Capital in the Twenty-First Century – Thomas Piketty (2014)




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.  There are nevertheless ways democracy can regain control over capitalism and ensure that the general interest take precedence over private interests…

Whenever one speaks about distribution of wealth, politics is never very far behind.

In 1798, Malthus, like his compatriots, was very afraid of new political ideas emanating from France, and to reassure himself that there would be no comparable upheaval in Great Britain he argued that all welfare assistance to the poor must be halted and that reproduction by the poor should be severely scrutinized. It is impossible to understand Malthus’s exaggeratedly somber predictions without recognizing the way fear gripped much of European elite in the 1790s.

Kuznets (1953) noted a sharp reduction in income inequality in the US between 1913 and 1948. In 1913, the upper decile of the income distribution (the top 10% of US earners) claimed 45-50% of annual national income. By 1948, the share had decrease to 30-35%. This was considerable and equivalent to the share of the poorest 50% of Americans. Inequality was shrinking. According to the “Kusnets curve” inequality can be expected to follow a “bell curve”. It should first increase and then decrease over the course of industrialization and economic development, as a larger and larger fraction of the population partakes of the fruits of economic growth. The data and the theory became a powerful political weapon in the context of the cold war: the intent of his optimistic predictions was quite simply to maintain the underdeveloped countries within “the orbit of the free world”.  The Kuznets’s curve theory was formulated in large part for the wrong reasons. The sharp reduction in inequality was due above all to the world wars and violent economic shocks they entailed. It had little to do with the tranquil process of intersectoral mobility described by Kuznets.

WTIP : world top income database

Just as income tax returns allow us to study changes in income inequality, estate tax returns enable us to study changes in the inequality of wealth.

First conclusion: one should be wary of any economic determinism in regard to equalities and wealth and income. The history of distribution of wealth has always been deeply political, and it cannot be reduced to purely economic mechanisms.  The reduction of inequality between 1910 and 1950 was due to wars and policies to deal with shocks. The resurgence of inequality after the 1980 was largely due to the political shifts in regard to taxation and finance.

Second conclusion: 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 emergent economies are now in the process of catching up with the advanced ones by adopting modes of production of the rich countries and acquiring skills comparable to those found elsewhere.

The forces of divergence? First, top earners can quickly separate themselves from the rest by a wide margin. More importantly there is a set of forces of divergence associated with the process of accumulation and concentration of wealth when growth is weak and the return on capital high. This is the principal threat to an equal distribution of wealth over the long run.  It is not out of question that those two forces of divergence come together in the 21st century. This has already happen to some extent and may yet become a global phenomenon, which could lead to level of inequality never seen before. The top decile in the US claimed 45-50% of the national income in 1910-20; 30-35%  from the 1940s to 1970s and rapidly rose from 1980 to 45-50% in 2000s.  This spectacular increase in inequality reflects an unprecedented explosion of very elevated incomes from labor, a veritable separation of the top managers of large firms from the rest of the population. These top manager by and large have the power to set their own remuneration, sometimes without limits and in any case without any clear relation to their individual productivity.

In slow growing economies, past wealth naturally takes on disproportionate importance, because it takes only a small flow of new savings the stock of wealth steadily and substantially. When the rate of return on capital significantly exceeds the growth rate of the economy, then it logically follows that inherited wealth grows faster than output and income. It is almost inevitable that inherited wealth will dominate wealth amassed in a lifetime’s labor and the concentration of capital will attain extremely high levels potentially incompatible with principles of social justice. It is possible to imagine public institutions and policies that would counter the effects of this logic: for instance a progressive global tax on capital.

It was not until the coming of the 21st century that the wealthy countries regained the same level of stock market capitalization relative to GDP that Paris and London achieved in the early 1900s.

It has been the demographic growth of the New World that has ensured that inherited wealth has always played a smaller role in the US than in Europe. This explain why the structure of inequality has always been so peculiar.[ US went from 3M at the time of independence to 300M today, France went from 30 million to 60 million in the same period. US is not the same country anymore. France example is more typical and pertinent for understanding the future. ]

Many commentators continue to believe that ever more fully guaranteed property rights, ever freer markets and ever purer and more perfect competition are enough to ensure a just, prosperous and harmonious society. Unfortunately, the task is more complex.

Capital/Labor split: at historically low level in the 1950’s, the growth of capital share accelerated with the victories of Margaret Thatcher in England in 1979 and Ronald Reagan in the US in 1980, followed by financial globalization and deregulation in the 1990’s. By 2010, despite the crises in 2007-2008, capital was prospering has it had not done since 1913.

National income: subtract from GDP the depreciation of capital that made the production possible (10% of GDP in most country) and add the net income received from abroad. A country that own a large portion of the capital of other countries may enjoy a national income higher than its domestic product.

In most rich countries the residents own as much in foreign real estate and financial instruments as foreigners own of theirs. France is not owned by Californian pension funds of the Bank of China. US does not belong to Japanese of German investors. The reality is that inequality with respect to capital is a far greater domestic issue than it is an international one.

Public wealth in most developed countries in currently insignificant: private wealth accounts for nearly all wealth almost everywhere.

Since the 1980s many countries have more or less balanced net asset positions, but those positions are quite large in absolute terms. Many countries have large capital stakes in other countries and those other countries also have stakes in the country in question, and the two positions are more or less equal, so net foreign capital is close to zero. Net income from abroad is just slightly positive in Japan, France, US, Britain, with 1-2% of GDP. Japan and Germany, whose trade surpluses have enabled them to accumulate over the past decades substantial reserves, have a net income from abroad at 2-3% of GDP. All continental blocs are close to equilibrium but for Africa where income is roughly 5% less than the continent output ( and 10% in some countries): this means that some 20% of African capital is owned by foreigners.

In developed countries today, the capital/income ratio generally varies between 5 and 6, and the capital stock consist almost entirely of private capital.

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 10,000 euros. If we subtract 10% for capital depreciation and divide by 12, this yield an average per capita monthly income of 760euro. If the output was equally distributed each individual would have an income of 760 euros per month.

Sub Saharan Africa, with a population of 900 million and annual output of 1.8 trillion (less than the French GDP if 2 trillion) result in a per capita output of 2000 euro/year, the poorest economic region. China has 8000 euro/year.

The world clearly seems to have entered a phase in which rich and poor countries are converging.

The fact that rich countries own part of the capital of poor countries can have a virtuous effect by promoting convergence. Wealthy country residents will obtain better return on their investment by investing abroad, the poor country will produce more and close the gap between them and the rich countries. However this mechanism does not guarantee convergence of per capita income.  Then after the wealthy countries have invested in their poorer neighbors, they may continue to own them indefinitely: poor countries must continue to pay to foreigners substantial share of what their citizens produce (as African countries have done for decades).

None of the Asian countries that have moved closer to the developed countries of the West in recent years has benefited from large foreign investments (Japan, South Korea, Taiwan, China).

Many studies show that gains from free trade come mainly from the diffusion of knowledge and from the productivity gains made necessary by open borders, not from static gains associated with specialization.

The poor catch up with the rich to the extent that they achieve the same level of technological know-how, skill and education, not by becoming the property of the wealthy.

Growth: illusions and realities

The 21st century may see a return to a low growth regime.

According to the best available estimates, global output grew to an average annual rate of 1.6% between 1700 and 2012, 0.8% of which reflects population growth, while another 0.8% came from growth in output per head.

According to the UN forecast, the demographic growth rate should fall to 0.4% by the 2030s and around 0.1% in 2070, a rate similar to the low growth regime before 1700 and far from the spectacular peak of 2% of the 1950-1990.


A 2% growth rate is equivalent to a cumulative generational growth (over 30 year) of 81%. After 100 year, the wealth is multiplied by 7.

A stagnant or, worse, decreasing population increases the influence of capital accumulated in previous generations. The same is true for economic stagnation. Inherited wealth will make a comeback. On the contrary growth can increase social mobility for individuals whose parents did not belong to the elite generation. This phenomenon not only decrease income inequality but also limit the reproduction of inequality of wealth.

The end of growth: the key point is that there is no historical example of a country at the world technological frontier whose growth in per capita output exceeded 1.5% over a lengthy period of time. A growth of 3-4% per year is illusory.

It was essentially inflation that allowed the wealthy countries to get rid of the public debt they owed at the end of World War II. Conversely, the wealth-based society that flourished in the 18th and 19th centuries was inextricably linked to the very stable monetary conditions that persisted over this very long period. Despite slight adjustments, the conversion rate between French and Britain currencies remained quite stable for two centuries (parities with gold and growth was slow so the amounts of money changed only very gradually over time). Until World War I money had meaning.

Today’s public debt is nowhere near the astronomical levels attained at the beginning of the 19th century, but it is at historical levels in France and some other countries and is probably the source of much confusion. Britain’s public debt attained extremely high levels, around 200% of GDP in only two occasion: after WWII and after the Napoleonic wars. While the French defaulted on 2/3 of its debt (in the 1800s) Britons who had the necessary means lent what the state demanded without appreciably reducing private investment: the debt was largely financed by increased private savings. It is quite clear that the very high level of public debt served the interest of the lenders- investing in government bond was good business for wealthy people. For over 100 years, British government did not repay the principal and only paid the annual interest due on the debt. The British budget was always in substantial primary surplus: tax exceeded expenditures by several % of GDP. It was only growth of GDP and income from 1815 to 1914 that ultimately allowed Britain to reduce its public debt (and never defaulted). After WWI, the inflation of the 1950s (4% a year) and of the 1970s (15% a year) help reduce the debt from 200% to a 50% of GDP ratio.

To simplify the total value of public debt increased over the long run to roughly 100% at the end of 20th century. This increase reflects the expansion of the economic role of the state, the development of ever more extensive public services (health, education) and infrastructures. The total value of public assets in France is 150% of national income.

In the 1980s started a wave of liberalization and deregulation. The memory of the Great Depression had faded. The stagflation of the 1970s demonstrated the limit of post war Keynesian consensus. With the end of the reconstruction and the Trente Glorieuse it was only natural to question the indefinitely expending role of the state and its increasing claims on national output. Privatisation, deregulation followed. Public wealth fell to very low levels and private wealth slowly returned to levels of the early 20th century. France totally transformed its national capital structure.

Capital in the US took some specific forms first because land was abundant and did not cost very much, second because of the existence of slavery and finally because of the [strong] demographic growth (accumulating smaller amount of capital).

In the 1850s, the low capital/income ratio in America (3 years of national income as opposed to 6-7 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 arrival were able to close the initial wealth gap (more rapidly than in Europe).

The United States is more than 95% American owned and less than 5% foreign owned.

In 1770-1810, If one adds the market value of slaves to other component of wealth, the value of southern capital exceeds 6 years of southern states’ income, or nearly as much as the total value of capital in Britain and France. Conversely in the North, with no slaves, total wealth was quite small: 3 years of income (as much as in the south of Europe).

Note that the phenomenon of international cross-investments is much more prevalent in European countries (France, Britain, Germany) where financial assets held by other countries represent between ¼ and ½ of the total domestic financial assets (which is considerable), than in larger economies such as US or Japan (around 1/10). This increases the feeling of dispossession. People forget that while domestic companies and government debt are largely own by the rest of the world, residents hold equivalent assets abroad.

Return on capital, from the 18th to the 21st century oscillated around a central value of 4-5% a year whereas in the early 21st century only it seems to be approaching 3-4%.

Too much capital kills the return on capital: it is natural to expect that the marginal productivity of capital decreases as the stock of capital increases.

Numerous studies mention a significant increase in the share of national income in the rich countries going to profit and capital after the 1970s, along with a concomitant decrease in the share going to wages and labor (linked to new and useful things to do for capital, mobility of capital, competition between states to attract investment, opportunities to substitute capital to labor)

The only thing that appear relatively well established is that the tendency for the capital/income ratio to rise, as observed in rich country and might spread to other countries around the world if growth (especially demographic growth) slows in the 21st century, may well be accompanied by a durable increase in capital’s share of national income and a decrease in return on capital.

In 1900-1910 in France, Britain, Sweden, the richest 10% owned 90% of the nation’s wealth.The wealthiest 1% owned 50% of the wealth. In other words, there was no middle class. The emergence of a patrimonial middle class was an important, if fragile, historical innovation. To be sure, wealth is still extremely concentrated today: the upper 10% own 60% of Europe’s wealth (more than 70 in the US). And the poorer half of the population owns 5% of wealth (as in 1900-1910). Basically all the middle class managed to get its hands on few crumbs : scarcely 1/3 of Europe wealth and ¼ in the US. The rise of a propertied middle class was accompanied by a very sharp decrease of the wealth of the upper 1% (from 50% in Europe in 1910 to 20-25% in 2010).

Since 1980, income inequality has exploded in the US. The upper decile’s share increased from 30-35% in 1970s to 45-50% in 2000s. Early data from 2011-2012 suggest the increase is still continuing. Financial crisis as such cannot be counted on to put an end to the structural increase of inequality in the US.

The US : a record level of inequalities of income from labor (probably higher than in any other society at any time) together with a level of inequality of wealth less extreme than in Europe in 1900-1910. If both logic continue and combine their effects, the future could hold in store a new world of inequality more extreme than any that preceded it.

In practice the Gini coefficient varies from 0.2 to 0.4 in distribution of labor income in actual societies;  from 0.6 to 0.9 for distribution of capital ownership; from 0.3 to 0.5 for total income inequality. Scandinavia in the 70/80s of labor income was 0.19. Conversely, Belle époque Europe had a Gini Coefficient of 0.85, not for from absolute inequality. Coefficients, synthetic indices are inevitably misleading. It seems to me far better to analyze inequalities in terms of distribution tables indicating the shares of various deciles and centiles in total income and total wealth.

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 process of inequality compression seems to have operated over the long run, contrary to the optimistic predictions of Kuznets’s theory.

There is no doubt that the increase inequality in the US contributed to the nation’s financial instability. One consequence of increasing inequality was the virtual stagnation of the purchasing power of the lower and middle classes, which made it more likely for modest household to take on debt. Banks, freed from regulation and eager to earn good yields on enormous savings injected into the system by the well-to-do, offered credit on increasingly generous terms.

It is important to note the considerable transfer of US national income (some 15%) from the poorest 90% to the richest 10% since 1980. This internal transfer between social groups is nearly 4 times larger than the impressive deficit the US ran in the 2000s (on the order of 4 point of national income). The trade deficit, which has its counterpart in China, Japan and Germany trade surpluses, is often describe as one of the key contributor to global imbalances that destabilized the US and global financial system. That is quite possible, but the internal imbalances are four times larger than the global imbalances. The place to look for solutions may be more within the US than in China or other countries.

The top thousandth in the US increased their share from 2% to 10% over the past decades. A share of 2% means people enjoy an income 20 times the average – 10% means people enjoy an income a 100 times the average. In France and Japan, the top thousandth share rose barely from 1.5% to 2.5% from 1980 to 2010. From a macroeconomic point of view, the explosion has thus far been of limited importance in continental Europe and japan. The rise is impressive but too few people have been affected to have had an impact as powerful as in the US where transfer of income to the 1% involve 10-15 points of national income.

In emerging and poor countries, tax data reveal much higher – and more realistic – top income levels than do household surveys. The highest incomes declared in household surveys are generally only 4-5 times higher than the average income.  The top centile share would be less than 5% of wealth. This is not very credible. Clearly household surveys, which are often the only source used by international organisations (WB) and government for gauging inequality, give a biased and misleading complacent view of the distribution of wealth.

Financial globalization seems to be increasing the correlation between the return on capital and the initial size of the investment portfolio, creating an inequality of returns that acts as an additional force for divergence in the global wealth distribution.

It is an illusion to think that something about the nature of modern growth or the laws of the market economy ensures that inequality of wealth will decrease and harmonious stability will be achieved.


According to Forbes, the planet boasted 140 billionaires in 1987  but counts more than 1,400 in 2013. They owned 0.4% of private wealth in 1987 and 1.5% in 2013 ($5.4 trillion). The average wealth of the group has increased from just over US$1.5bn in 1987  to US$15 bn in 2013n (6.4% a year, above inflation). For the sake of comparison; average global wealth per capita increased by 2.1% a year and world GDP by 3.3% (all after deduction of inflation). The amounts remain small but the rate of divergence is spectacular. If this continues, the share of these tiny groups (billionaires and 1/100 million fractile) could reach substantial levels by the end of 21st century. Only a progressive tax on capital can effectively impede such dynamic.

Approximate conclusions: Global inequality of wealth in the early 2010 appears to be comparable in magnitude to that observed in Europe in 1900-1910. The top thousandth seems to own nearly 20% of total global wealth, the top centile 50% and the top decile somewhere between 80 and 90%. The bottom half owns less than 5% of total global wealth. These estimates are highly uncertain.

The rate of inflation in the wealthy countries has been stable at around 2% since 1980. This is much lower than the peak inflation in the 20th century and much higher than the prevailing rate up to WWI.

Although the effect on inflation are complex, evidence suggests that the redistribution induced by inflation is mainly to the detriment of the least wealthy and to the benefit of the wealthiest.

Sovereign funds (imperfect estimates) from China; Hong Kong, Singapore, Dubai, Lybia, Iran, Azerbaijan etc. today own 1.5% of the world private wealth (same as the billionaires). The annual rent derived from exploitation of natural resources has been about 5% of GDP since 2000 (half of which is petroleum, the rest being gas, coal, minerals, wood…) compared with 2% in the 1990 and 1% in 1970s. If rate continue to increase – with the barril as high as $200 by 2020-2030, sovereign wealth funds could own 10-20% of global capital by 2030-40. No economic law rules this out but sooner or later this would trigger political reactions (restriction on purchase of real estate, industrial assets etc.). Petroleum rents might well enable the oil states to buy the rest of the planet (or much of it) and to live on the rents of their accumulated capital. China, India are different: they have a large populations whose needs remain far from satisfied.

In the future, the threat of gradual acquisition of rich countries by China seems less credible and dangerous than a process in which the rich countries would come to be owned by their own billionaires. The rich countries are not about to be taken over by the poor countries, which would have to get much richer and that would take many more decades.

Are the rich countries really poor? The net asset position of the rich countries relative to the rest of the world is in fact positive (rich countries own on average more than the poor countries) but is masked by the fact that the wealthiest residents of the rich countries are hiding some of their assets in tax havens (which can account for up to 10% of GDP, or 2-3 times more according to NGOs). [If one adds up financial statistics, poor and rich countries have a negative position : it seems that Earth must be owned by Mars]

The inequality r>g (return on capital>growth of income) implies that wealth accumulated in the past grows more rapidly than output and wages. This inequality expresses a fundamental logical contradiction. The entrepreneur inevitably tend to become a rentier, more and more dominant over those who own nothing but their labor. Once constituted, capital reproduce itself faster than output increases. The past devours the future. The long term consequences are potentially terrifying, especially when one adds that the return on capital varies directly with the size of the initial stake (the higher the stake, the higher the return) and that divergence are occurring on a global scale.

There is ample reason to believe that growth rate will not exceed 1-1.5% in the long run. Growth can be encourage by investing in education, knowledge and nonpolluting technology. But none of these will raise the growth rate to 4-5%. With a average return on capital at 4-5%, it is therefore likely that r>g will again be the norm for the 21st century, as it was until WWI. It took two world wars to reduce the return on capital, thereby creating the illusion that the structural contradiction of capitalism had been overcome.

If we are to regain control of capitalism, we must bet on democracy – and in Europe, democracy on the European scale. In small countries of Europe which will soon look very small indeed in relation to the global economy, national withdrawal can only lead to even worse frustration and disappointment than currently exist with the European Union. Nation state is the right level to modernize social and fiscal policies but only regional political integration can lead to effective regulation of the globalized pratimonial capitalism of the 21st century.