Capital in the Twenty-First Century (102 page)

5
. Roughly 65–70 percent for wages and other income from labor and 30–35 percent for
profits, rents, and other income from capital.

6
. About 65–70 percent for wages and other income from labor and 30–35 percent for
profits, rents, and other income from capital.

7
. National income is also called “net national product” (as opposed to “gross national
product” (GNP), which includes the depreciation of capital). I will use the expression
“national income,” which is simpler and more intuitive. Net income from abroad is
defined as the difference between income received from abroad and income paid out
to foreigners. These opposite flows consist primarily of income from capital but also
include income from labor and unilateral transfers (such as remittances by immigrant
workers to their home countries). See the online appendix for details.

8
. In English one speaks of “national wealth” or “national capital.” In the eighteenth
and nineteenth centuries, French authors spoke of
fortune nationale
and English authors of “national estate” (with a distinction in English between “real
estate” and other property referred to as “personal estate”).

9
. I use essentially the same definitions and the same categories of assets and liabilities
as the current international standards for national accounts, with slight differences
that are discussed in the online appendix.

10
. Detailed figures for each country can be consulted in the tables available in the
online appendix.

11
. In practice, the median income (that is, the income level below which 50 percent
of the population sits) is generally on the order of 20–30 percent less than average
income. This is because the upper tail of the income distribution is much more drawn
out than the lower tail and the middle, which raises the average (but not the median).
Note, too, that “per capita national income” refers to average income before taxes
and transfers. In practice, citizens of the rich countries have chosen to pay one-third
to one-half of their national income in taxes and other charges in order to pay for
public services, infrastructure, social protection, a substantial share of expenditures
for health and education, etc. The issue of taxes and public expenditures is taken
up primarily in
Part Four
.

12
. Cash holdings (including in financial assets) accounted for only a minuscule part
of total wealth, a few hundred euros per capita, or a few thousand if one includes
gold, silver, and other valuable objects, or about 1–2 percent of total wealth. See
the online technical appendix. Moreover, public assets are today approximately equal
to public debts, so it is not absurd to say that households can include them in their
financial assets.

13
. The formula
α
=
r
×
β
is read as “
α
equals
r
times
β
.” Furthermore, “
β
=
600%” is the same as “
β
=
6,” and “
α
=
30%” is the same as “
α
=
0.30” and “
r
=
5%” is the same as “
r
=
0.05.”

14
. I prefer “rate of return on capital” to “rate of profit” in part because profit
is only one of the legal forms that income from capital may take and in part because
the expression “rate of profit” has often been used ambiguously, sometimes referring
to the rate of return and other times (mistakenly) to the share of profits in income
or output (that is, to denote what I am calling
α
rather than
r
, which is quite different). Sometimes the expression “marginal rate” is used to denote
the share of profits
α
.

15
. Interest is a very special form of the income from capital, much less representative
than profits, rents, and dividends (which account for much larger sums than interest,
given the typical composition of capital). The “rate of interest” (which, moreover,
varies widely depending on the identity of the borrower) is therefore not representative
of the average rate of return on capital and is often much lower. This idea will prove
useful when it comes to analyzing the public debt.

16
. The annual output to which I refer here corresponds to what is sometimes called
the firm’s “value added,” that is, the difference between what the firm earns by selling
goods and services (“gross revenue”) and what it pays other firms for goods and services
(“intermediate consumption”). Value added measures the firm’s contribution to the
domestic product. By definition, value added also measures the sum available to the
firm to pay the labor and capital used in production. I refer here to value added
net of capital depreciation (that is, after deducting the cost of wear and tear on
capital and infrastructure) and profits net of depreciation.

17
. See esp. Robert Giffen,
The Growth of Capital
(London: George Bell and Sons, 1889). For more detailed bibliographic data, see the
online appendix.

18
. The advantage of the ideas of national wealth and income is that they give a more
balanced view of a country’s enrichment than the idea of GDP, which in some respects
is too “productivist.” For instance, if a natural disaster destroys a great deal of
wealth, the depreciation of capital will reduce national income, but GDP will be increased
by reconstruction efforts.

19
. For a history of official systems of national accounting since World War II, written
by one of the principal architects of the new system adopted by the United Nations
in 1993 (the so-called System of National Accounts [SNA] 1993, which was the first
to propose consistent definitions for capital accounts), see André Vanoli,
Une histoire de la comptabilité nationale
(Paris: La Découverte, 2002). See also the instructive comments of Richard Stone,
“Nobel Memorial Lecture, 1984: The Accounts of Society,”
Journal of Applied Econometrics
1, no. 1 (January 1986): 5–28. Stone was one of the pioneers of British and UN accounts
in the postwar period. See also François Fourquet,
Les comptes de la puissance—Histoire de la comptabilité nationale et du plan
(Paris: Recherches, 1980), an anthology of contributions by individuals involved
in constructing French national accounts in the period 1945–1975.

20
. Angus Maddison (1926–2010) was a British economist who specialized in reconstituting
national accounts at the global level over a very long run. Note that Maddison’s historical
series are concerned solely with the flow of output (GDP, population, and GDP per
capita) and say nothing about national income, the capital-labor split, or the stock
of capital. On the evolution of the global distribution of output and income, see
also the pioneering work of François Bourguignon and Branko Milanovic. See the online
technical appendix.

21
. The series presented here go back only as far as 1700, but Maddison’s estimates
go back all the way to antiquity. His results suggest that Europe began to move ahead
of the rest of the world as early as 1500. By contrast, around the year 1000, Asia
and Africa (and especially the Arab world) enjoyed a slight advantage. See Supplemental
Figures S1.1, S1.2, and S1.3 (available online).

22
. To simplify the exposition, I include in the European Union smaller European countries
such as Switzerland, Norway, and Serbia, which are surrounded by the European Union
but not yet members (the population of the European Union in the narrow sense was
510 million in 2012, not 540 million). Similarly, Belarus and Moldavia are included
in the Russia-Ukraine bloc. Turkey, the Caucasus, and Central Asia are included in
Asia. Detailed figures for each country are available online.

23
. See Supplemental Table S1.1 (available online).

24
. The same can be said of Australia and New Zealand (with a population of barely 30
million, or less than 0.5 percent of the world’s population, with a per capita GDP
of around 30,000 euros per year). For simplicity’s sake, I include these two countries
in Asia. See Supplemental Table S1.1 (available online).

25
. If the current exchange rate of
$
1.30 per euro to convert American GDP had been used, the United States would have
appeared to be 10 percent poorer, and GDP per capital would have declined from 40,000
to about 35,000 euros (which would in fact be a better measure of the purchasing power
of an American tourist in Europe). See Supplemental Table S1.1. The official ICP estimates
are made by a consortium of international organizations, including the World Bank,
Eurostat, and others. Each country is treated separately. There are variations within
the Eurozone, and the euro/dollar parity of
$
1.20 is an average. See the online technical appendix.

26
. The secular decline of US dollar purchasing power vis-à-vis the euro since 1990
simply reflects the fact that inflation in the United States was slightly higher (0.8
percent, or nearly 20 percent over 20 years). The current exchange rates shown in
Figure 1.4
are annual averages and thus obscure the enormous short-term volatility.

27
. See
Global Purchasing Power Parities and Real Expenditures—2005 International Comparison
Programme
(Washington, DC: World Bank, 2008), table 2, pp. 38–47. Note that in these official
accounts, free or reduced-price public services are measured in terms of their production
cost (for example, teachers’ wages in education), which is ultimately paid by taxpayers.
This is the result of a statistical protocol that is ultimately paid by the taxpayer.
It is an imperfect statistical contract, albeit still more satisfactory than most.
A statistical convention that refused to take any of these national statistics into
account would be worse, resulting in highly distorted international comparisons.

28
. This is the usual expectation (in the so-called Balassa-Samuelson model), which
seems to explain fairly well why the purchasing-power parity adjustment is greater
than 1 for poor countries vis-à-vis rich countries. Within rich countries, however,
things are not so clear: the richest country in the world (the United States) had
a purchasing-power parity correction greater than 1 until 1970, but it was less than
1 in the 1980s. Apart from measurement error, one possible explanation would be the
high degree of wage inequality observed in the United States in recent years, which
might lead to lower prices in the unskilled, labor-intensive, nontradable service
sector (just as in the poor countries). See the online technical appendix.

29
. See Supplementary Table S1.2 (available online).

30
. I have used official estimates for the recent period, but it is entirely possible
that the next ICP survey will result in a reevaluation of Chinese GDP. On the Maddison/ICP
controversy, see the online technical appendix.

31
. See Supplemental Table S1.2 (available online). The European Union’s share would
rise from 21 to 25 percent, that of the US–Canada bloc from 20 to 24 percent, and
that of Japan from 5 to 8 percent.

32
. This of course does not mean that each continent is hermetically sealed off from
the others: these net flows hide large cross-investments between continents.

33
. This 5 percent figure for the African continent appears to have remained fairly
stable during the period 1970–2012. It is interesting to note that the outflow of
income from capital was on the order of three times greater than the inflow of international
aid (the measurement of which is open to debate, moreover). For further details on
all these estimates, see the online technical appendix.

34
. In other words, the Asian and African share of world output in 1913 was less than
30 percent, and their share of world income was closer to 25 percent. See the online
technical appendix.

35
. It has been well known since the 1950s that accumulation of physical capital explains
only a small part of long-term productivity growth; the essential thing is the accumulation
of human capital and new knowledge. See in particular Robert M. Solow, “A Contribution
to the Theory of Economic Growth,”
Quarterly Journal of Economics
70, no. 1 (February 1956): 65–94. The recent articles of Charles I. Jones and Paul
M. Romer, “The New Kaldor Facts: Ideas, Institutions, Population and Human Capital,”
American Economic Journal: Macroeconomics
2, no. 1 (January 2010): 224–45, and Robert J. Gordon, “Is U.S. Economic Growth Over?
Faltering Innovation Confronts the Six Headwinds,” NBER Working Paper 18315 (August
2012), are good points of entry into the voluminous literature on the determinants
of long-run growth.

36
. According to one recent study, the static gains from the opening of India and China
to global commerce amount to just 0.4 percent of global GDP, 3.5 percent of GDP for
China, and 1.6 percent for India. In view of the enormous redistributive effects between
sectors and countries (with very large numbers of losers in all countries), it seems
difficult to justify trade openness (to which these countries nevertheless seem attached)
solely on the basis of such gains. See the online technical appendix.

1
. See Supplemental Table S2.1, available online, for detailed results by subperiod.

2
. The emblematic example is the Black Plague of 1347, which ostensibly claimed more
than a third of the European population, thus negating several centuries of slow growth.