “intermediate consumption”). As the name indicates, this sum measures the value the firm adds in the process of production. Wages are paid out of value added, and what is left over is by definition the firm’s profit. The study of the capital-labor split is too often limited to th
e wage-profit split, which neglects rent.

  31. The notion of permanent and durable population growth was no clearer, and the truth is that it remains as confused and frightening today as it ever was, which is why the hypothesis of stabilization of the global population is generally accepted. See Chapter 2.

  32. The only case in which the return on capital does not tend toward zero is in a “robotized” economy with an infinite elasticity of substitution between capital and labor, so that production ultimately uses capital alone. See the online technical appendix.

  33. The most interesting tax data are presented in appendix 10 of book 1 of Capital. See the online technical appendix for an analysis of some of the calculations of profit shares and rates of exploitation based on the account books presented by Marx. In Wages, Price, and Profit (1865) Marx also used the accounts of a highly capitalistic factory in which profits attained 50 percent of value added (as large a proportion as wages). Although he does not say so explicitly, this seems to be the type of overall split he had in mind for an industrial economy.

  34. See Chapter 1.

  35. Some recent theoretical models attempt to make this intuition explicit. See the online technical appendix.

  36. To say nothing of the fact that some of the US economists (starting with Modigliani) argued that capital had totally changed its nature (so that it now stemmed from accumulation over the life cycle), while the British (starting with Kaldor) continued to see wealth in terms of inheritance, which was significantly less reassuring. I return to this crucial question in Part Three.

  7. Inequality and Concentration: Preliminary Bearings

  1. Honoré de Balzac, Le père Goriot (Paris: Livre de Poche, 1983), 123–35.

  2. See Balzac, Le père Goriot, 131. To measure income and wealth, Balzac usually used francs or livres tournois (which became equivalent once the franc “germinal” was in place) as well as écus (an écu was a silver coin worth 5 francs in the nineteenth century), and more rarely louis d’or (a louis was a gold coin worth 20 francs, which was already worth 20 livres under the Ancien Régime). Because inflation was nonexistent at the time, all these units were so stable that readers could move easily from one to another. See Chapter 2. I discuss the amounts mentioned by Balzac in greater detail in Chapter 11.

  3. See Balzac, Le père Goriot, 131.

  4. According to the press, the son of a former president of France, while studying law in Paris, recently married the heiress of the Darty chain of appliance stores, but he surely did not meet her at the Vauquer boardinghouse.

  5. I define deciles in terms of the adult population (minors generally earn no income) and, insofar as possible, at the individual level. The estimates in Tables 7.1–3 are based on this definition. For some countries, such as France and the United States, the historical data on income are available only at the household level (so that the incomes of both partners in a couple are added). This slightly modifies the shares of the various deciles but has little effect on the long-term evolutions that are of interest here. For wages, the historical data are generally available at the individual level. See the online technical appendix.

  6. See the online technical appendix and Supplemental Table S7.1, available online.

  7. The median is the level below which half the population lies. In practice, the median is always lower than the mean, or average, because real-world distributions always have long upper tails, which raises the mean but not the median. For incomes from labor, the median is typically around 80 percent of the mean (e.g., if the average wage is 2,000 euros a month, the median is around 1,600 euros). For wealth, the median can be extremely low, often less than 50 percent of mean wealth, or even zero if the poorer half of the population owns almost nothing.

  8. “What is the Third Estate? Everything. What has it been in the political order until now? Nothing. What does it want? To become something.”

  9. As is customary, I have included replacement incomes (i.e., pensions and unemployment insurance intended to replace lost income from labor and financed by wage deductions) in primary income from labor. Had I not done this, inequality of adult income from labor would be noticeably—and to some extent artificially—greater than indicated in Tables 7.1 and 7.3 (given the large number of retirees and unemployed workers whose income from labor is zero). In Part Four I will come back to the question of redistribution by way of pensions and unemployment insurance, which for the time being I treat simply as “deferred wages.”

  10. These basic calculations are detailed in Supplemental Table S7.1, available online.

  11. The top decile in the United States most likely owns something closer to 75 percent of all wealth.

  12. See the online technical appendix.

  13. It is difficult to say whether this criterion was met in the Soviet Union and other countries of the former Communist bloc, because the data are not available. In any case, the government owned most of the capital, a fact that considerably diminishes the interest of the question.

  14. Note that inequality remains high even in the “ideal society” described in Table 7.2. (The richest 10 percent own more capital than the poorest 50 percent, even though the latter group is 5 times larger; the average wealth of the richest 1 percent is 20 times greater than that of the poorest 50 percent.) There is nothing preventing us from aiming at more ambitious goals.

  15. Or 400,000 euros on average per couple.

  16. See Chapters 3–5. The exact figures are available in the online technical appendix.

  17. On durable goods, see Chapter 5 and the online technical appendix.

  18. Exactly 35/9 × 200,000 euros, or 777,778 euros. See Supplemental Table S7.2, available online.

  19. To get a clearer idea of what this means, we can continue the arithmetic exercise described above. With an average wealth of 200,000 euros, “very high” inequality of wealth as described in Table 7.2 meant an average wealth of 20,000 euros for the poorest 50 percent, 25,000 euros for the middle 40 percent, and 1.8 million euros for the richest 10 percent (with 890,000 for the 9 percent and 10 million for the top 1 percent). See the online technical appendix and Supplemental Tables S7.1–3, available online.

  20. If we look only at financial and business capital, that is, at control of firms and work-related tools, then the upper decile’s share is 70–80 percent or more. Firm ownership remains a relatively abstract concept for the vast majority of the population.

  21. The increasing association of the two dimensions of inequality might, for example, be a consequence of the increase in university attendance. I will come back to this point later.

  22. These calculations slightly underestimate the true Gini coefficients, because they are based on the hypothesis of a finite number of social groups (those indicated in Tables 7.1–3), whereas the underlying reality is a continuous wealth distribution. See the online technical appendix and Supplemental Tables S7.4–6 for the detailed results obtained with different numbers of social groups.

  23. Other ratios such as P90/P50, P50/P10, P75/P25, etc. are also used. (P50 indicates the fiftieth percentile, that is, the median, while P25 and P75 refer to the twenty-fifth and seventy-fifth percentiles, respectively.

  24. Similarly, the decision whether to measure inequalities at the individual or household level can have a much larger—and especially more volatile—effect on interdecile ratios of the P90/P10 type (owing in particular to the fact that in many cases women do not work outside the home) than on the bottom half’s share of total income.

  25. See in particular Joseph E. Stiglitz, Amartya Sen, and Jean-Paul Fitoussi, Report by the Commission on the Measurement of Economic Performance and Social Progress, 2009 (www.stiglitz-sen-fitoussi.fr)

  26. Social tables were similar, in spirit at least, to the famous Tableau économique that François Quesnay published in 1758, which provided the first synthetic picture of the economy and of exchanges between social groups. One can also find much older social tables from any number of countries from antiquity
on. See the interesting tables described by B. Milanovic, P. Lindert, and J. Williamson in “Measuring Ancient Inequality,” NBER Working Paper 13550 (October 2007). See also B. Milanovic, The Haves and the Have-Nots: A Brief and Idiosyncratic History of Global Inequality (New York: Basic Books, 2010). Unfortunately, the data in these early tables are not always satisfactory from the standpoint of homogeneity and comparability. See the online technical appendix.

  8. Two Worlds

  1. See Table 7.3.

  2. See Table 7.1 and the online technical appendix.

  3. For complete series for the various centiles and up to the top ten-thousandth, as well as a detailed analysis of the overall evolution, see Thomas Piketty, Les hauts revenus en France au 20e siècle: Inégalités et redistribution 1901–1998 (Paris: Grasset, 2001). Here I will confine myself to the broad outlines of the story, taking account of more recent research. The updated series are also available online in the WTID.

  4. The estimates shown in Figures 8.1 and 8.2 are based on declarations of income and wages (the general income tax was instituted in France in 1914, and the so-called cédulaire tax on wages was adopted in 1917, so we have separate annual measures of high incomes and high wages starting from those two dates) and on national accounts (which tell us about total national income and total wages paid), using a method initially introduced by Kuznets and described briefly in the introduction. The fiscal data begin only with income for 1915 (the first year in which the new tax was levied), and I have completed the series for 1910–1914 using estimates carried out before the war by the tax authorities and contemporary economists. See the online technical appendix.

  5. In Figure 8.3 (and subsequent figures of similar type) I have used the same notations as in Les hauts revenus en France and the WTID to designate the various “fractiles” of the income hierarchy: P90–95 includes everyone between the ninetieth and ninety-fifth percentile (the poorer half of the richest 10 percent), P95–99 includes those between the ninety-fifth and ninety-ninth percentile (the next higher 4 percent), P99–99.5 the next 0.5 percent (the poorer half of the top 1 percent), P99.5–99.9 the next 0.4 percent, P99.9–99.99 the next 0.09 percent, and P99.99–100 the riches 0.01 percent (the top ten-thousandth).