Capital in the Twenty-First Century (105 page)

22
. The harmonized international norms used for national accounts—which I use here—prescribe
that assets and liabilities must always be recorded at their market value as of the
date of the balance sheet (that is, the value that could be obtained if the firm decided
to liquidate its assets, estimated if need be by using recent transactions for similar
goods). The private accounting norms that firms use when publishing their balance
sheets are not exactly the same as the norms for national accounts and vary from country
to country, raising multiple problems for financial and prudential regulation as well
as for taxation. In
Part Four
I come back to the crucial issue of harmonization of accounting standards.

23
. See, for example, “Profil financier du CAC 40,” a report by the accounting firm
Ricol Lasteyrie, June 26, 2012. The same extreme variation in Tobin’s Q is found in
all countries and all stock markets.

24
. See the online technical appendix.

25
. Germany’s trade surplus attained 6 percent of GDP in the early 2010s, and this enabled
the Germans to rapidly amass claims on the rest of the world. By comparison, the Chinese
trade surplus is only 2 percent of GDP (both Germany and China have trade surpluses
of 170–180 billion euros a year, but China’s GDP is three times that of Germany: 10
trillion euros versus 3 trillion). Note, too, that five years of German trade surpluses
would be enough to buy all the real estate in Paris, and five more years would be
enough to buy the CAC 40 (around 800–900 billion euros for each purchase). Germany’s
very large trade surplus seems to be more a consequence of the vagaries of German
competitiveness than of an explicit policy of accumulation. It is therefore possible
that domestic demand will increase and the trade surplus will decrease in coming years.
In the oil exporting countries, which are explicitly seeking to accumulate foreign
assets, the trade surplus is more than 10 percent of GDP (in Saudi Arabia and Russia,
for example) and even multiples of that in some of the smaller petroleum exporters.
See
Chapter 12
and the online technical appendix.

26
. See Supplemental Figure S5.2, available online.

27
. In the case of Spain, many people noticed the very rapid rise of real estate and
stock market indices in the 2000s. Without a precise point of reference, however,
it is very difficult to determine when valuations have truly climbed to excessive
heights. The advantage of the capital/income ratio is that it provides a precise point
of reference useful for making comparisons in time and space.

28
. See Supplemental Figures S5.3–4, available online. It bears emphasizing, moreover,
that the balances established by central banks and government statistical agencies
concern only primary financial assets (notes, shares, bonds, and other securities)
and not derivatives (which are like insurance contracts indexed to these primary assets
or, perhaps better, like wagers, depending on how one sees the problem), which would
bring the total to even higher levels (twenty to thirty years of national income,
depending on the definitions one adopts). It is nevertheless important to realize
that these quantities of financial assets and liabilities, which are higher today
than ever in the past (in the nineteenth century and until World War I, the total
amount of financial assets and liabilities did not exceed four to five years of national
income) by definition have no impact on net wealth (any more than the amount of bets
placed on a sporting event influences the level of national wealth). See the online
technical appendix.

29
. For example, the financial assets held in France by the rest of the world amounted
to 310 percent of national income in 2010, and financial assets held by French residents
in the rest of the world amounted to 300 percent of national income, for a negative
net position of
−
10 percent. In the United States, a negative net position of
−
20 percent corresponds to financial assets on the order of 120 percent of national
income held by the rest of the world in the United States and 100 percent of national
income owned by US residents in other countries. See Supplemental Figures S5.5–11,
available online, for detailed series by country.

30
. In this regard, note that one key difference between the Japanese and Spanish bubbles
is that Spain now has a net negative foreign asset position of roughly one year’s
worth of national income (which seriously complicates Spain’s situation), whereas
Japan has a net positive position of about the same size. See the online technical
appendix.

31
. In particular, in view of the very large trade deficits the United States has been
running, its net foreign asset position ought to be far more negative than it actually
is. The gap is explained in part by the very high return on foreign assets (primarily
stocks) owned by US citizens and the low return paid on US liabilities (especially
US government bonds). On this subject, see the work of Pierre-Olivier Gourinchas and
Hélène Rey cited in the online technical appendix. Conversely, Germany’s net position
should be higher than it is, and this discrepancy is explained by the low rates of
return on Germany’s investments abroad, which may partially account for Germany’s
current wariness. For a global decomposition of the accumulation of foreign assets
by rich countries between 1970 and 2010, which distinguishes between the effects of
trade balances and the effects of returns on the foreign asset portfolio, see the
online technical appendix (esp. Supplemental Table S5.13, available online).

32
. For example, it is likely that a significant part of the US trade deficit simply
corresponds to fictitious transfers to US firms located in tax havens, transfers that
are subsequently repatriated in the form of profits realized abroad (which restores
the balance of payments). Clearly, such accounting games can interfere with the analysis
of the most basic economic phenomena.

33
. It is difficult to make comparisons with ancient societies, but the rare available
estimates suggest that the value of land sometimes reached even higher levels: six
years of national income in ancient Rome, according to R. Goldsmith,
Pre-modern Financial Systems: A Historical Comparative Study
(Cambridge: Cambridge University Press, 1987), 58. Estimates of the intergenerational
mobility of wealth in small primitive societies suggest that the importance of transmissible
wealth varied widely depending on the nature of economic activity (hunting, herding,
farming, etc.). See Monique Borgerhoff Mulder et al., “Intergenerational Wealth Transmission
and the Dynamics of Inequality in Small-Scale Societies,”
Science
326, no. 5953 (October 2009): 682–88.

34
. See the online technical appendix.

35
. See
Chapter 12
.

1
. Interest on the public debt, which is not part of national income (because it is
a pure transfer) and which remunerates capital that is not included in national capital
(because public debt is an asset for private bondholders and a liability for the government),
is not included in
Figures 6.1
–
4
. If it were included, capital’s share of income would be a little higher, generally
on the order of one to two percentage points (and up to four to five percentage points
in periods of unusually high public debt). For the complete series, see the online
technical appendix.

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
)
=
K
^α
L
^1
−
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.