Piketty 2014

The Belknap Press of Harvard University Press
Cambridge, Mass. - 2014
The Major Results of This Study
First, one should be wary of any economic
determinism in regard to inequalities of wealth and
income. The history of the distribution of wealth
has always been deeply political, and it cannot be
reduced to purely economic mechanism.
Second, 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
The main forces for convergence are the diffusion of
knowledge and investment in training and skills. The law
of supply and demand, as well as the mobility of capital
and labour, which is a variant of that law, may always
tend toward convergence as well, but their influence is
less powerful than the diffusion of knowledge and skill.
By adopting the modes of production of the rich
countries and acquiring skills comparable to those found
elsewhere, the less developed countries have leapt
forward in productivity and increased their national
incomes. The Technological convergence process may be
abetted by open borders for trade, but it is fundamentally
a process of the diffusion and sharing of knowledge – the
public good par excellence – rather than a market
Forces of divergence
First, top earners can quickly separate
themselves from the rest by a wide margin.
Second, 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 is high. This second
process is potentially more destabilizing than
the first, and it no doubt represents the
principal threat to an equal distribution of
wealth over the long run.
Two basic patterns
Fig. I.1 and I.2 show two basic patterns. Each graph
represents the importance of one of these
divergent processes. Both graph depict “U-shaped
curves” that is, a period of decreasing inequality
followed by one of increasing inequality. One might
assume that the realities the two graphs represent
are similar. In fact they are not. The phenomena
underlying the various curves are quit different and
involve distinct economic, social, and political
processes. Fig. I.1 represents income inequality in
the United States, while the curves in Fig. I.2 depict
the capital/income ratio in several European
countries (Japan is similar).
Two forces of divergence
In Fig. I. 1 the spectacular increase in inequality largely reflects
an unprecedented explosion of top managers of large firms
from the rest of the population. One possible explanation is
that the skills and productivity of these top managers rose
suddenly in relation to those of other workers. Another
explanation is that these top managers by and large have the
power to set their own remunerations.
In Fig. I. 2, the “U-shaped curve” reflects an absolutely crucial
transformation. The return of high capital/income ratios over
the past few decades can be explained in large part by the
return to a regime of relatively slow growth. In slowly growing
economies, past wealth naturally takes on disproportionate
importance, because it takes only a small flow of new savings
to increase the stock of wealth steadily and substantially. The
fundamental inequality r>g will play a crucial role. When the
rate of return on capital significantly exceeds to growth rate of
the economy, than it logically follows that inherited wealth
grows faster than output and income. Inherited wealth will
dominate wealth amassed from a lifetime’s labour.
The First Fundamental Law of Capitalism
The capital/income ratio β is related in a simple way to the
share of income from capital in national income, denoted
α. The formula is: α = r x β ; where r is the the rate of
return on capital. If the capital stock equals β=6 years of
income and the average return to capital is equal r=5% per
year, then the share of capital income (rent, dividends,
interest, profits, etc.) in national income equals α = r x β =
This formula is a pure accounting identity. It can be applied to
all societies in all periods of history, by definition. Thought
tautological, it should nevertheless be regarded as the first
fundamental law of capitalism, because it express a simple,
transparent relationship among the three most important
concepts for analyzing the capitalist system: the
capital/income ratio, the share of capital in income, and the
rate of return on capital.
The Second Fundamental Law of Capitalism
In the long-run, β=s/g with s = (net-of-depreciation) saving rate and
g = economy’s growth rate (population + productivity)
With s=10%, g=3%, β≈300%; but if s=10%, g=1,5%, β≈600%
Note: β=s/g = pure stock-flow accounting identity; it is true whatever the
combination of saving motives
This formula, which can be regarded as the second fundamental law of
capitalism, reflects an obvious but important point: a country that saves a
lot and grows slowly will over the long run accumulate an enormous stock
of capital (relative to its income), which can in turn have a significant
effect on the social structure and distribution of wealth. In a quasistagnant society, wealth accumulated in the past will inevitably acquire
disproportionate importance.
The return to a structurally high capital/income ratio in the twenty-first
century, close to the levels observed in the eighteenth and nineteenth
centuries, can therefore be explained by the return to a slow-growth
regime. Decreased growth – especially demographic growth – is thus
responsible for capital’s comeback.
The notion of capital in Piketty’s study
The reader of Piketty’s study should be aware of his different notion of capital
compared to traditional economic theory. “I define – he says (p. 48) –
‘national wealth’ or ‘national capital’ as the total market value of
everything owned by residents and governments of a given country at a
given point in time, provided that it can be traded on some market.” It
consists of the sum total of non-financial assets and financial assets, less
the total amount of financial liabilities (debt).
This is not the notion of capital of classical economists and Marx, including
the modern reformulation of the classical paradigm by Piero Sraffa.
Working capital and fixed capital were the means of production employed
by the capitalist/entrepreneur to produce, with a certain number of
workers, a given commodity and their value was the basis for calculating
the rate of profit. All the riches and properties outside the firm were not
considered as “productive capital”.
Indeed in modern economic theory ‘wealth’ and ‘capital’ are two different
notions. But for Piketty’s analysis it is important to have a single notion of
‘capital/wealth’ because of the role played by inherited riches in the
distribution of income. His analysis concerns not only the structure of the
capitalist system at a certain time but also its historical evolution, because
past accumulation of wealth affects the present distribution of income.
The Capital/Income Ratio over the Long Run
The second fundamental law (β=s/g) is applicable in the long
run. It is an asymptotic law. At the individual level, fortunes
are sometimes amassed very quickly, but at the country
level, the movement of the capital/income ratio is a long
run phenomenon. Now we can understand why it is so
much time for the shocks of 1914-1945 to fade away, and
why it is so important to take a very long historical view
when studying these questions.
To sum up: the second law does not explain the short-term
shocks to which the capital/income ratio is subject, any
more than it explains the existence of world wars or the
crisis of 1929 – events that can be taken as examples of
extreme shocks – but it does allow us to understand the
potential equilibrium level toward which the
capital/income ratio tends in the long run, when the effects
of shocks and crisis have dissipated.
The Privatization of Wealth in the Rich Countries
The Privatization of Wealth in the Rich Countries
The very sharp increase in private wealth observed in the
rich countries, and especially in Europe and Japan,
between 1970 and 2010, can be explained largely by
slower growth coupled with continued high savings.
The explanation is privatization. The proportion of
public capital in national capital has dropped sharply in
recent decades, especially in France and Germany,
where net public wealth represented as much as a
quarter or even a third of total national wealth in the
period 1950-1970, whereas today it represents a few
percent (public assets are just enough to balance public
debt). This evolution reflects a quite general
phenomenon that has affected all eight leading
developed economies. In other words, the revival of
private wealth is partly due to the privatization of
national wealth.
Inequality and concentration: preliminary bearings
In all societies, income inequality is the result of adding
up these two components: inequality of income from
labor and inequality of income from capital: to what
extent do individuals with high income from labor also
enjoy high income from capital?
In Table 7.3 note that inequality of total income is closer
to inequality of income from labor than to inequality of
capital, which comes as a surprise, since income from
labor generally accounts for two-thirds to threequarters of total national income. The top decile of the
income hierarchy received about 25% of national
income in the egalitarian society of Scandinavia in the
1970s and 1980s. In more inegalitarian societies the
top decile claimed as much as 50% of national income
(with about 20% going to top centile). This was true in
France and Britain during the Ancien Régime as well as
the Belle Epoque and is true in the United States today.
The Explosion of US Inequality after 1980
Inequality in the US started from a lower peak on the eve
of WWI but at its low point after WWII stood above
inequality in Europe. Europe in 1914-1945 witnessed
the suicide of rentier society, but nothing of the sort
occurred in the US.
Inequality reached its lowest ebb in the US between 1950
and 1980: the top decile of the income hierarchy
claimed 30 to 35% of US national income, or roughly
the same level of France today. Since 1980, however,
income inequality has exploded in the US. The upper
decile’s share increased from 30-35% of national
income in the 1970s to 45-50% in the 2000s, an
increase of 15 points of national income.
The Rise of Supersalaries
The top 1 per cent in the United States
Institutional factors and inequality
Personal skill and productivity do not explain the recent
change in inequality. The increase in wage inequality in the
US is due mainly to increased pay at the very top end of the
distribution. It is hard to see any discontinuity between the
9% and the 1% regardless of that criteria we use: years of
education, selectivity of educational institutions or
professional experience.
Two distinct phenomena have been at work in recent
decades. First, the wage gap between college graduates
and those who go no further than high school has
increased. Second, the top 1% (and even more the top
0.1%) have seen their remuneration take off.
Moreover, the explosion of very high salaries occurred in
some developed countries but not others. This suggests
that institutional differences between countries rather than
general and a priori universal causes such as technological
change played a central role.
Inequality in the Anglo-Saxon Countries
Inequality in Continental Europe and Japan
Hyperconcentrated Wealth in France
In France the structure of capital was totally transformed
between the 18th and the beginning of the 20th century
(landed capital was almost entirely replaced by industrial
and financial capital and real estate), but total wealth,
measured in years of national income, remained relatively
stable. In particular, the French Revolution had relatively
little effect on the capital/income ratio (β). The Revolution
also had relatively little effect on the distribution of wealth
In 1810-1820, wealth was probably slightly less unequally
distributed than during the Ancien Régime: both before
and after the Revolution, France was a patrimonial society
characterized by a hyperconcentration of capital, in which
inheritance and marriage played a key role. At the bottom,
France remained the same society, with the same basic
structure of inequality, from the Ancien Régime to the Third
Republic, despite the economic and political change that
took place in the interim.
Why is the rate of return on capital
greater than the growth rate
It is an incontrovertible historical reality that r was indeed
greater than g over a long period of time. Economic growth
was virtually nil throughout much of human history:
combining demographic with economic growth, we can say
that annual growth rate from antiquity to the seventeenth
century never exceeded 0.1-0.2% for long. Despite the
many historical uncertainties, there is no doubt that the
rate of return on capital was always considerably greater
than this: the central value observed over the long run is 45% a year.
Throughout most of human history, the inescapable fact is
that the rate of return on capital was always at least 10 to
20 times greater than the rate of growth of output (and
income). Indeed this fact is to a large extent the very
foundation of society itself: it is what allowed a class of
owners to devote themselves to something other than their
own subsistence.
r>g : the case of France
Capital share and saving in France
r>g : the world case
The reversal of the 20th century: g>r
As Fig. 10.9 shows, r – generally 4-5% - has throughout history
always been distinctly greater than the global growth rate,
but the gap between the two shrank significantly during the
20th century, especially in the second half of the century,
when the global economy grew at a rate of 3.5-4% a year. In
all likelihood, the gap between r and g would return to a
level comparable to that which existed during the Industrial
It is easy to see that taxes on capital – and shocks of various
kind – can play a central role. Before WWI, taxes on capital
were very low. We may therefore assume that the rate of
return on capital was virtually the same after tax as before.
After WWI, the tax rates on top incomes, profits, and
wealth quickly rose to high levels. Since the 1980s,
however, as the ideological climate changed dramatically
under the influence of financial globalization and
heightened competition between states for capital, these
same tax rates have been falling and in some cases have
almost entirely disappeared.
The reversal of the 20th century: g>r
Inequality in US and Europe
At the eve of WWI, the top decile’s share was 45-50% of national
income in all European countries, compared with a little more than
40% in the US. By the end of WWII, the US had become slightly
more inegalitarian than Europe: the top decile’s share decreased on
both continents owing to the shocks of WWII.
The strong divergence, beginning in 1970-1980, led to the following
situation in 2000-2010: the top decile’s share of US national income
reached 45-50%, or roughly the same level as Europe in 1900-1910.
In Europe, we see wide variation, from the most inegalitarian case
(Britain, with a top decile share of 40%) to the most egalitarian
(Sweden, less than 30%), with France and Germany in between
(around 35%).
If we calculate (somewhat abusively) an average for Europe based on
these four countries, we can make a very clear international
comparison: the US was less inegalitarian than Europe in 19001910. slightly more inegalitarian in 1950-1960, and much more
inegalitarian in 2000-2010 (see Fig. 9.8)
The role of progressive taxation in the 20th century
The role of inheritance taxation
The political meaning of taxation
The major 20th century innovation in taxation was the
creation and development of the progressive income
tax. This institution, which played a key role in the
reduction of inequality in the last century, is today
seriously threatened by international tax competition.
It may also be in jeopardy because its foundations were
never clearly thought through, owing to the fact that it
was instituted in an emergency that left little time for
reflection. The same is true of the progressive tax on
inheritances, which was the second major fiscal
innovation in the 20th century and has also been
challenged in recent decades.
Taxation is not a technical matter. It is pre-eminently a
political and philosophical issue, perhaps the most
important of all political issues. Without taxes, society
has no common destiny, and collective action is
The principal destabilizing force of a market economy is that the
private rate of return on capital (r) can be significantly higher for
long periods of time than the rate of growth of income and output
(g). The inequality r>g implies that the wealth accumulated in the
past grows more rapidly than output and wages. This inequality
expresses a fundamental logical contradiction. The entrepreneur
inevitably tends to become a rentier, more and more dominant over
those who own nothing but their labor.
To be sure, one could tax capital income heavily enough to reduce the
private return on capital to less than the growth rate. But if one did
that indiscriminately, one would risk killing the motor of
The right solution is a progressive annual tax on capital, to regulate the
globalized patrimonial capitalism of 21st century. The difficulty is
that a global tax on capital requires a high level of international
cooperation and regional political integration. It is not within the
reach of the nation-states in which earlier social compromises were
hammered out. Only global and regional integration, such as the
European Union, can lead to effective regulation of the globalized
patrimonial capitalism of the 21st century.

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